We have talked a lot over the last year about our preference for PVC as likely the better longer-term story within polymers – more stable growth – more limited global investment and less impact from the plastic waste moves, as very little PVC ends up in packaging. The exception is the medical device space, where demand for PVC in single-use applications is growing as illustrated below. While the medical device industry is setting up to use recycled PVC it is going to be hard to close the loop here as medical waste is generally quite contaminated and PVC does not do well in a conventional pyrolysis process because the chlorine molecule is a contaminant. The solution will likely be getting PVC from end-of-life consumer durables and recycling that PVC back into medical applications. Disposal of the medical waste is best done through a pyrolysis or gasification process that includes very high-temperature plasma technology. These facilities exist and operate well outside of the US, and we would expect to see broader acceptance within the US over time. See more in today's daily.
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The crack in US polypropylene prices is probably worth some comments as the polymer has shown extraordinary strength since the middle of last year, in the face of new capacity that was expected to push the US market into surplus. In the chart below we show that the spread over propylene has not fallen, but this is because propylene is falling lock-step with polypropylene for the most part. Those companies integrated back to PDH economics will see a significant margins squeeze as polymer prices fall while propane prices increase. We have written recently about a concern that lower auto production rates in the US will back up into parts and that this will impact materials. In the early days of the auto cutbacks, we assumed that the automakers and their suppliers would simply build inventory, with the expectation of a bounce-back in demand once the chip shortage was over. As the chip shortage has dragged on and become more significant, we have likely hit any limit of inventory build, and we are concerned that polypropylene pricing could collapse if auto-related demand does not recover quickly. While autos are not a dominant demand category for polypropylene the sector is certainly large enough to swing the polymer market from shortage to surplus. With the rise in propane prices and other ethylene feedstocks, polypropylene profits could fall meaningfully. See today's daily for more comments on the propane markets.
What a difference a day makes – over the weekend we discussed how US ethylene pricing was approaching levels relative to Asia that could restart trade and today prices are jumping again in anticipation of possible lost production from the Tropical Storm. The risk from Nicholas is flooding, but it has already passed much of the South Texas capacity and the larger risk is to the capacity east of Houston and into Western Louisiana at this time. As with Ida, it will take several days to get a read on how much of the chemical and related capacity has been impacted and the likely impacts on supply/demand. See today's daily for more.
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.
We saw the stable to downward trends in both US ethylene and propylene spot prices reverse at the end of 2020, in part because of recovering demand post the initial wave of COVID, but also because of storm-related production constraints in October and early November. The weaker spot markets for both ethylene and propylene today reflect much stronger production for propylene (all PDH capacity running) and Hurricane Ida-related upsets that have left the monomer markets less badly impacted than derivatives. Something similar happened in 2020, especially for ethylene, but the backlog of derivative demand cause a step up in ethylene consumption when everything restarted. This could happen again, and we are earlier in the Hurricane season. See today's daily report for more.
It will be interesting to see how US propane prices track this winter as we have low inventories in the US and there will likely be a step up in year-on-year export demand because of investments in Asia to consume imported propane. At some prices level, there will be demand destruction as ethylene and propylene economics are close to break-even in Asia and the region looks over-supplied enough for some producers to consider cutting back or even shutting down – if propane is the least attractive feedstock then the propane-based units will close first. Those producers in the US that have propane flexibility are unlikely to be anywhere near the market today as declining propylene prices in the US only make the feedstock less attractive. We wonder whether some of the traditional propane users in the US Gulf are experimenting with light naphtha/condensate as an alternative, but these feedstocks will also become less attractive as propylene prices fall. See more in today's daily report.
It is increasingly likely that Hurricane Ida will add another leg of strength to US chemical pricing more broadly, with a host of prolonged production outage news and force majeure notices, giving momentum to some price increase announcements for September, some of which looked very speculative at the time they were made. Buyers will have an eye on continued pockets of supply chain disruption, strong demand in general, particularly for those levered to holiday spending, and the not insignificant fact that we still have almost three months of hurricane season to go! Note that two of the more disruptive storms of 2020 hit in October. We talk specifically about PVC in today's daily - See price chart below.
The ACC “chemical activity barometer” shown in the exhibit below is more impressive when you consider that by August of last year the demand recovery was in full swing and operating rates were high. There was some negative impact from the first hurricane, but this hit very late in August 2020 and would not have influenced the ACC reported activity significantly. We focus on price and margin in most of our commodity commentary and this is appropriate, given how much more important they are than incremental volume for all commodities, but it is worth noting that all of the chemical producers get decent cash flow gains from uninterrupted high (optimal) operating rates. The last two years have been a little plagued by more than expected unplanned stoppages, and this has helped keep the US market buoyant, but those that have been able to run at optimized rates for prolonged periods are benefiting. Prices have been the biggest contributor for Dow and ExxonMobil on the integrated polyethylene front in the US this year, but both have had the benefit of very strong operating performance, as have most others with a bias to Texas. Dow and ExxonMobil have large facilities that were in the path of Ida. LyondellBasell and CP Chem do not. See our daily report for more.
We discuss recent historic highs reached in China to US container freight rates in our daily research today, and (absent Ida) we note that freight charges remain a major component in favor of US polymer price support. With current container rates so high, it is difficult for US consumers to get access to cheaper material from Asia, even if they are willing to try the untested grades in their equipment. Absent the freight extremes today, we would be much more definitive in declaring that the US's record spot/contract polyethylene price difference was unsustainable and would be corrected quickly. While there appear to be some surpluses of US polyethylene today, such that producers are testing the incremental export market, the same producers can hide behind the freight barrier as they make arguments to support domestic pricing. Some US buyers may be getting pricing relief because they have price mechanisms that partly reflect the spot price. It is also possible that large buyer discounts have risen through this period of very high pricing (this has happened before).
The advanced nature of the ExxonMobil/SABIC project, which we have discussed previously, is another cause for concern around US polyethylene market strength for a couple of reasons. First, it is only the first wave, with Baystar and Shell hot on the heels in 1H 2020. Second, it will add another ethylene seller in the US – SABIC – and this may be enough to cause some ripples. If you look at this in the context of the Asia production growth data provided by the ACC (below) there should be a significant cause for concern around the global balance for many products. Some of the specific Asia country growth, year on year and year to date, is driven by COVID-related shutdowns in 2020 – Taiwan and Malaysia for example – but the bulk of the China growth, which is more significant in absolute volume terms is from new capacity. China’s ability to sell surpluses internationally is hindered by the current logistic problems, but these will not last, and we should also factor in where the material will go that had been imported into China. The global polyethylene market could look very different in 2022, although all eyes will be focused on Hurricane Ida for the next week. See more in today's daily report.