Is this the beginning of the end? The linked report that US traders are struggling to find export homes for incremental HDPE should not be a surprise given the significant price difference between the US domestic price and prices in other markets – Exhibit 1 in today's daily report. HDPE is the more fungible polyethylene, with both LLDPE and LDPE much more grade and application-specific. It is often the first polyethylene grade to spike in a shortage and fall when there is a surplus.
The higher ethane prices and the sharp increase in 2Q is likely offering some support for ethylene, but the more likely leveling factor of the last week or so has been the Nova outage and any lost production at Westlake, which will have a direct impact on export availability. Until ethylene spot prices in the US approach costs, which are around 10 cents per pound based on ethane feed, the more important driver of pricing will be whether or not there is a surplus and if there is what price is needed to generate export demand. The US ethylene surplus is equivalent to a couple of large plants and consequently, the market can swing from short to long depending on who is operating and is very vulnerable to weather-related closures, although these often take down ethylene derivative plants as well, creating shortages of the derivatives. Polyethylene can afford to pay more than y twice the current price of ethylene, while the ethylene export market needs a further step down from here. Consequently, the range of potential volatility in 3Q is very high – we underestimated the weather impact last year, as did everyone else and it would be a tough call today for a producer with a surplus as to whether to push it into the export market or hold on to it. See more in today's Daily Report.