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.
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 Baystar polyethylene start-up date is consistent with the guidance that the company has been providing for a while, but it still leaves the venture with an ethylene surplus until that time and while the ethylene has been placed, according to the company, the ethylene that it has displaced will likely keep some downward pressure on US ethylene pricing until the polymer plant starts up (all things being equal). Even when the polymer plant starts, the US is expected to have a net ethylene surplus and we would expect exports to continue and prices to reflect levels to make the exports possible.
The weakness in polymer pricing in Asia and the drag that auto sales had on US consumer spending in May (spending was up ex-autos) should begin to undermine the very strong polypropylene market in the US, and the fall may happen at a reasonable clip. Polypropylene is more fungible than polyethylene, in that much more of the customization of polypropylene comes post-production rather than during production. There are several unique polyethylene technologies, especially for linear-low where the process drives the properties and adds value. For polypropylene, while there is some of this, most product is compounded and consequently, there is more fungibility before compounding and less risk from experimenting with suppliers. If freight rates were not so high as discussed in today's daily, we believe that we would have seen a notable amount of polypropylene moving from Asia to the US by now.
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 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.
The weakness in US monomer pricing has stalled this week, and buyers and sellers may be exploring marginal export or derivative export opportunities at these levels. Further weakness will come if attempts to export only serve to undermine pricing in the markets they are targeting. Underlying demand remains very strong and this is a supply-driven issue as US ethylene plants run back towards full rates and incremental refinery supply impacts the benzene and propylene markets. See today's report which includes detailed commentary on methanol in addition to the products in the chart.
As we highlighted in yesterday's report, ethylene continues to weaken (see chart below) in the US and it is the one product with a true supply/demand-driven problem today – there is simply more capacity to produce ethylene in the US than there is the capacity to consume it. This is a recent phenomenon and has been clouded by the various storm-related outages, the delay in the Sasol start-up. We began to see the length in the ethylene market lats last year and physical export volumes jumped dramatically – fully loading the terminal in Houston for loadings from November through January. This was based on pricing from October through December that created a significant arbitrage to ship to Asia – partly because a few of the China integrated projects had ethylene derivative projects complete before ethylene units were complete. The risk for US ethylene is that it could go much lower – barring outages – as there is no one left in the US who can take a marginal ton, most likely, and China seems well supplied. For more details please see today's daily.
The relative moves in ethylene and propylene prices are not surprising given the news flow – propylene is likely being influenced by concerns around refinery cutbacks again – this time because of the colonial pipeline issues, while ethylene should continue to see downward pressure as the US oversupply emerges from all of the recent production difficulties. See our Daily Report for more.
The volatility in propylene was something we predicted months ago – there are simply too many moving parts in the market today to predict incremental supply/demand dynamics. We remain of the view that refining rates will improve further over the coming months to address the increasing demand for gasoline and this could swing propylene back in the other direction. See today's report for more on this.