Scatter charts with significant outlying points are always eye-catching and the exhibit below is no exception. The extremes of the chart are interesting as they show that when US polymer prices are low, Asia generally trades at a premium, and when US prices are high Asia trades at a discount. But today’s discount is several standard deviations from the norm, and it is too compelling a trade to ignore. If the US was short polyethylene we would be less focused on this arbitrage but that is not the case. Unilateral decisions from US producers to keep production in line with contract demand could maintain pricing support, but the competitive disadvantage that this places on US consumers – especially in durable applications (where the polymer is a larger part of the finished product cost) is significant. It is also a major cost headwind for the packaging companies in the US, and tough to pass through in most cases on staples and household products, because of the buying power of the major food and drug retailers.
Source: Bloomberg, C-MACC Analysis, May 2021
The arbitrage is assisted by the very high cost of freight between Asia and the US today and the reluctance of US polyethylene converters to experiment with imported polymer. The only products that might make sense to import into the US would be low-cost trash and shopping bags, but that is an established route already and it is not clear that much more could come in. HDPE pipe or polyethylene industrial sheet – especially geothermal liner for applications such as landfill might also make sense, but HDPE pipe is not dense and the shipping costs would likely overwhelm the arbitrage. The uncorrelated current point in the exhibit above will not last, but there are secondary considerations that may limit the rate of change. The only real move that could unhinge the US market quickly would if US buyers of converted polyethylene, such as the packagers themselves, were to import polymer from Asia and ask their suppliers in the US to process it for them (taking the product risk away from the guy in the middle). See today's daily report for more
