We focus on ethylene price trends today, as we discuss it’s movement and related ethane tightness in today's daily report – more operating ethylene capacity means more ethylene (depressing prices) but it also means more ethane demand, inflating its price. Margins remain robust, even with the feedstock increase and the price decline and it is important to remember that any decline in US ethylene prices would be stopped at a level that allowed increased exports, which would still be well above US costs. With the full ethylene fleet operating in the US, there is a surplus (i.e. more ethylene than there is consuming capacity) so we expect export economics to drive spot pricing under “normal” circumstances. Abnormal production outages over the last year have seen that export surplus come and go a couple of times and the price volatility the Exhibit below shows that.
The chart below focus on the ethylene cost curve and show that the US currently retains a distinct cost advantage despite escalating domestic feedstock costs. The current cost advantage in the US is sufficient to move ethylene derivatives into most markets profitably and while US spot prices for ethylene may not quite reflect the levels needed to stimulate exports today – US ethylene costs certainly do. The restart of the Nova unit in Louisiana may put some further downward on US ethylene prices but as we discussed yesterday, given the weather risks in 3Q it is an interesting dilemma today over whether you sell surplus ethylene or store it on the basis that spot prices will rise because of production outages – this time last year the “store it” decision would have been the right one as spot prices rose through 3Q.
The chart below and the others in our daily report linked add more weight to our argument that polymer grade propylene prices in the US have some downside and that it could happen relatively quickly, especially if ethylene producers play the current propane feedstock arbitrage to their full extent. Given weaker propylene derivative markets outside the US, propylene derivative pricing would likely come under some negative pressure if propylene prices fell.