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.