The upwards pressure on crude oil prices will likely drive propane prices much higher in the near term and this will significantly impact propane dehydrogenation (PDH) costs in the US and put further upward pressure on propylene prices and prices for propylene derivatives. Note in the exhibit below that US polymer prices are turning slightly more positive relative to Asia again. While some of this will be cost-based issues in the US, especially for polypropylene, higher freight rates (again) continue to make it difficult for producers in Asia to maintain attractive operating rates and make it harder to push prices higher to reflect what are now rapidly escalating costs. The oil moves today may result in more capacity closures in Asia, which should lead to better pricing, but as we noted in our Weekly on Monday (and likely more extreme today) outside of US ethane-based ethylene producers, no one is making money producing ethylene today. Prices are going higher.
Our latest Sunday Thematic research report titled, "Reshoring Should Remain Supportive of Chemicals in ’22" studied the investment in US enterprise zones, near and medium-term, and the broad-based benefits for domestic supply chains.
US rail data for chemicals remain at the 5-year highs and have been there for almost 2 months. This is working its way into the supply chain and we are seeing weakness in US polymer prices across the board, except for PVC. US spot polymer prices are in a bit of a “no man's land” right now as they would need to drop significantly to find incremental demand offshore, given US premiums to the rest of the world. We believe that most of the volume leaving the US is doing so within company-specific businesses – ExxonMobil supplying ExxonMobil customers, Dow supplying Dow customers, etc, and consequently, these shipments do not show up in the spot market.
To put some perspective around the shipping container costs shown in Exhibit 1 of our daily report today, $20,000 per container equates to roughly 34 cents per pound of cargo assuming that the container is filled to maximum weight. If we also add in loading inefficiencies and assume 500 miles of road transport in the US or Europe, we can add another 5-10 cents per pound. Using ethylene costs in Asia at roughly 43 cents per pound as a basic benchmark (see our most recent weekly catalyst report), we thus estimate that it would cost around 90 cents per pound to get Asia polyethylene into the US. This does not include any working capital cost assumptions around ownership of the cargo from point of production to point of use. US spot PE prices are currently below 80 cents per pound for the more commodity grades of polyethylene, which is the market that could most easily be targeted by imports from Asia. When container rates were closer to $3000 per unit, the all-in import costs would have been roughly 30 cents per pound lower and the arbitrage would have been worth exploring. Of course, if the freight rate was only $3000 per container US polymer prices would likely be lower.