We are seeing some monomer price weakness in the US, despite the rising costs. For ethylene, this is likely because of increased supplies (new capacity and turnarounds ending) and all capacity to consume running at full rates, including the export terminals. There is plenty of margin in exporting ethylene today and US prices are not falling because they need to find another buyer internationally. We could see some opportunistic buying for inventory at these prices, especially if you believe that the conflict in Ukraine is not ending soon and also if you are concerned about more extreme weather as we move through the summer in the south of the US.
The drop in US benzene pricing is likely a function of lower crude oil pricing and the overall impact this is having on oil product values. As the US has moved to much lighter ethylene feedstocks, the proportion of benzene that is coming from refining is overwhelming and alternative values for benzene or reformate in the gasoline pool are a strong driver of US and international pricing. Lower naphtha pricing for ethylene units outside the US will also hurt benzene values. By contrast, the stronger natural gas market – through the end of last week - supported ethane pricing in the US and we saw a step up in propane pricing – which have provided support for ethylene and propylene – also note that the analysis we published yesterday in the weekly catalyst suggests that the US can export ethylene to Asia at current prices – delivering ethylene into the region below current local costs. This should keep a floor under US ethylene pricing although any further decline in crude oil prices relative to US natural gas and NGLs will close this arbitrage.
In an important, but inevitable, change in tone, it is worth noting that the Borouge ethylene expansion announcement includes the idea that the complex will explore the possibility of a major carbon capture facility that will take much of the CO2 from the existing complex as well as the new plant. We have stated previously that the mood has changed sufficiently such that large industrial investments without a carbon abatement plan will not get approval from stakeholders and this is a prime example of what we expect. Locations with low-cost CCS will see disproportionate investment in our view and Abu Dhabi already has CCS in place as Adnoc is selling blue ammonia already to Japan. As we noted in a recent Sunday Piece, we expect carbon abatement challenges to slow expansions in basic chemicals and, despite this announcement by Borealis, see a market shortage in 2024/25 as a consequence.
We saw the stable to downward trends in both US ethylene and propylene spot prices reverse at the end of 2020, in part because of recovering demand post the initial wave of COVID, but also because of storm-related production constraints in October and early November. The weaker spot markets for both ethylene and propylene today reflect much stronger production for propylene (all PDH capacity running) and Hurricane Ida-related upsets that have left the monomer markets less badly impacted than derivatives. Something similar happened in 2020, especially for ethylene, but the backlog of derivative demand cause a step up in ethylene consumption when everything restarted. This could happen again, and we are earlier in the Hurricane season. See today's daily report for more.
The propylene charts in today's daily and below, show the extreme nature of the US market today – both relative to costs and prices internationally. Despite the very high cost of propane, the US propylene price is high enough to justify shipping propane to Asia – running it through local PDH capacity and shipping the propylene back to the US! This is the definition of unstable, but the logistics would be a constraint as the US does not have ship-based LPG import capability whee it would be needed. While we think propylene (polymer grade) is a compelling “short”, the markets over the last year have been so volatile and unpredictable and the US Hurricane season is far from over, so we would likely not put our money at risk today.
Polymer grade propylene in the US is weakening, albeit slowly, but remains very high versus history, versus ethylene and incremental costs of production. Propylene has the same volatile dynamic that ethylene has today in that if short, consumers can pay a lot more, and if long the price was a long way down to reach any cost hurdle. Just like ethylene we expect the market to show meaningful volatility in 3Q 2021 unless we get a storm effect in the US that impacts production more than demand. The futures market for propane and propylene expects propylene to fall relative to propane and barring weather events this is probably a reasonable view. See more in today's daily report.
USGC ethylene spot prices have weakened since reaching a multi-year peak in mid-April, something we have discussed for some time. This week's downtick in propylene values is a bit more unique as it has occurred alongside weakness in other monomer markets, which is a general trend that appears likely to gain momentum. Most monomer markets are weakening from recent 2Q21 highs in the US. We broadly find an increasing level of support for our view that many commodity chemical product prices will peak for the year in 2Q21. Exhibit 1 in our Daily Report shows an Asia arbitrage that should allow US ethylene to move to Asia, but is in the potential to take it because of local Asia surpluses, Asia prices will remain under pressure, although ethylene values in this region are fast approaching costs. We will soon be back to the previous equilibrium in an oversupplied ethylene market, where the economics of Asia production sets prices, and US exporters make a margin based on their cost advantage. The question now is how long it is before polymer prices follow.
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.