While we continue to see valiant efforts from the polyethylene producers to increase prices further in June, this is what we used to refer to as a “cow in front of a train” strategy. In that throwing a cow in front of a train was not going to stop it, but it might slow it down a bit! Barring weather, it is inevitable that US polyethylene prices shown in the chart below will start to give back some of their premium pricing over the coming months. One factor among several others pointed out on today's Daily Report is that Ethylene is much weaker and the international markets are materially out of line, and if freight rates have peaked, the arbitrage will undermine prices in the US. Producers will do their best to hang on to the high margins for as long as they can, and a few more cows may be sacrificed, but the weather is their only hope.
The easing of US base chemical spot pricing continues and has now spread, as expected to polymer grade propylene. Supply now appears to be back to levels that do not reflect weather-related interruptions and despite the very strong downstream demand in the US the inevitable monomer surpluses are appearing. The US is a net importer of benzene and consequently, we see a floor being reached pretty quickly here, and while propylene prices could drop much further, PDH economics will provide support, and with a higher propane price, that support will likely be much higher than the price support for ethylene.
Referring back to our daily report today, can polyethylene hold on? Despite the strength in US polyethylene prices and the aggressive attempts by sellers to hold on through the quarter, there are couple of key factors working against them. Local supply may be tight in the US, but as we discussed yesterday, ethylene is moving towards a global surplus that could push US prices even lower than we are seeing this week and as the chart below shows clearly, how large the gap between Asian ethylene prices and those in the US. Unlike ethylene, polyethylene is harder to trade in to the US, partly because it is an unusual movement and the shipping costs are high, as would be the cost of getting from a US port to a consumer, but partly because US consumers serving the higher end of the market are very grade and quality conscious and would concerned about product quality and the risk of sending something to their customers that does not do the job as well.