The resin market’s wild ride got even hairier last week. Supply shortages intensified, prices rose, and processors flocked to the spot market, scooping up every reasonable offer. After those were gone, they proceeded to grab the unreasonably priced offers, too. Not surprisingly, market prices continued to climb, sometimes twice per day, and by the close of business on Feb. 26, average spot polyethylene (PE) prices had tacked on $0.10/lb, while polypropylene (PP) shot up another $0.12/lb, reports the PlasticsExchange in its Market Update. Though some processors fell off, not willing to chase material in this seemingly ever-rising market, a steady stream of demand persisted along with sometimes strong surges. Some buyers became more liberal with requirements, as crises demand creativity — many have expanded their typical technical specifications and packaging requirements to accommodate available material until better market conditions eventually return.
Resin production meets a perfect storm.
It has been two weeks since a massive winter storm struck the Houston area, knocking out power and shutting down the entire petrochemical-producing region, including some 80 to 85% of US PE and PP production. Resin supplies were already reeling from a series of other disruptions that have plagued the industry for the past six months, notes the PlasticsExchange, so the market was in no condition for another wallop. Although some production facilities began to restart near week’s end, at least two billion pounds of resin production will be lost, adding to the woes of processors, many already facing reduced supplies from previous force majeure–driven allocations. It is too early to tell how many resin reactors will smoothly restart in early March, as many critical supply-chain components were also disrupted, writes the PlasticsExchange. When they do come back online, however, a sizable amount of startup resin and rough off grade is expected to be made prior to a resumption of Prime plastics production.
Once the mid-February storm hit, there was little doubt that PE producers would successfully implement their $0.07/lb increase onto February contracts, bringing total gains to $0.36/lb since June. Could it get worse? Yes. On Feb. 26, a fire at the Pemex Cangrejera Petrochemical complex in Mexico shut down yet another major PE production facility, further restricting PE resin supplies. This may very well be the catalyst that will carry the next $0.07/lb increase, which is already on the table for March, according to the PlasticsExchange. On the other hand, this new disaster could also be a blessing in disguise, because without a good outlet for its ethane, Pemex might be forced back to the negotiating table and resupply the giant Braskem Idesa complex with ethane, which it had cut off in December. It was this very conflict that had triggered another leg to the resin rally in December and January. Braskem needs the ethane feedstock to crack into ethylene and then turn into polyethylene. It’s perhaps wishful thinking, concedes the PlasticsExchange, but still logical. In the meantime, the North American resin market just lost more critical PE production.
In 2020, about 40% of North American PE production was sold into the export market. Producers kept substantial inventories on hand to facilitate overall sales, and this cushion is being drawn down to help fill domestic contracts. While a good portion of these exports were contracted or otherwise sold directly through formal sales channels, the rest of the exports have basically been spot and recently these types of incremental sales have slowed to a trickle, with uncommitted resin instead diverted into the domestic market. In an ironic flip of international trade, PE imports are also beginning to sail to the United States. Still, spot supplies throughout the chain have been depleted, and while aged resin somehow comes out of the woodworks as prices rise, many resins are outright difficult to find.
Blow mold prices rise $0.42/lb since beginning of the year.
The vast majority of high-density PE blow mold resin is produced in the Gulf, and available materials are increasingly challenging to source, reports the PlasticsExchange. Blow mold prices have risen the most among PE grades, gaining $0.26/lb in February and $0.42/lb since the beginning of the year. High-flow low-density PE and linear-low-density PE resins for color, compounding, and injection molding are practically as scarce, and supplies of high-density PE for injection molding have been thinning by the day. A good percentage of low-density and linear-low-density PE film grade resins are made in Canada and unaffected by the Houston storms, but it matters not: Few fresh offers have appeared in weeks. Ethylene costs have rallied along with resin, providing a level of underlying support. Spot ethylene has reached $0.515/lb, the highest since 2014.
PP conditions have tightened further, creating an untenable environment. Producers’ collective inventories have sunk to the lowest level since the PlasticsExchange started keeping records — just 17 days of monthly sales, and that was before the Houston storm shuttered 85% of US PP capacity. The added shock has driven availability even lower and sent resin prices screaming to record levels.
Spot PP prices have jumped in leaps and bounds, often scoring $0.05/lb daily gains to reach levels in the vicinity of $1.50/lb and higher, which is up an extraordinary $0.50/lb during the month of February and $0.67/lb in the first two months of 2021. Contract buyers saw a lesser increase of $0.33 to 0.34/lb in February, which included a cost-push increase of $0.28/lb, as February PGP settled at strategically tempered $0.885/lb, plus a margin increase of $0.05 to 0.06/lb. However, few contract buyers were satisfied with the partial allocations due to widespread force majeure declarations, and consequently also ran to the spot market to supplement supplies, according to the PlasticsExchange.
Amazingly, overall resin demand has kept up surprisingly well. Some processors that make price-sensitive commodity products are just sitting this one out. Others with downstream contracts, especially for proprietary products with long-term customers that cannot easily pass through rising costs, acknowledge that perhaps they will not make money in the first half of 2021. In the bigger picture, however, continuity and loyalty trump the bottom line, so they are accepting today’s reality and paying up for resin.
An unprecedented supply/demand imbalance.
Indeed, there is a lot of PP coming in from overseas. The PlasticsExchange said that it has imported thousands of tons to maintain liquidity to its market, but it still estimates an industry shortfall in the time ahead. Things could change, as more industry orders based on price-sensitive elastic demand falls away, but there is plenty of new inelastic demand that was not even a consideration in the past. For instance, billions of face masks and syringes will be made from PP, and with what the government and insurance companies are paying for vaccines, does it really matter if the couple ounces of resin to make the syringe costs $0.18 or $0.35 or even $5? It is completely new inelastic demand, writes the PlasticsExchange, and this type of buying does not stop as the price rises.
In the 21 years that the PlasticsExchange has been making markets and supplying resin, nothing has come close to this supply/demand imbalance, reports the resin clearinghouse. PP was half the price a few short months ago, and it seemed to be getting too pricey back then! Some were initially comparing this market to the first resin crisis in 1953 and then the oil embargo market of 1973, but we have seemingly already surpassed those relative shortfalls, as there is a different magnitude of supply/demand than generations ago. The market seems to still have legs, but we are also in uncharted territory, so anything can happen, writes the PlasticsExchange. Parabolic markets make their biggest moves in the final throes, trying to avoid the peak before it busts, because when it does, it can bust hard, and none of us want to be caught up in that. Indeed, this is a rough one, but eventually, and we don’t know when, this, too, shall pass.
Read the full Market Update on the PlasticsExchange website.