September 2012

As energy, feed and monomer markets swing daily, volatility for polyethylene and polypropylene grows and manifests itself in surprising shifts.

August was a particularly interesting month for producers, with a tight supply of most resin grades in both PE and PP. Buyers however, seemed to have purchased enough inventories during the summer months to sustain themselves and avoid panicked buying. Even with delayed shipments and backlogged orders, not many converters seemed to be caught short on supply.

In the export space, there remains a significant buildup of product that was waiting for packaging in the US Gulf and is now moving on the water. The International Longshoremen’s Association and the U.S. Maritime Alliance are meeting with federal mediators to avoid a strike on the East Coast of the United States and in the Gulf that would significantly disrupt export shipments. It’s worth keeping an eye on the headlines to see how the labor contract plays out, which is set to expire September 30th. It will take through September for producers to become more balanced on inventory with buyers also expected to come back to the market for October shipments.

With margins for the chemical companies sitting at such robust levels, a correction the other way in terms of supply and demand could play out, making it hard to hold an October increase for PE. In our last post, we anticipated the market moving up five cents per pound in polyethylene as tight supply and rising costs had been building up. Similarly, we now see the same taking place in polypropylene which has surprisingly been a laggard to polyethylene but is setting up for a move upward as we head for year-end.

The story in polyethylene is a bit more straight-forward than propylene. Ethane, again the most preferred feed in ethylene production, is heading toward $0.30 cpg in the US Gulf. Although PE inventory has been tight, causing the recent $0.05 cpp increase to stick, we would expect production to ramp up to take advantage of the potential margins from ethane cracking. We cannot ignore however, that the last wave of ethylene cracker turnarounds takes place in October. Assets being taken down include Eastman, Shell, Westlake and Flint Hills in this time frame. Conveniently, another $0.05 cpp increase for PE is on the table for October. Spot ethylene may be well supported during this turnaround, as it has been since Hurricane Isaac moved through Louisiana. The real factor we need to watch for is a signal in pricing for whether or not inventory levels return to normal by October. (read full article)