Spot prices for ethylene have surged in the US in the last week (chart below) – especially for delivery to Louisiana, where Westlake has a production outage. The price increase has completely removed the brief export arbitrage to Asia that lasted for a few weeks in late May and early June (Exhibit 5 in today's daily report). As we discussed on Sunday, ethylene is in a very wide no-mans-land in the US as it is not in sufficient surplus to drive pricing down to costs, and would likely be supported well above US costs and more by Asia costs in the current market, but if the market becomes short, buyers can pay a lot more for it as derivative prices are so high. If a PVC producer, such as Westlake, is buying, they can afford to pay significant premiums given that ethylene is less than 50% of the PVC molecule.
Source: Bloomberg, C-MACC Analysis, July 2021
The US ethylene surplus is not significant in the context of the total market in the US and even less so when derivative units are running at full rates. One unexpected outage can tip the balance, especially as we head into hurricane season and companies are trying to assess how much inventory they should hold and whether it makes sense to sell surpluses. We suggested a few weeks ago that holding on to ethylene may be more valuable than selling it and that recommendation looks like a good one given higher pricing today.