US ethylene prices have bounced off a low this week largely, in our view on the steep rise in natural gas and ethane. The drop in ethylene prices over the last couple of weeks signals an imbalance whereby production is more than enough to satisfy domestic demand and export demand. Export demand is limited by terminal capacity, and we have seen some domestic demand issues for polyethylene, not because of demand weakness, but because of export logistic bottlenecks, that are resulting in product (with homes to go to) backing up in the US ports. Given the timing of this build-up, we may see some higher end-quarter working capital from some of the chemical companies with sizeable export footprints for 1Q 2022. The sharp increase in US natural gas prices and the catch up that ethane has made to natural gas, should keep some upward pressure on spot ethylene prices if gas prices remain high. Propylene remains very supported by high propane prices.
It is interesting to note the rapid rise in US propylene (and benzene) values as they follow propane and crude prices (propane is following crude because of its heating value and export opportunities). Ethylene is not moving as US natural gas is in surplus and is not following international natural gas prices. The US is surplus ethylene and derivatives, but we would expect to see ethylene and ethylene derivative prices jump up in the US if Europe is physically unable to make ethylene and derivatives or if the costs in Europe become so high that supplying incremental volumes from the US becomes even more compelling. For more see today's report titled "Into The Mystic – Ex-US Energy Price Surge Favors US Producers; Low Visibility Keeps Capex In Check".
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.
In a recent report, we discussed the relative demand strength in the US, as well as the high costs of importing chemicals and polymers into the US and suggested that higher energy and feedstock costs could arrest price declines in the US at levels that still drive significant profitability for US producers. With that in mind, it is interesting to note the upward move in propylene spot prices in reaction to higher propane prices and the resulting flat settlement in propylene contract prices.
We have seen relative stability in US spot ethylene and propylene prices for several weeks now, despite some volatility in feedstock markets. Ethylene likely has significant export support in that there are complexes in Asia that are net short of ethylene and where derivative production can be increased if ethylene is available at the right price. There are also displacement opportunities if US ethylene can be delivered to importers in Asia at lower prices than local production costs. This is broadly the case today and there may even be select opportunities in Europe. In Asia it is likely easier, as the buyer would be replacing an alternate supplier. In Europe, most potential buyers would be looking at cutting back their own local production and that is a more marginal decision given the impact on unit economics of lower operating rates. US propylene demand remains high, but prices are now settling closer to PDH costs, although not close enough to encourage anyone to slow production. See more in today's daily report!
The propylene chart below shows a significant disconnect between spot and contract prices – more than at any point in recent history, and if the US contract price does not fall it will likely be an indicator that either discounts have increased or that more volume is moving against a spot price marker. The pressure is also on to lower ethylene contract prices, but the propylene spread is far more extreme.
The US propylene to propane spread finished this week within the 5-year range, as opposed to setting the high end of the 5-year range, for the first time since December 2020. It still has a long way to go to reach seasonal 5-year averages and even further to reach seasonal lows, and there is plenty of margin left in PDH production in the US, even if the returns are now much lower than they were only a couple of months ago. Propylene pricing in the US is now low enough to encourage all derivative units to operate at high rates and we expect derivative price declines to follow – perhaps as steeply as propylene in the spot markets but more slowly in the contract markets.
As we hinted in yesterday's report, the wheels are wobbling in the US market, especially for polyolefins and this comes at a time when Asia prices are finding some strength because of production and cost issues – it shows how quickly market dynamics can change in this industry and the closing of the gap between Asia and US propylene prices in the first exhibit below is perhaps the most dramatic example. We see a real opportunity for the wheels to stop wobbling and completely fall of the western wagons in the near term, and as the second exhibit below shows propylene continues lower, and with further to fall to hit PDH economics.
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.