The US chemical rail volumes should be considered in the context of some of the slowing demand that has been indicated by companies downstream of chemicals, and we see this as further evidence for possible inventory build through the chain. Earlier in the year these builds would have been justified by supply chain issues that have plagued all segments of retail and manufacturing for close to two years, but today we should be at or above inventory comfort levels. We are calling for weakness in demand and some margin erosion in US chemicals and polymers in 2H 2022, before a strong rebound as early as 2024, but if buyers of polymers and chemicals and their customers look to reduce inventories more quickly, the landscape could change quickly. While this is possible, with the threat of higher energy prices very real, we would be surprised in anyone was interesting in dramatically lowering inventories today.
Source: AAR, Bloomberg, C-MACC Analysis, April 2022
Propylene and ethylene spot pricing is weaker again this week, in part related to a pullback in US natural gas prices, but in both cases, they signal some oversupply, which looks more obvious for ethylene than propylene. The US is long ethylene and most derivatives and now has more ethylene and polymer because of new capacity. The incremental pound of ethylene is likely searching for an export opportunity, either as ethylene or as an easy-to-ship ethylene derivative (EDC, ethylene glycol, or ethylbenzene/styrene). The spot price reflects what is needed to make the exports work, but rising benzene prices may make the ethylbenzene/styrene export less attractive, especially given the net short balance of US benzene. The propylene weakness is more likely a sign of weaker domestic demand for propylene derivatives. It may be another signal of a consumer slowdown and less interest in holding more inventory at the chemical buyer level. See more in today's daily report.
Source: Bloomberg, C-MACC Analysis, May 2022