OUTLOOK '12: N American PE and PP suppliers expect margin bump

27 December 2011 19:00  [Source: ICIS news]

PE and PP suppliers expect margin bumpBy Michelle Klump

HOUSTON (ICIS)--Tighter supply and improving global demand are expected to help boost profit margins in the polyolefins sector in the coming year, sources said.

North American polyethylene (PE) manufacturers have announced price increases totalling 13 cents/lb ($287/tonne, €221/tonne) for the first part of 2012. Those increases are in addition to a 5 cent/lb increase suppliers are seeking for December contracts.

Meanwhile, the polypropylene (PP) market is also bracing for price increases in the first quarter, but most sources don't expect any increase before February or March.

Two common themes underpin the outlook for both markets. Continued, if anaemic, growth in the US economy is likely to drive up the price of crude oil and other commodities. Also, low inventories throughout the polyolefins chain will lend strength to price hikes.

Low PP inventories were felt in December, as buyers attempted to prebuy as a hedge against expected first-quarter price increases. Buyers faced an already depleted market after an October buying frenzy helped clean out suppliers' inventories.

The impending closure of Phillips Sumika's 365,000 tonne/year PP plant in Pasadena, Texas, scheduled for the end of January 2012, was expected to cause some additional short term supply tightness, sources said.

Another factor creating tightness was the closure of the Sunoco refinery in Marcus Hook, Pennsylvania, which limited the feedstock resources for Braskem's 345,000 tonne/year Marcus Hook PP plant, sources said.

Ultimately, the Phillips Sumika closure is expected to lend some stability to the market by adding 700m lb of propylene monomer back into the supply stream, a broker said.

However, in the short term, the market will be tight before producers boost production to optimal rates, the broker said.

While some market participants expect a price bump in January, most said they don't believe a significant price increase will come until February or March, based on high propylene inventories. Feedstock inventories in the second week of December rose for the 13th consecutive week, with stockpiles of 4.945m bbl.

"Until we see the inventory numbers come down, how is there going to be any strength for a price increase?" a market participant said.

But several turnarounds are expected to tighten things up in the first quarter, and refinery turnaround season beginning in late February could further tighten propylene supply, sources said.

A producer suggested that if tightness continues for several months, it is possible that producers may try to seek some margin improvement by increasing formula-based prices.

One buyer predicted that polymer-grade-propylene could reach the 70s to 80s cents/lb range in the second half of the year.

Even at those prices, the buyer said importation of PP resin remains unlikely, adding that prices would need to be above $1 for the logistics to make sense. However, some markets could continue to see more finished goods being imported from regions with cheaper resin, sources said.

In the PE market, low inventories, scaled back production rates and some unplanned production outages are creating tight market conditions that are lending strength to price increase initiatives.

Additionally, at least seven US crackers are expected to go off line for maintenance the first half of 2012, starting with at least one cracker in January. Most of the shutdowns will happen in the second quarter, when at least five units are scheduled to go down.

But one producer said the most significant factor affecting domestic pricing will be international prices, which are heavily influenced by crude oil.

The producer, who predicted that crude oil prices would be an average of $10 higher in 2012, said that could correlate to resin pricing that would be on average 5-10 cents/lb higher than in 2011.

Other PE producers were predicting strong first and second quarters, based on encouraging consumer retail numbers, including stronger auto sales.

"The only fly in the ointment could be if the situation in Europe has such a huge global impact on people's psychology," one producer said.

($1 =  €0.77)

For more on polyolefins visit ICIS chemical intelligence

By: Michelle Klump
+1 713 525 2653

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