Pricing, supply of PE, PP remain hard to predict

For resin market knowledge, it's hard to top Kathy Hall and David Barry.

Hall and Barry have been covering resin markets for more than a decade for PetroChem Wire, which now operates as PCW by OPIS and is a unit of Dow Jones. Hall — who founded PCW in 2007 — serves as the unit's executive director, while Barry is associate director.

The pair recently took some time to share some insights on current resin markets, which are being pushed and pulled by many factors surrounding the global economy.

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Q: What have been the biggest growth markets for polyethylene, polypropylene and other commodity resins so far in 2022?

Hall: I think the demand pattern of most significance in 2022 is that the segments that saw tremendous growth in 2020 and 2021 have abated. For example, plastic goods related to home improvement projects were flying off the shelves during a steady spate of lockdown-inspired DIY projects.

But how many times a year does one remodel? Appliances, plastic decking, doors, windows and floors are not annual purchases, and their pull on resins has certainly lessened.

Barry: I agree that a lot of the pandemic-driven boom in personal protective equipment (PPE) packaging and bottled soaps and sanitizers has faded, along with plastic decking and lawn furniture businesses that benefited from people wanting to spend more time in their backyards. However, with the pandemic winding down and stimulus funds still in the bank, we heard about a revival of municipal infrastructure projects. Infrastructure spending, along with high energy prices, has made PE pipe a strong growth market this year.

Q: What impacts are these markets seeing from inflation and higher interest rates?

Barry: A couple of observations here. Higher interest rates make it more expensive for processors to carry inventory, whether that's resin or finished goods, which may have contributed to the destocking trend we saw this summer. Also, inflation has caused the average consumer to opt more for the less expensive store brands and less for the premium brands and discretionary goods. I don't know how much this has affected PE demand in aggregate, but it has caused some market share shift at the retail level.

Q: What impact will new PE (Shell) and PP (Heartland) capacity have?

Hall: As with any project, the new supply does get baked into the demand forecast and much of the new product is typically contracted before the project is even through with the investment decision process. That said, the new capacity will take several years before overall demand catches up with it. This is why when such massive amounts of new product begin to be produced, the entire market feels it, and exports play a key role in balancing supply. This could prove challenging in this environment of shipping delays and ports already clogged with inventory, and the only alternative to balance the market is to throttle back production.

Q: Expectations for 2023? Do you see markets stabilizing?

Hall: If we knew the future with certainty, we'd play the lottery! But we do always have a solid indicator of sentiment from the monomers' futures markets. Right now, ethylene's forward curve is in a slightly backward-dated shape, meaning that prices in August and September are slightly higher than they are in the months to come. Ethylene's forward curve flattens in early 2023, which indicates either a lack of belief that prices will change much or that there is a profound lack of interest in trading that market at this time.

This week, we're seeing August ethylene at 27.25 cents per pound, with slight increases each month until a plateau is hit in early 2023 at 26.88 cents. For propylene, though, the forward trend is opposite and the polymer grade market is in contango, meaning that prices in August are lower than they are in forward months. August PGP this week is at 45 cents per pound, while Q4 pricing is 45.25 cents. In this week's 2023 market, PGP moves from 46 cents for January to 48 cents for July.

Barry: There is so much uncertainty in the forecast. When will China's economy rebound? How will Russia's invasion of Ukraine play out, and will Europe's economy be suffocated by high energy prices as a result? Will we see more extreme weather events along the Gulf Coast? Barring the extreme weather event, I believe the North American PE and PP markets will be well supplied next year, and we'll see supply chain spreads returning to more normal ranges.