The US ethylene market strengthened slightly in early July, most likely because of supply disruptions as it is hard to see how domestic demand could improve from here. There is not much room to increase prices further if the export market is the balancing mechanism through July and August, as prices remain depressed in Asia and any arbitrage would close quickly if prices in the US moved any higher. Despite the rising NGL prices discussed in today's daily report and on Sunday, the US has plenty of margin left in ethylene, and prices could go lower if that is necessary to move additional volume. While we talk in the opening paragraph about increased inventories of finished goods in anticipation of the year-end holiday season and continued supply constraints, and how this is leading to a shortage of warehouse space, we suspect that everyone upstream of the finished good suppliers is also looking at adding or maintaining a larger inventory cushion than they have in recent years. We still believe that it is a tough call today as to whether you should sell surplus ethylene or store it as we head into hurricane season in the US.
Source: Bloomberg, C-MACC Analysis, July 2021
Reflecting on our Sunday piece and the notes in the energy section today, the Lotte Chemical decision to increase LPG cracking capacity in Korea is one of many announcements that keep us convinced that propane will remain in tight supply for the longer term, perhaps pricing it out of the ethylene feedstock markets, given the growing demand for on-purpose propylene production. We continue to see announcements of PDH capacity worldwide to support new polypropylene capacity, with much of this dependent on imports of propane.
