The gap between the US contract and spot price for polyethylene in the exhibit below looks wrong, and it could be wrong in absolute terms but the trend alone makes a statement. In the past, we have seen a couple of instances where reported contract settlements have drifted further from net transaction prices, either because of larger agreed discounts or because of contract formulae that reflect spot pricing to a greater degree. This tends to work for a while, but ultimately smaller buyers with more limited purchasing power become more disadvantaged and there is a breaking point at which the “contract” price is adjusted downwards by the price reporting services to better reflect what is really going on. The current market feels like the times in the past when an adjustment has been needed.
Source: Bloomberg, C-MACC Analysis, September 2021
The second chart below shows how supported the ethylene business in the US remains, despite the lower oil/gas ratio. As we have discussed in recent work, we see much of the disconnect coming from the supply chain disruptions and the very high global freight costs. While there is some trade of ethylene and other monomers, the global price correction mechanism historically has sat with the trade of liquids, such as ethylene glycol, styrene, and EDC, and solids, such as polyethylene and polypropylene. Today, polymers should be moving from east to west to exploit the huge price arbitrage, but the overly inflated freight costs are preventing that movement and the margin advantage is accruing to the US, where local demand is strong – allowing for increased polymer sales domestically and higher operating rates through the chain. US export surpluses have been contained by strong local demand and a series of production outages – see Dow comments of polyethylene linked – also helping to keep the US margins high. For more on production economics, see our weekly update.
Source: Bloomberg, C-MACC Analysis, September 2021