The weakness in polymer pricing in Asia and the drag that auto sales had on US consumer spending in May (spending was up ex-autos) should begin to undermine the very strong polypropylene market in the US, and the fall may happen at a reasonable clip. Polypropylene is more fungible than polyethylene, in that much more of the customization of polypropylene comes post-production rather than during production. There are several unique polyethylene technologies, especially for linear-low where the process drives the properties and adds value. For polypropylene, while there is some of this, most product is compounded and consequently, there is more fungibility before compounding and less risk from experimenting with suppliers. If freight rates were not so high as discussed in today's daily, we believe that we would have seen a notable amount of polypropylene moving from Asia to the US by now.
It is interesting to note that Asia propylene is moving to Europe. We identified the US arbitrage with Asia in our Sunday Thematic and Weekly Recap: Propylene – A Nightmare For Short and Long Term Planners. While the European arbitrage is equally interesting, logistics will be easier into Europe because there are several propylene (and propane) terminals in Europe, while the logistic challenge in the US is more significant – it is much easier to bring a few containers of polypropylene into the US than a tanker of propylene, but containers are expensive and the propane/propylene carriers may be less so today.
With the decline in ethylene spot prices and the start-up of the Total/Borealis JV ethylene plant in Port Arthur, TX, it is not surprising to see the Navigator headline linked. We would also expect (weather permitting) US exports of ethylene to surge through the balance of the year, even if in some cases the marginal ton is replacing higher-cost production in Asia and possibly Europe. The higher the price of oil moves (relative to natural gas), the more profitable this business will be in 2H 2021.
Source: Bloomberg, C-MACC Analysis, June 2021