Is this the beginning of the end? The linked report that US traders are struggling to find export homes for incremental HDPE should not be a surprise given the significant price difference between the US domestic price and prices in other markets – Exhibit 1 in today's daily report. HDPE is the more fungible polyethylene, with both LLDPE and LDPE much more grade and application-specific. It is often the first polyethylene grade to spike in a shortage and fall when there is a surplus.
We worry about the weather in the US at this time of the year and are very mindful of how much of an impact hurricane season had in 2020, but we are past the point of knowledge of the first hurricane to hit Louisiana last year (August 27th landfall), although there were two in October. In the meantime, the economic incentive to produce ethylene and polyethylene in the US has seldom been this high, and an uninterrupted summer of production could push the US into surplus for ethylene and many of its derivatives, The ethylene forward curve for 2022 appears to be driven by an expectation that exports will set domestic prices and that export prices will reflect Asia costs – in other words, the forward price is much lower than current levels. We see countless headlines each week that talk about how much less polyethylene China has imported year-to-date versus 2020 and this is a function of new capacity in China. The product that was imported last year needs to find a home elsewhere.
Continued strong production rates in the US, more production in China, and more exports from China – see port comments in the “Other” section in today's daily report – could drive a collapse in incremental US export prices for polyethylene quite quickly, and this will inevitably work its way into the domestic market. But everything hinges on production remaining high and over the last 2 years, we have seen plenty of unpredictable events tighten markets. The higher production rates in the US are reflected in the ACC data from Exhibit 6 in today's daily report, while the Exhibit below shows just how much room HDPE prices have to fall in the US. Note that Asia HDPE margins are at break-even today.
Source: Bloomberg, C-MACC Analysis, August 2021