The oversupply in China for many commodities is becoming more evident daily. Our research depicts this as supply-driven, based on the surge of ethylene and propylene and derivative capacity since 3Q 2020. Notwithstanding the Dow commentary (in our daily report today), the weakness in Asia in polyethylene will ultimately impact the US, as the US relies on international demand for at least 25% of its polyethylene production – much less for polypropylene. The gyrations in the ethylene and propylene markets, as shown in the chart below, indicate the US dealing with the differences between the two monomer chains. Far more ethylene and ethylene derivatives move offshore than propylene and propylene derivatives. Despite the ongoing strength in derivatives, the ethylene market is loosening. At the same time, propylene shows extreme volatility because demand remains strong and has seen greater production issues on a relative basis, per our estimate. Supply is barely keeping up, even as refinery rates increase, because of problems with PDH units, pipelines, and splitters, which would not be meaningful in a more normalized market, but make a difference when refinery supply is constrained. High propane prices, which could move even higher, keep upward pressure because of PDH economics and because they keep propane out of ethylene units.
