Weekly Market Drivers for the USA
Two market changes can be expected if the naphtha price remains at today’s levels: imported finished goods will escalate (stretch film, can liners, and other commodity products) and the producers’ inventories will outpace demand. Both market changes will force the suppliers to respond to today’s domestic price level.
North American suppliers have two choices: - Proactive - gradually decrease prices regardless of current tight inventories. This is not likely due to the year-end incentives/bonuses for seller and product managers. 2014 has been a thriving year for suppliers and processors should not expect a proactive price reduction.
- Reactive - wait until inventories grow without an export market, supply outpaces demand, and sales are lost to Asia manufacturing.
In order to continue to manage inventories, NA suppliers will have to sell resin almost 25% less than domestic prices. RTi will continue to monitor export activity.
Secondary market activity remains steady. Buyers are buying as needed, without any price increase potential. Multiple car offers are still not present and pricing remains firm. Inventories will need to improve before this market achieves any decreases.
Feedstock pricing declined this week. Both ethane and spot ethylene prices moved down. Despite tight ethylene supplies, sellers began to discount ethylene prices due to the global price weakness due to oil.
Exports pricing from North America is 10% higher than offers from Korea and Thailand. North America suppliers have declined to meet new price point into Latin America.
RTi Polyethylene Outlook and Suggested Action Strategies
30/60/90 Days: Without any chance of price increases, buyers should manage inventories. Processors should begin informed discussions regarding the high price disadvantage North America has now.
In the PP market, October PGP contract prices settled higher by $0.04/lb to $0.765/lb.
Shortly after the settlement, spot propylene markets began showing their weakness. That weakness has continued into this with further erosion in spot propylene.
Spot RGP saw a couple rail transactions early this week at $0.58/lb. Activity since then has been light. The RGP market is being valued at the $0.60/lb level.
Spot PGP transactions were also hard to come by this week with bids and offers moving to a range of $0.68/lb to $0.72/lb. There was a November trade late this week at $0.715/lb.
Propylene inventories reported by the EIA dropped from 2.476 million barrels to 2.299 million barrels. This is the eleventh week in a row of drawing inventory levels. This is also the lowest level of inventory since mid-2011. Obviously, the market is not responding as if inventories were tight. The reason is that many of the big supply outages have returned to operation and the EIA inventories lag by a couple weeks. The point being that we expect the EIA inventories to bottom out and start building in the coming weeks.
FHR’s PDH unit is up and running. Exxon and Marathon FCC units restarted last week, and Shell’s FCC unit has restarted this week. Exxon’s Beaumont refinery expected to restart by the end of next week and P66 Sweeny is expected over the weekend. We have also heard of the potential for crackers to shift to a slightly heavier feed slate on some furnaces.
Between propylene producing assets restarting, propylene derivative demand destruction, and imports of propylene, the supply/demand balance of propylene is improving and pricing is starting to respond.
The other big factor in play is crude oil prices. WTI lost more ground this week with recent values at $80.80/bbl. Brent crude is also down to $84.70/bbl.
In addition to crude prices falling, propylene capacity additions in China are having a bearish influence on propylene prices in the Far East. Propylene prices are down roughly $0.11/lb to $0.12/lb, and they continue to drop. The spread between PGP in the Far East and the US price of $0.765/lb is $0.235/lb. This has opened up an arbitrage that has resulted in propylene imports to the US. US PGP prices need to fall roughly $0.135/lb just to shut the arbitrage.
In polypropylene, we see many converters delaying October purchases as much as they can. With expectations of a significantly lower November PGP price, nobody wants to buy at October price levels.
The softer demand has opened up availability of resin into the spot markets. However, spot sellers are also having a difficult time selling at October price points, and this caused spot PP price offers to drop.
With buyers sitting on the sidelines for the moment and prices soon to fall, we think this will bring buyers back to the market with heavy buying patterns to close out the year.
RTi Polypropylene Outlook and Suggested Action Strategies
30 Days: Buy as needed. Prices are soon to fall. Be sure to get your year-end orders on the books. The potential for a big demand pull from PP could limit availability. 60/90 Days: Supply/demand balances should be much improved by this time. If oil prices can find a home at current prices, PGP could see a big correction during this timeframe.
In the PVC market, expectations for improved ethylene supplies forced spot ethylene down $0.11/lb+ this month, leading to expectations for lower ethylene contract pricing and pressure to reverse the September PVC price increase in October.
Export demand for PVC is expected to continue lower due to lower oil based ethylene feedstock costs overseas.
Producers matched operating rates with demand down roughly 5% both in domestic and export demand for September and are expected to try to do more of the same in October. Days of supply remained flat.
A temporary shutdown of the Evangeline pipeline to repair a leak will restrict some ethylene deliveries to PVC operations in Louisiana, but reduced PVC operating rates and the long anticipated re-start of the Williams cracker in LA would more than offset this outage.
After rising $0.05/lb across Aug/Sep, contract ethylene is expected lower throughout Q4 as supplies improve and demand is reduced due to seasonal slowness and reduced export demand. The stronger US$ does not help affordability of US resin.
Lower export pricing and demand, as well as a return to lower ethylene spot prices will erode the September increase and have the potential to return some of the Q1 increases later in Q4 or into Q1 2015.
Domestic demand will suffer as buyers look for lower prices, buying only as needed.
PVC export prices fell by more than 4% in September with October now starting to move lower as prices overseas have moved lower along with oil (as the primary feedstock for ethylene in export markets) and ample supplies.
PVC operating rates fell by nearly 5% in September yielding a 2% inventory draw as producers were cautious about matching demand with production in light of high ethylene costs. Supplies remained ample as domestic demand fell in September by 5% and exports fell 5%.
PVC raw material costs in September peaked at a $0.015/lb premium to January to be followed by a forecasted $0.02/lb reduction in October taking raw material cost $0.005/lb below August.
There has not been a contract ethylene settlement for October, nor any nominations. Spot prices have dropped ~$0.06/lb (~$0.59/lb) this week. The spot price is also down ~$0.17/lb since late September.
The Exxon Bayport cracker restarted this week, shifting the ethylene supply from tight to “getting more ample” according to an RTi source. The Evangeline pipeline which went offline last week was expected to restart early next week, however that has now been delayed with no restart date. The Williams Geismar unit is not technically delayed, but they now will not have commercial product available until December. They do expect to start running feed into the unit in November.
Chlorine prices remained flat again this week, and a nonfactor in PVC price moves.
RTi PVC Outlook and Suggested Action Strategies
30 Days: Balanced domestic supplies and a rapidly falling feedstock market here and overseas are a strong predictor of lower spot PVC to be followed by a roll-back of the September increase. Buy as needed, looking for August pricing. 60/90 Days: As ethylene supplies continue to improve and seasonal/export PVC demand fades further, look for even lower pricing, giving back some of the Q1 increases.
The opportunity for a decrease in October PET contracts remains intact. However, there are a couple of factors that might make it more of a challenge.
The PTA market is the biggest issue facing PET at this time. BP, the largest producer in the US, has been having problems at their Cooper River facility since the fire in August. Luckily they still had a second line there, until now. This line went down unexpectedly, but is in the process of ramping back up. This is adding even more tightness into the market. A more prominent effect is projected to hit PET buyers in November. October should be safe for a decent decrease.
BP’s issues are putting pressure on overall domestic PTA production, forcing others to run at maximum rates, which could potentially push their equipment too far. As of now, no other issues have been seen, but it may become an issue in the future if they cannot perform maintenance, etc.
While there are PTA imports coming in from overseas, the added costs are going to keep the domestic market from really getting the full benefits of the lower oil. This is going to have to come from imported PET.
PET pricing in Asia has started to show a little strength since prices have come down so dramatically. They will not likely go too much lower if oil hovers in the low $80 per barrel range. However, they are still cheaper than domestic US prices at current levels.
The lack of PTA production in the US and cheaper oil have led spot PX to hit some of the lowest levels in years. October contracts remain unsettled, but could temporarily become more disconnected from PTA.
Ethylene glycol is not a major factor – spot ethylene prices in the US and Asia have been trending lower.
Overall production costs for integrated producers will move lower throughout the end of the year. The extent that this will translate to the broader PET market is unclear at this time.
PET pricing in Europe is continuing to slip. Producers are getting competitive as there is too much supply in the market. With lower energy costs, buyers are still expecting lower PET pricing.
RTi PET Outlook and Suggested Action Strategies
30 Days: Imported material and weakening costs for PET producers should move the domestic market lower this month. The amount will depend largely on the PX settlement, which could be in the neighborhood of a $0.04/lb decrease. At this time, as much as $0.03/lb could come off of PET. 60/90 Days: The issues facing the domestic PTA market are continuing. PET price increases are not expected at this time, but there could definitely be a limit on the decreases that were originally projected. As long as imports remain competitive and available, the market will stay flat to down to close out the year.
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