Weekly Market Drivers for the USA
Suppliers continue to overlook global polyethylene price pressure. There have not been any market wide price reductions offered. There are only a few market dynamics to reduce prices in North America; some resin grades in certain market segments are still a little tight, there is no battle for market share and off grade prices are near prime.
The major problem will be if the suppliers wait until the inventories grow because of exports and imported finished product starts to replace North American manufacturing. Major retailers are not going to wait for their retail bag (grocery bag) price to fall in North America, they will order from Asia.
Nova might be the sympathetic supplier that will commence needed market price adjustments. It is not the smaller suppliers and it is most likely not going to be Dow or LBI that will lower the price.
The price has to come down soon or NA processors are in trouble. Do they ride the year out for profits and deal with the mess next year? Or start to walk the price down?
Contract ethylene settled down $0.04/lb in October to $0.5050/lb. The contract market has minimal impact on polyethylene prices. Contract prices have been stable in the high $0.40’s for the last 34 months. Spot prices are down $0.18/lb since the middle of October to $0.52/lb. Cash cost to produce ethylene remains close to the three year average of $0.12/ lb.
Distributors and traders are selling off any inventory and are canceling orders with suppliers. The concern of falling prices has this segment withdrawn from any additional inventory. Buyers should be cautious of multiple car deals and truckload inventories moves.
Final inventories improved by 35 million pounds in September. According to preliminary data for October, there was an additional 25 million pound gain (HDPE -13; LDPE +26; LLDPE +12). This marks the third consecutive build, leaving producers with inventories approximately 4.5% above the average of the past few years.
Exports are down to only 15% of production. This is the lowest in at least five years. This is the first data that confirms the lack of global competitiveness. Very few export transactions happened after the middle of October. Expect November exports to be a ten-year low.
CPChem’s Cedar Bayou is restarting this week (struggling with flaring). The Williams Geismar unit is restarting, currently cracking hydrocarbons but not expected to have commercial product for several more weeks. Formosa’s Point Comfort unit is down for a planned TAR (30 days). Exxon Baytown had a power outage, trying to restart.
Latin America and SEA prices continue to soften. The bottom has not been reached. Cost to produce is approximately $0.05/lb to $0.07/lb below the selling price. Soft demand may lead to continued downward pricing.
RTi Polyethylene Outlook and Suggested Action Strategies
30/60/90 Days: Prices will not increase in the next 90 days if oil remains near $80/bbl. Continue to pressure your supplier for lower prices due to the global downturn of PE prices and the eventual competitive discord between NA and every other region. Do not buy one more pellet than you need and delay, delay, delay; timing is on the processors side. Inventory management is critical in a down market.
In the PP market, contract PGP settled down by $0.05/lb for November for a price of $0.715/lb. All indications point to another drop in price for December.
Spot propylene continues to move lower but at a rather slow pace. Spot RGP is being valued in the $0.53/lb to $0.545/lb range after transacting at $0.555/lb early in the week. There have only been offers in the market since, with the latest coming at $0.53/lb. The real value could be lower.
Spot PGP traded this week at $0.67/lb. Moving out into 2015, prices were lower with several trades conducted at $0.6375/lb.
From a supply perspective, market conditions are quickly improving for propylene. CPChem was in the process of restarting their Port Arthur cracker this week. The associated propylene splitters will boost supply in the near future. LBI’s metathesis unit is up and running. This is another big chunk of supply that was recently missing. We are also seeing a slightly heavier feed slate into the crackers with propane and butane competitive with ethane as feed. This will add some incremental supply.
In addition, the bulk of the refinery TAR season is over. Refinery rates are being reported at 90.1% (US) and 92.3% (PADD3). The propylene rich PADD3 region is up from 87.0% just a few weeks ago.
All this return of supply is being reflected in the EIA propylene inventories which have increased from 2.183 to 2.932 million barrels over the past two weeks. This is a remarkable build in such a short time.
Also, cargoes of imported propylene have already started to arrive from other regions in the world.
Propylene prices in the Far East region continue to slowly decline. PGP prices are valued at $0.515/lb to $0.525/lb. This leaves a wide gap to US prices of nearly $0.20/lb. The arbitrage to the US is wide open for additional pounds to flow this way unless prices here drop. US PGP prices have carried a premium to Far East prices of about $0.07/lb to $0.08/lb. If US supplies of propylene continue to build, there is plenty of room for prices to fall.
On the polypropylene front, one of the most interesting data points this week was how well demand held up in October. Considering prices were at a yearly high and the industry was coming off five straight months of above average demand, we were expecting demand to be off much more than it actually was.
With prices now on the decline, we would expect demand to perform well. This is the one bullish factor we can point to amongst a handful of bearish signs.
Also of note, Exxon issued another price increase letter stating their intention to expand margins another $0.02/lb. This is in addition to Exxon’s implementation of a $0.02/lb expansion in the August/September timeframe. We have not yet seen a response from other suppliers, but this will be critical to PP prices heading into 2015.
RTi Polypropylene Outlook and Suggested Action Strategies
30 Days: Buy as needed. Prices are on the decline. It is very likely that we see the lowest prices of the year once December PGP contracts settle. 60/90 Days: With oil prices dragging petrochemical prices lower and better supplies of propylene in the US, the potential for further price erosion beyond December is certainly there.
PVC demand is seeing seasonal declines and is losing ground in export markets as lower feedstock costs from oil overseas move pricing lower. Export pricing has fallen below $0.39/lb as demand in October fell 4%.
Domestic demand saw a 6% demand increase for October, offsetting the decline in exports, but with operating rates nearing 87% there was a small inventory build.
Outlook for a decrease in November of $0.02/lb to $0.03/lb is promising with more to come out in December given a good start-up of the Williams cracker this month to help supply ethylene to PVC plants in LA.
Export demand for PE and PVC is expected to continue lower due to lower oil based ethylene feedstock costs overseas as Brent crude pricing nears $80/bbl, lending additional downward pressure to domestic ethylene pricing.
Inventories are 13% lower than a year ago having lost ground since the beginning of the year due to higher and more sustained domestic demand related to the stronger growth US economy and construction recovery.
Lower export pricing and demand, as well as a return to lower ethylene spot prices will erode the September increase first, followed by a return of some of the Q1 increases late in Q4 or into Q1 2015.
PVC export prices have fallen more than 5% since August as competitive levels overseas continue to fall.
PVC raw material costs in September peaked at a $0.015/lb premium to January. October fell $0.02/lb with another $0.02/lb decrease forecast for November taking raw material to the same level as a year ago before $0.11/lb of increases due to short PVC supplies and some ethylene escalations.
October contract prices are down $0.04/lb to $0.5050/lb. Spot prices are freefalling, down over $0.10/lb on average since October and down ~$0.20/lb since September. The current spot price is ~$0.52/lb. The supply position has improved and could be on the verge of being considered long. The planned TAR’s have been completed, the units have either restarted or are in the process of being restarted. CPChem’s Cedar Bayou is restarting this week (struggling with flaring). The Williams Geismar unit is restarting, currently cracking hydrocarbons but not expected to have commercial product for several more weeks. Formosa’s Point Comfort unit is down for a planned TAR (30 days). Exxon Baytown had a power outage, trying to restart.
Chlorine prices were stable this week. They had been inching lower as seasonal demand is decreasing, in addition to reduced costs in downstream products. Inventory levels are still healthy, and chlorine is not expected to be a factor in PVC prices in the short term.
RTi PVC Outlook and Suggested Action Strategies
30 Days: Use improving domestic supplies, falling export prices and a rapidly falling feedstock market here and overseas to pressure producers for a removal of the September plus a part of the March increase. Operating rate discipline appears to be lacking as margins are up and producers want to grab sales that were missed earlier in the year when outages were rampant. Buy as needed, looking for August or better pricing. 60/90 Days: As ethylene supplies continue to improve and export PVC demand fades further, look for roll backs of at least $0.03/lb from Q1 2014. Buy as needed.
November PET contract prices are not yet settled, but have the potential to decline in the neighborhood of $0.03/lb to $0.05/lb based on current cost estimates.
The domestic market is still tight on PTA, and this is not likely to change until Q1. Imported material will alleviate some of the supply issues, but will also factor partly into cost.
The magnitude of the decline in PET contracts this month will be limited by availability, and the willingness of buyers to import material.
Resin pricing in China has reached the lowest levels since the financial crisis. Although still quite higher than those lows, it still makes a statement about the global market.
Imported PET can be delivered roughly $0.07/lb below domestic contract prices. However, this number has been fluctuating recently. Either way, imports are at a distinct advantage right now given the supply situation of the US market.
There is also greater supply in Asia as Europe is losing interest based on unfavorable exchange rates.
In Europe, there is quite a bit of regional capacity returning from maintenance outages that should keep the producers looking for market share. Prices were down slightly this week.
Paraxylene, and therefore PTA contracts, in the US remain unsettled for November. There have been estimates of decreases of up to $0.07/lb for PX. This is on the higher end of the range, but it makes sense given the spot market is down nearly $0.11/lb since the beginning of October.
Ethylene glycol pricing is starting to have a factor as well. It has been moving lower in Asia and the US given the sharp declines in ethylene in both regions.
Crude oil prices have reached the lowest level in years, with both WTI and Brent below $80/bbl. This is having not only effect on cost, but is affecting buying sentiment all over the world.
RTi PET Outlook and Suggested Action Strategies
30 Days: Further declines are projected in November. Overall feedstock costs will be heading lower, but the extent of the PTA and domestically produced PET tightness might keep the reductions lower than the total cost moves. Regardless, buy as needed. Low oil will keep downward pressure on the market. 60/90 Days: Lower pricing is expected into Q1, with increase pressure returning to the market at the latter part of this timeframe. Typically increase pressure is around to start the year, but this will depend mainly on supply and the status of the energy markets.
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