North American polypropylene buyers have received a rude awakening in 2017, with prices for that material jumping 10 cents per pound since Jan. 1. That's a sharp reversal from a combined 11.5 cents in price drops that market had seen in the last three months of 2016.
The January hike was the result of tight supplies of polymer-grade propylene feedstock. The PetroChem Wire consulting firm in Houston said that propylene prices in December didn't reflect a tight market, but that situation was masked by year-end destocking. When demand resurfaced in January, propylene buyers found they had to pay dramatically higher prices.
PetroChem Wire added that the run-up in propylene costs has caught PP buyers off guard and caused some to lower their order volumes for January. But not all run-ups in PP prices are alike, according to Phil Karig, managing director of the Mathelin Bay Associates LLC consulting firm in St. Louis.
“The last big increases in PP prices a few years back were driven largely by resin producers looking to increase their long-term margins in an environment of static polymer production capacity as well as pinched propylene monomer availability,” Karig said in an email.
“The current situation is more similar to a ‘short squeeze' in the stock market where expectations about the future are suddenly upended by quick moving events,” he added. “Demand for PP is suddenly stronger than expected, including for exports, and propylene availability is suddenly pinched. Put the two together and a big increase is not surprising.”
Unlike the previous two years where increases were margin driven, the current PP price increase “is all cost-push,” according to Scott Newell, a market analyst with Resin Technology Inc. in Fort Worth, Texas. “It's very reminiscent of the pre-2015 period where monomer was always short and [PP] prices were high and volatile,” he said.
PP makers are keeping stable margins when feedstock gets tighter, and are keeping 1-3 cents per pound in savings when feedstock is long in order to justify reinvestment in polypropylene, added Ashish Chitalia, a market analyst with the Wood Mackenzie consulting firm in Houston.
He said that relief in propylene prices is expected soon, due in part to Enterprise Petrochemicals completing a new PDH propylene unit in Mont Belvieu, Texas. Price relief “will present an opportunity to regain some of the lost margins to PP producers,” Chitalia explained. “However, producers and consumers are likely to be more cautious going forward, as high prices and margins will lead to more overseas imports, repeating the similar cycle seen in 2016.”
Through November, North American PP sales for 2016 were flat vs. 2015, according to the American Chemistry Council. A drop of almost 2 percent in domestic sales was negated by a jump of almost 74 percent for sales into the export market.
