Polyethylene (PE) spot prices were mostly steady-to-a-half-cent lower last week, as transactions consolidated at levels $0.04/lb higher than December levels. Spot-trading platform The Plastics Exchange (TPE) reports that producers sought increases totaling $0.07-0.08/lb on January contracts, and with inventories tight throughout the supply chain, the market began the month "super-strong", according to TPE CEO Michael Greenberg. By mid-month, market participants ultimately agreed to a $0.04/lb January increase, keeping the balance on the table for February. TPE notes that an additional increase of $0.05/lb was issued for February contracts.
The fall of crude oil by $10/bbl in two weeks and a subsequent easing in exports quelled enthusiasm in the PE market, with Greenberg saying many traders remain shell shocked from the intense volatility the market has displayed over the last two years. "When the market is moving higher, traders are comfortable buying speculatively, but when the market stalls, suddenly material becomes available," Greenberg says.
With North American PE producers deriving around 70% of their feedstocks from natural gas, which has been comparatively cheaper than petroleum, domestic producers have benefited from a substantial cost-benefit compared to most international PE producers, who get around 70% of their feedstocks from crude oil. The disparity has opened and maintained a wide export arbitrage, which has helped replace a considerable amount of lost domestic demand. To wit: North American PE producers exported about 900 million lb of resin in December, almost 28% of their total sales. Greenberg notes that falling crude and a strengthening dollar, are beginning to impact domestic resin prices and likely contributed to January price increases settling at only $0.04/lb, rather than $0.07-0.08/lb that seemed possible when crude was at $84/bbl and on an upswing. Exports could slow further during China's mid-February New Year celebration, but PE producers have remained extremely disciplined in their manufacturing, making the possibility of an inventory glut less likely. Greenberg says this discipline is quite apparent in American Chemistry Council (ACC) production data. According to the ACC report, at the end of December there was an estimated 2.77 billion lb of PE inventory held at the producer level. This is 3% above the 2009 average, but almost 500 million lb less inventory than the 2008 average. Looking forward, Greenberg says the move to settle January increases at $0.04/lb and leave $0.08/lb of increases on the table for February, could ultimately mean that realistic producers will likely push to implement a $0.03/lb in February contracts, pursuing the remaining nickel at a later date.
Polypropylene (PP) spot prices maintained their upward bias, adding around a half-cent last week. The market was characterized by cost-push increase pressures and a lack of supply, due largely to reduced resin production in December, as January's spot market recovered the discount it developed to the December contract market. Further spot market advancements point to higher PP contract prices in February, with resin producers nominating on average a $0.04/lb price increase for January. TPE notes that there is very little generic-prime material available in the market. The flow of offgrade material has been below average as well, but as producers increase operating rates, TPE has seen several waves of transitional material offered. Last week, Greenberg posited that supply/demand dynamics were finally tipped towards producers and that for the first time in a couple years, it seemed possible that producers could achieve a price increase that was greater than the change in monomer prices. Almost on cue, one producer did seek a February increase equal to the change in monomer costs plus an extra $0.02/lb. After experiencing compressed margins for an extended period of time, and responding with capacity shutdowns to realign production, TPE thinks that such a modest call for margin expansion at this time seemed reasonable. Unlike PE, which has been able to largely offset weakened domestic demand through exports, regional PP producers were forced to rationalize capacity in the face of diminished sales. For January contracts, producers will implement $0.03/lb increase for those tied directly to polymer-grade propylene (PGP) monomer. For contracted volumes with freely negotiated prices, TPE believes the increase should be at least the nominated $0.04/lb. With propylene monomer supplies and prices still on an upswing, it seems that prices could again move higher in February. If production and monomer supply issues were to quickly resolve, crude oil prices, having come off about $10/bbl from January highs, could begin to pressure the market, but for now it appears to be well supported. —[email protected]