The theme of product shortages continues, with prices in China reflecting the global tightness and signaling that the import dependence is still there for some products, despite the recent and continuing capacity additions. The base chemical price rises in the US are contributing to the rising US producer price index for February and given that we have seen further price rises since February, March could show another jump.
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Today we had earnings reports from both Braskem and Lanxess. It is hard to fault either company for the tones and expectations lined out in today's report. This is an industry where forecasting is generally problematic as there are too many potential influences that are not only outside the control of the companies themselves, but also prone to surprise movements regularly. Who could have foretold COVID and the early impacts of COVID on all commodity and specialty markets. Equally, no-one forecast the rapid rise in durable demand in 2H 2020 the subsequent impact that it has had on global supply chains – and then there is the weather!
We are experiencing a perfect storm for chemical pricing. The supply chain dislocations are causing buyers right down the chain to think about both supply routes and how much inventory they should hold (we would expect a general working capital increase across manufacturing and possibly retailing over the next 6 months – price and volume-driven). The risk of over-buying is high, and, for example, plastic buyers may be pressing all suppliers for contract maximums, in the hope that one or two can deliver. Things will change when four or five deliver in the same week – unlikely before late 2Q 2021 in our view. When you add the supply chain issues to rising oil prices and the US base chemicals and polymer production issues, you have a global tight market that is expressing itself most aggressively in the US and creating some of the extraordinary trends in the charts we highlighted in today's daily.
One of the striking conclusions from our Weekly yesterday (charts 41-43) was the steady upward march in PVC pricing in all regions – everywhere is at 5-year highs, the US, Europe, and Asia. While it is very easy to be distracted by the spikes in polyethylene and polypropylene pricing, we believe that these price rises are far more impacted by the spike in consumer durable spending, production outages, and global supply dislocations than PVC, which we have believed for some time has better longer-term fundamentals and will benefit from infrastructure spending increase, while not being materially impacted by a consumer flip from durables to travel.
As we anticipated (and have covered at length in our ESG and Climate service), we see a renewed increase in adding more US LNG capacity as global markets tighten again and as more emerging economies see LNG as a cleaner and potentially cheaper path to broader electrification. There is also talk of changing contract structures to share the pains and gains of LNG price volatility. This would be good for the buyers and is likely to generate more importer interest, but it will challenge some of the independent projects from a financing perspective if more variable price components become the norm in contract construction – this could create a competitive edge for the oil majors over the independents, as they would have less trouble raising the investment funds. One of the enabling factors of the early LNG projects was the fixed nature of contracts and the ability to lock in a largely fixed return for both equity and debt investors.
The propylene moves, highlighted in our report today, show just how fragile some of the commodity markets can be and how supply/demand imbalances can change very quickly. In this case, there are likely some significant restart timing issues associated with the freeze, compounding the return of propylene production from PDH units that had been shut down for maintenance. It is also possible that the spot market was overly influenced in the early part of this year by propylene producers purchasing to cover contractual shortfalls than propylene consumers paying up, only to lose money on their incremental sales.
The focus today should be on the data suggesting that the US is importing both polyethylene and polypropylene, something which the nominal US supply/demand balance for both products should not support. The US has a material surplus of polyethylene capacity (almost 30% of US polyethylene capacity is surplus to US needs – on paper) and the start-up in the Fall of last year of Braskem’s new polypropylene units in Texas should have pushed polypropylene into surplus and the message from Braskem before start-up was that the company expected to export as significant volume. So, what has changed? Anyone reading our daily reports will have seen us highlight the development of a reverse arbitrage for both polymers’ pricing versus “normal” for many months, this is not news. What is news is that there is not enough flexibility in the system to meet US demand at attractive enough prices to avoid opportunistic imports. However, some of the imports likely are from companies with capacity in the US and other countries trying to balance their global portfolios. It is also possible that polymer consumers who are less concerned about specific grade quality – i.e. those that are already bidding up recycled polymer prices are importing opportunistic volume to lower their average purchase prices.
The effects of the Texas outages are far from over, and given some of the very tight supply chains before the storm (see our Sunday recap – for comments on excessive optimism and US customer inventories), there is limited flexibility in the system anywhere and prices continue to rise globally. This is maintaining a trend in the US and reversing some of the trends in Europe year to date and many of the more negative trends in Asia that had resulted from significant capacity additions. The cut back in US polymer exports, especially polyethylene is creating anticipated shortages everywhere and prices reflect attempts by importers to secure alternate supply. However, the pricing rally extends well beyond polyethylene.