We still believe that there is a good chance that 2Q 2021 is the peak for polymer profits in the US and Europe, but it very unclear how severe the downside could be, given the growth potential. Seasonal turnaround will keep markets more balanced in 2Q, and the major uncertainty beyond that will be weather in the US. A series of storms like last year could hold the market up through 3Q and into 4Q, but an absence of any weather events could expose US surpluses quite quickly, especially for ethylene and derivatives. The new builds in China have focused on ethylene and polyethylene (and some glycol), propylene and polypropylene, and PTA and PET, and this is where the potential weakness will emerge. There has been some new styrene capacity and that is also a vulnerable segment in our view. PVC, acetic acid, and large parts of the polyurethane chains look much more balanced to us and we have more faith in the projections being made by companies like Celanese, Olin, and Orbia than we do the major polyethylene producers. See today's daily report for more details.
The price dynamic discussed in today's report and shown in the exhibit below looks unusual in a recent historic context and is unlikely to last very long, but it is worth noting that the recent history does not reflect the longer-term history.
The propylene swing relative to ethylene in the US, as shown in the graph below is extraordinary. As we discussed yesterday it is a typical, albeit, tightly compacted commodity cycle, with the desperate shortage finding the incremental buyer who was more concerned about volume than price and the rapid supply and demand response that followed the peak in propylene pricing to correct the imbalance. The current price relative to ethylene does not look stable either and we would expect a reversal quite quickly – incremental propylene production from PDH is based on a higher cost feedstock than ethylene today – propane prices are higher than ethane prices, and while the volatility may remain in the relative price, we would expect to see propylene pricing rise back above ethylene again, fairly quickly. If polypropylene prices follow propylene and start to reflect a discount to polyethylene, that could also drive some polymer switching at the margin, which would help propylene relative to ethylene.
The propylene moves, highlighted in our report today, show just how fragile some of the commodity markets can be and how supply/demand imbalances can change very quickly. In this case, there are likely some significant restart timing issues associated with the freeze, compounding the return of propylene production from PDH units that had been shut down for maintenance. It is also possible that the spot market was overly influenced in the early part of this year by propylene producers purchasing to cover contractual shortfalls than propylene consumers paying up, only to lose money on their incremental sales.