Weekly resin update: No bottom yet for resin prices

Spot resin trading lost some momentum the week of Feb. 8, reports the PlasticsExchange in its weekly market update. The flow of material was sporadic and transactions were choppy. Energy and feedstock markets were mostly lower, dousing resin suppliers' hopes that prices are hitting bottom. Spot polyethylene (PE) prices were weak, but that did not stop producers from nominating a $0.05/lb price increase for March. Spot polypropylene (PP) prices dropped a deuce, as another wave of imports hit the shores. While PP producers are trying to gain another $0.03/lb beyond the change in monomer, processors are pushing back hard for a flat or lower net settlement. 

PE prices remained under pressure, as negative sentiment held a tight grip on the processor community. Material for all commodity PE grades are plentiful; even LDPE Frac melt is available. HDPE has generally led the market lower during this cycle, and these resins saw consolidation this week, note PlasticsExchange analysts. LLDPE and LDPE film grades picked up the slack, shaving off $0.005 to 0.01/lb. Although several PE producers agreed to reduce February contracts by $0.03/lb, even the new levels remain higher than domestic spot prices, which can be interpreted as a bearish sign. While market prices have fallen dramatically over both the short and medium term, many buyers believe there is more room at the bottom. As such, spot buying activity was skewed toward smaller orders, with processors filling in supply gaps awaiting lower prices ahead.

There is plenty of margin throughout the pellet side of the PE supply chain. While ethane to ethylene margins have shrunk to the low teens, they are still historically wide, so crackers have incentive to maximize output. Although ethylene to PE margins have also been reduced, they remain extremely healthy, ranging between $0.20 and 0.40/lb and more depending on product and target market. PE producers, therefore, are encouraged to optimize reactor utilization and remain agile in product choice.

Years of massive North American feedstock cost advantages have been whittled away by plunging crude oil prices, which also provide international PE producers, many with modern world-class reactors and surplus capacity, with competitive resin to win back market share. Given this, the complex dance of international trade has become fascinating.

North American PE producers are well-integrated back to the cracker, so they can profitably export at will, even if it requires borrowing from upsteam margin. While the arbitrage to Europe is open, aided by the recently strengthening euro and cheap ocean freight, Middle Eastern supply with quicker transit is providing strong competition.

PP finally might be transitioning back to a two-sided market, according to the PlasticsExchange. After more than a year of seemingly continuous margin-enhancing price increases, the upward pressure seems to be subsiding, at least for now. While the domestic market, which has seen excellent demand growth, is still categorically short of supply, the volume of imports continues to grow and is starting to have a loosening effect; both HoPP and CoPP retreated a sizable $0.02/lb this past week. The market also took a very short hiatus in December, so we need to wait and see if this little break is sustainable.

PP price declines have actually not been rare, as contracts decreased about $0.245/lb over the past 15 months. With February PGP contracts just settling down $0.015/lb to $0.30/lb, monomer costs dropped $0.465/lb during the same time. The $0.22/lb difference, which varies among market participants, represents the production margin that producers have garnered. Most processors have been pleased with their resin cost savings; however, sometimes major contentions arise. That happened in Q4 of 2015 and is happening right now, when producers look to implement an outright price increase while their monomer costs are steady to lower. Considering macro conditions, the PP market might best be served with February as a month where producers gain but not at the expense of processors—flat to slightly lower PP contracts could be at hand.

Read the full Market Update on the PlasticsExchange website.