It's back to 2012/2013 for polyethylene, but with a potential twist. As we noted in today's daily report, international prices for polyethylene are being pushed up by oil prices, and even with higher prices in Asia, margins are still negative locally, which suggests that they will go higher. This margin umbrella is what generated windfall profits for US and Middle East producers in 2012, 2013, and half of 2014. The upward pressure remains high for international polyethylene prices because producers are not covering costs locally and in theory, the US should continue to benefit and we see domestic polyethylene prices rising again, both contract and spot. The risk for the US is local overcapacity of polyethylene and potential export challenges. The pricing arbitrage to export US polyethylene is huge and rising, but we are in a constrained trade world and we understand that export terminals are at capacity and warehouses are full. It is possible that the sharply lower US ethylene price is not just a function of new ethylene capacity, but also a function of integrated polyethylene producers choosing to limit production and looking for homes for the extra ethylene. If the polyethylene producers in the US try to push more volume domestically we could see local prices fall well below their export alternative – this is possible, but unlikely, in our view. Polypropylene does not have the same significant net export and the two plant closure in the US are likely enough to drive the price support that we are seeing this week.
Source: Bloomberg, C-MACC Analysis, April 2022
The fall in US ethylene prices has driven margins below those in Europe, which have jumped on much higher local ethylene prices. What the chart below does not show is that the US could very profitably supply Europe with ethylene today if the terminal and shipping capacity was available. We see the price weakness in the US as driven by a lack of options – partly because of logistics. Liquid carrier rates are higher and any attempts to move liquid ethylene derivatives out of the US, such as ethylbenzene, glycol, and especially EDC, face higher transportation costs and therefore require lower input costs.
Source: Bloomberg, C-MACC Analysis, April 2022
