INSIGHT: North America polypropylene approaches flip in trade balance

02 March 2010 16:28  [Source: ICIS news]

By David Barry

There is an onshore breeze blowing in the North American polypropylene (PP) sector. Tight feedstock supply has caused export business to diminish, and some domestic buyers are beginning to look harder at import options.

North America is poised to become a net importer of PP. The question is what this transition will look like, and how will it alter the way the industry operates?

As it did for most of 2009, the US domestic polypropylene (PP) market has started out the year by defying the gravity of buyers’ expectations and going for three consecutive price increases.

Initial hopes for a March rollover faded, and resin buyers now foresee a 3-5 cents/lb increase as feedstock propylene values continue to rise on limited availability.

An unusual blast of cold weather in January 2010 - and the ensuing US Gulf coast cracker outages - certainly helped bring about the current tightness in the olefins markets. But for propylene the problem is also structural.

“The US market has shifted to light feedstocks for crackers, resulting in more than 1m tonnes reduction in propylene supply,” says Joseph Congdon, director of global polypropylene consulting at Townsend Solutions. He notes that this is almost the same volume of the PP export market in 2009.

As propylene prices rise on tighter supply, Congdon says low-value PP applications (which means most exports) will decrease or they will switch to other materials such as polyethylene (PE).

Jim Virosco of Nexant says North America is likely to become a net importer of PP very soon, if not late this year, then probably in 2011-2012.

“By the end of this year, we’re forecasting [North American] operating rates falling quite a bit as a result of backing out of exports.”

There is plenty of anecdotal evidence that US PP buyers are seeking to extend their resin supply chains overseas, perhaps hoping to smooth out some of the volatility in their resin costs. Market watchers have yet to see extensive importation of PP resin, however.

For one thing, experts say it is easier to ship finished goods like film and fibre roll stock than to ship the pelletized resin. Finished goods imports have been increasing gradually for years, mostly from producers in China and India where labour costs are low. Now these low-cost converters also have the most direct access to cost-advantaged Middle East PP.

North American resin buyers also assume considerable risk that the market could drop out from under them while they have material in transit. The price differential needed to justify PP importation is at least 15-20 cents/lb, a resin marketer said.

So even if buyers successfully negotiate the process of qualifying resin from a foreign manufacturer for their specific application and then managing the complicated logistics, they could lose plenty of money in the process.

It remains to be seen if offshore resin manufacturers will become a major factor in US market dynamics. Braskem, with its pending acquisition of Sunoco, could be well-positioned to exert regional influence from Brazil, some say.

A more likely consequence of the shifting global PP trade balances will be further capacity closures, says Congdon.

“In the short term there is excess capacity for PP and we expect more plant shutdowns this year.”

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By: David Barry
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