Polyethylene (PE) spot prices were mostly steady to $0.005/lb lower last week on what Mike Greenberg described as slightly softening sentiment. Greenberg, CEO of plastics spot-trading platform The Plastics Exchange (TPE), said the market is currently trading about $0.10/lb higher than the beginning of January, adding that the strength of the spot market is lending support to producers' effort to raise February contract prices by as much as $0.08/lb, on top of the $0.04/lb increase pushed through in January. These increases are partially an effort by producers to recover margins, since spot ethylene costs have advanced some $0.16/lb so far this year.
Spot ethylene rallied during January in reaction to reduced production and strong demand as resin reactors were brought back to more normal operating levels after being throttled back during December. According to preliminary data just released by the American Chemistry Council (ACC), resin production units ran at 93.73% of capacity in January, much higher than December's 86.5% rate. Operating rates during 2009 averaged a shade under 88%, with that figure skewed lower by the 80% average of January and February. By comparison, rates averaged 91.3% during the last half of 2009. So far in 2010, ethylene production has been hampered by unplanned outages.
January PE exports retreated from the record pace that escalated throughout 2009, when 909 million lb of PE were shipped overseas during December, representing 28.2% of total PE sales by North American producers. PE exports began January quite strong before slowing in the latter half of the month. According to the preliminary ACC data, January PE exports were estimated to be only 752 million lb, strong by historic rates, but still off 25 million lb from the 2009 monthly average and more than 100 million lb less than the average of the last six months.
In recent years, PE producers have used growing exports to offset weakening domestic demand, which has dropped from a monthly average of more than 2.66 billion lb in 2006 and 2007, to 2.4 billion lb in 2008, and just 2.27 billion lb in 2009. Preliminary ACC data show domestic PE sales estimated at 2.43 billion lb in January 2010, up from December. Greenberg speculates that the threat of higher prices pushed some processors to restock raw materials.
In the futures market, forward months of ethylene are priced at ever-increasing discounts. Last week the spot price for February delivery ethylene was $0.04/lb above March, indicating that, "the light at the end of the tunnel might be quickly approaching," according to Greenberg, who also noted that monitoring the spread value would be critical to market participants.
PE contracts will move higher in February, with $0.08/lb in increases currently on the table, but the size of increase is still being negotiated. Scarce and expensive spot monomer coupled with a soft export market should curb discretionary resin production. The sharp rise in ethylene has made North American PE less attractive to Asian buyers from an arbitrage perspective. Going forward, Greenberg says the answers to several questions will drive the market: How much of the current $0.08/lb price increase will stick? Following their New Year celebration, will Chinese PE demand return to pre-holiday levels? Will the domestic market stay tightly supplied?
Polypropylene (PP) spot prices stabilized after weeks of rallying, and by the end of last week actually softened $0.005/lb on waning sentiment. The PP market has been driven higher by rising refinery-grade propylene (RGP), which also seems to have stalled in its ascent. The all-important polymer-grade propylene (PGP) monomer contract price settled at $0.635/lb, up $0.065/lb from January, providing a minimum target for February resin contracts as producers tend to their margins. Greenberg says that in order to keep up with rising costs, PP producers are seeking February contract increases of at least $0.065/lb, and as much as $0.085/lb, if they seek to gain a little margin and offset other rising costs, such as energy and transportation. In the face of weak demand and high monomer costs, producers are careful not to over-produce resin, keeping only about 32 days' worth of inventory on hand.
Processors in need of prime material are paying higher prices, which range in the $0.70s/lb, depending on grade. The widespec market, however, has at times become a bit "sloppy," according to Greenberg, with railcars going unsold for days, even though some prices remain in the high $0.60s/lb.
According to preliminary ACC data, PP producers limited their reactor operating rates to just 80.87% of nameplate capacity in January. While this was an improvement from the December's 72.5% rate, it was still below the 83% average seen in 2009. Early estimates for January domestic sales are 1.237 billion lb, a 25 million lb improvement over the 2009 average, but still 6% below the 2008 average and 14% below the 2007 average, which was 1.438 billion lb. —[email protected]