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TPE North American resin pricing, June 14-18: PP ends eight-week skid; PE down $0.02-$0.03/lb

Overview: Polypropylene (PP) ended its recent skid, raising a penny in the spot market, while polyethylene (PE) continues its slide, losing another $0.02-$0.03/lb. Spot-trading platform, The Plastics Exchange (TPE) saw similar movements in the spot monomer markets, where ethylene prices fell in active trading and propylene prices edged upward.

June PE contracts are still under discussion but should be finalized in the next week. Some distance remains between producer and processor expectations, as suppliers seek to relieve linear low-density (LLDPE) and high-density (HDPE) prices by $0.04/lb and low-density (LDPE) by just $0.02/lb. Buyers, meanwhile, are angling for a $0.06-.$0.08/lb decrease. May HDPE/LLDPE contracts were $0.06/lb lower and LDPE prices dropped just $0.04/lb. Prior to this, average PE contracts for all grades were up $0.18/lb during 2010.

June Polypropylene contract prices have been marked down $0.08/lb, after dropping $0.12/lb in May. PP contracts had risen $0.22/lb through the first four months of 2010, moving in step with the change in polymer-grade propylene (PGP) monomer contract prices.

Ethylene's spot market was busy, as it rallied a bit early in the week, but the gave that increase back plus a little more by Friday. Ethylene for June delivery traded multiple times nearly a penny higher than the previous week, but the final trade on Friday was back at $0.32/lb. Monomer for July delivery fell a couple cents, ending the week at $0.30/lb. The Net Transaction Price (NTP) for June Ethylene has not settled. In May, the NTP was down $0.0775/lb at $0.4475/lb.

Propylene spot prices continued to recover, with refinery grade propylene (RGP) up another penny or so to last trade at $0.40/lb. PGP did not appear to trade in the spot market, following a recent trend where spot PGP has been relatively inactive. The most recent PGP transaction was at $0.505/lb for August delivery. June PGP monomer contracts settled early in the month down $0.08/lb to $0.555/lb.

Energy markets moved decisively higher this past week. August is transitioning to become the new front month for crude oil, and it was up $2.92/bbl to $78.26/bbl, about $10/bbl above the May swing low. July natural gas spent most of the week above $5/mmBtu, but ended up at $4.997/mmBtu, still $0.216/mmBtu higher. The crude oil:natural gas price ratio expanded slightly to 15.6:1.

Polyethylene (PE) spot prices maintained bearish momentum and prices continued to fall. Spot ethylene prices started the week higher but finished lower in active trading. June PE contracts remained under discussion, and while prices will certainly be lower, TPE reported that producers and processors are still several cents apart on their pricing expectations.

Spot HDPE and LLDPE prices dropped another $0.02-$0.03/lb and are now down $0.14-$0.16/lb from their April peak. Tightly supplied LDPE continues to buck the overall PE trend, with its prices holding steady and sitting just $0.05-$0.07/lb off their highs. Wide spot margins have encouraged aggressive production of the pure commodity grades. According to preliminary American Chemistry Council (ACC) data for May, HDPE reactors ran above 90%, while LLDPE reactors ran full out, achieving a tad more than 100% of nameplate capacity. TPE points out, however, that a couple LDPE reactors faced production issues, only allowing for an 86% run rate, hence the short supplies.

Aside from LDPE, high producer PE inventory levels, totaling more than 3.2 billion lb at the end of May, are at an 18-month high, opening up a very large gap between the domestic and export market. Rather than simply providing a typical $0.02-$0.03/lb freight allowance, TPE says export offers are now often priced to the bid, as much as $0.10-$0.12/lb or more below domestic levels, to "make the resin disappear internationally."

Ethylene spot prices have dropped about 57% from their April high of $0.74/lb, trading down around $0.32/lb for prompt delivery. Spot ethylene for July last transacted at $0.30/lb. Ethane prices for the balance of 2010 are still backward-dated a few cents, so given that ethylene has recently traded through the end of 2010 at ethane plus $0.07-$0.085/lb, which is typically an ample level, ethylene monomer is poised to trade into the very high $0.20s/lb in the coming months.

"Another couple cents of feedstock relief does not appear to provide PE prices much more room to the downside," TPE CEO Michael Greenberg said. "However, remember that PE margins, currently in the low-mid $0.20s/lb...are still wide by historic standards." Greenberg said that even large-volume HDPE blowmolding export prices in the mid $0.40s/lb are priced with acceptable margins.

TPE believes that barring an unexpected variable like hurricane, extreme U.S. dollar weakness, or resin plant disruptions, PE production margins should get whittled away towards historic norms, bringing along lower PE prices.

As the end of the month approaches, producers are offering to lower June contract HDPE and LLDPE prices by $0.04/lb and drop LDPE by just $0.02/lb, while processors are pushing for $0.06-.08/lb relief. "Some processors who desire a larger price break in June are starting to hedge against disappointment," Greenberg said, "already looking into July for further relief-just in case."

Polypropylene (PP), after eight weeks of consistent declines in the spot market, finally found some support last week. Prices only bounced back about $0.01/lb, but TPE noted that this first weekly gain in two months is cause for notice. Propylene monomer prices picked up a penny for the second week in a row, but at $0.40/lb, RGP prices are still almost $0.20/lb below their April peak. June PGP contracts were down $0.08/lb to $0.555/lb, which provided basis for the $0.08/lb relief afforded to June PP contracts. Spot PGP trade has been illiquid during the past few weeks, with a few infrequent transactions seen in the low $0.50s/lb.

While overall spot PP availability remains elevated, the volume of offers has diminished. It appears that after blowing out large quantities of offgrade resin in the lower-mid $0.50s/lb, there seems to be less urgency for producers to move material. Several suppliers have pulled prices back up a few cents for their remaining offers and appear less willing to cut deals on generic prime. "It will be interesting to see if this is just a pause in the market's descent," Greenberg said, "which will resume in the near future or if some stability has been found at this level.

TPE noted that generic prime PP homopolymer retraced all the way back to about $0.60/lb, which is not only where it began 2010, but also a critical historic pivot point of price. The $0.60/lb level that was once considered a ceiling for PP, is now serving as a floor or at least a stopping point for the moment, according to TPE. Greenberg recalled that it was at this price level several years ago that processors began losing long-term orders, hurting overall PP demand which has yet to be recovered. "If we pierce this price to the downside, perhaps old markets can be revitalized," Greenberg theorized. Latin American buyers, particularly from Mexico, have resumed interest in prime resin, and order size seems to have been increased slightly back towards historic norms.

TPE notes that it will take a lot of extra orders to help shrink the high level of upstream inventories, with preliminary ACC data showing that at the end of May producer inventories stood at 1.67 billion lb, their highest level since November 2008. While the spot resin market is strongly influenced by supply and demand, overall mid-long term PP pricing remains pegged to propylene monomer costs.

The fact that crude oil prices have rallied more than $10/bbl since their swing lows, is lending support to PP supply chain pricing. The PGP-RGP spread has shrunk dramatically from more than $0.20/lb to nominally around $0.10-$0.12/lb, and while still wider than the $0.05/lb historic average, it currently provides limited downside potential from this level. "Most prognosticators agree that propylene and PP prices will likely edge lower in July," Greenberg said, "but not nearly as extreme as the $0.12/lb and $0.08/lb break seen the past two months." [email protected]

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