The US propylene to propane spread finished this week within the 5-year range, as opposed to setting the high end of the 5-year range, for the first time since December 2020. It still has a long way to go to reach seasonal 5-year averages and even further to reach seasonal lows, and there is plenty of margin left in PDH production in the US, even if the returns are now much lower than they were only a couple of months ago. Propylene pricing in the US is now low enough to encourage all derivative units to operate at high rates and we expect derivative price declines to follow – perhaps as steeply as propylene in the spot markets but more slowly in the contract markets.
The last chart in yesterday’s daily showed the components of the year-on-year decline in US rail freight over the last few weeks and the blame lies squarely on autos and auto parts. The production restrictions continue for automakers and we could see a scenario where propylene derivative prices collapse in the areas that are most levered to auto’s – polypropylene and polyurethanes. The combination of lower demand and lower costs will not be lost on the major buyers who have been contending with high and increasing prices for a year at this point.
Power price increases are unlikely to stall the negative momentum in US propylene prices, but rising propane prices will put a limit on how much further they can fall from here. Read more in today's daily report.
Source: Bloomberg, C-MACC Analysis, October 2021
