Price and market trends: Tight supply to support US polyolefins in 2014

10 January 2014 09:47  [Source: ICB]

Price hikes for polyethylene may not come until February while polypropylene buyers brace for early hikes

While positive economic signs are bolstering sentiment about improved demand in the US polyolefins sector in 2014, tight supply of feedstocks and polymers in the first half of the year is expected to lend support to pricing.

Participants in both the US polyethylene (PE) and polypropylene (PP) markets expect to see slight growth in 2014.

Most market participants peg that growth to be in line with improvement in US GDP, which is expected to grow by 2.8%, according to the National Association for Business Economists (NABE).

However, while there is optimism on economic improvement as well as the return of manufacturing to the US, growth in the polyolefins sector over the next few years will be limited by tight supply, sources said.

“The market is getting to be where producers are sold out when we are looking at 2014 and 2015,” said one producer.

Another producer agreed, saying that through October 2013, domestic demand for PE was flat to up by about 1%, while exports for the same period were up by around 8-10%, creating an overall growth rate for the period of about 2%.

“I think what we are looking at… is relatively slow growth or no growth in the domestic business and exports will be whatever capacity is available,” the producer said. “I don’t know how much capacity is left – people are running at pretty strong rates now. I’m thinking total growth will be limited by supply.”

The polyolefins markets have seen tight supply in the last quarter of 2013, with production outages hitting the PE market and tight propylene supply combined with low producer operating rates keeping PP supply snug.

A heavy cracker turnaround schedule that begins in March 2013, with the bulk of outages occurring in April, is expected to keep both ethylene and propylene supply tight during the first quarter, as producers stockpile inventory in advance.

“Some of the studies have shown that as much as 20% of the ethylene will be offline – that would be absolutely crazy,” said one PE producer. “We are really in trouble if something unplanned happens.”

Barring any unplanned outages in the ethylene or PE market, sources expect stable pricing through at least January in the PE sector, with the potential for increases starting in February.

With flat pricing in December, prices for high density polyethylene (HDPE) were up by 16 cents/lb for 2013, while prices for low density polyethylene (LDPE) and linear low density polyethylene (LLDPE) were up by 14 cents/lb for the year.

Two US polyethylene (PE) producers have announced separate price increases of 4 cents/lb ($88/tonne, €63/tonne) for February contracts.

Dow Chemical and LyondellBasell each nominated separate increases for all grades of PE, effective on 1 February, according to copies of customer letters obtained by ICIS.

While the letters offer no reason for the hikes, sources said they are likely based on expectations that feedstock ethylene will be tight in the first few months of the year, ahead of planned cracker maintenance.

One market participant said it believes the increase proposals are an effort by producers to support January price levels. No price increase announcements have been heard for January PE contracts, which means producers are targeting a rollover from December price levels, sources said.

Because prices already at such a high level, one producer said there is less of an emphasis on trying to boost margins in the first few months of the year.

“In the US, we don’t have any big drivers to try to get more margin,” the producer said, adding that there will be a push for higher prices if ethylene spikes ahead of the March and April cracker turnarounds.

While some buyers are still holding out hope for a price drop in early 2014, others are more concerned about securing supply. “Availability has been tight,” said one distributor. “While it may be a little better right now, going into the new year customers want to make sure they are going to be covered.”

In the PP sector, buyers are bracing for more increases to start 2014, with some sources saying that they expect another 5-6 cent/lb increase in January, and others saying they expect prices to rise by just another 4-5 cents/lb during the first quarter.

Prices have risen by double digits in the first quarter of each of the last three years. However, some sources have said that since propylene and PP prices for December are 12 cents/lb higher than they were at the same point in 2012, they will not have as far to travel in the first quarter of 2014. Prices are 9 cents/lb lower than their peak for 2013, which came in February.

“Prices will still be up in the first quarter, but not up by 20 cents or more,” said one producer. “The market is tight as we head into 2014. The market will be firmer and will be more stable, and won’t see that big swing in pricing.”

In addition to feedstock-related price increases, producers are expected to be successful in implementing between 1-2 cents/lb in margin expansion for 2014 contracts starting in January, sources said.

The overall tightness in both the PE and PP sectors is expected to last for the next few years, until new proposed plant capacity begins to come online between 2015 and 2017. Already, as many as 10 companies have announced plans to expand PE capacity in the region.

If all of the plants proceed as proposed, the PE industry as a whole will see a 28.7% boost to the existing North American PE capacity.

In the PP sector, there are at least eight new on-purpose propylene projects expected to bring at least 4m tonnes/year of additional propylene capacity to the market. Much of that new propylene will be aimed at the PP market, sources said.

By: Michelle Klump
+1 713 525 2653

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