While Alpek shows a decline in the polypropylene to propylene spread in the exhibit below, it is important to note how high margins remain in the US. It is also important to note that the company points to high freight costs from Asia as one of the key drivers. China has significant polypropylene surpluses, and the price delta with the US is very high and, on paper, looks high enough to encourage imports into the US. But it is not that simple. The freight rates for containers from Asia are just one of many roadblocks, including wait time – on the water and the docks – and product quality. A US converter will likely not risk buying a few spot containers from China if focused on a product spec for a US customer. One way to get more material into the US would be for the end-user to buy the product – durable manufacturer or packager – and then ask its supplier to effectively toll-process. That way the product quality and logistic risk sit with the end consumer rather than the converter in the middle. The longer US domestic polypropylene prices remain inflated versus Asia, the more end-users may look at this option.
Source: Alpek – 1Q22 Earnings Results Presentation, April 2022
In today's daily report titled "Direction Of The Wind – High Domestic Prices Favor Imports, Product Availability Indicators Improve" we also note the improved PVC chain margin this month, the very strong Shin-Etsu results, and a rare announcement of new vinyl/PVC capacity in the Middle East. One of our expected positive drivers of PVC margins and stability has been a lack of new capacity additions, and even with this new project, capacity will likely lag demand. India is experiencing rapid demand growth for PVC and is likely seeing issues in getting additional imports this year. The economics for PVC are not attractive in India as the country has no competitive ethylene feedstock and is generally short of electrical power – key for chlorine. The project in the Emirates will have low-cost hydrocarbon and low-cost power, and we would expect to see PVC and caustic soda move to India from this facility – this looks like a good project for both ADNOC and Reliance.
