We talk about the US producer’s pressure to keep polyethylene contract prices flat in October earlier in today's daily report but the exhibit below helps to show some of the potential longer-term consequences of that behavior. The desire to keep pricing high by the producers is obvious as they will continue to make outsized margins if they do and carry some of the good 3Q profitability into 4Q – it will still not be as good as 3Q as costs are up for ethylene and every polyethylene producer is integrated back to ethylene in the US. The large gap in pricing with Asia is declining, in part because Asia prices are at costs and costs as rising as crude oil prices strengthen.
Source: Bloomberg, C-MACC Analysis, October 2021
The protection for the US is that the price difference with Asia is lower than the current cost of transporting polymer to the US because of the high container rates. The unintended longer-term consequence is likely a reluctance to invest in the US to consume more polymer if you have the option to invest elsewhere, especially for higher value-added goods that can cope with the high freight costs. We keep talking about reshoring opportunities for the US, but it is hard to see that happening for goods that have high polymer content if polymer prices in the US are much higher than in other parts of the World.
Separately, in our ESG and Climate piece published today, we look at the possible fate of recycling and alternative polymers if conventional polymer prices fall. The flip side of this is that the longer US conventional polymer prices stay inflated, the longer the newcomers (recyclers of alternatives) have to establish customer commitments. These are marginal volumes in the grand scheme of the US polymer markets but once established and validated by end-users they could grow quickly.