US-Asia PP Arbirtrage Remains Uncertain



By John Richardson

THE jury is out over whether the recent decline in US propylene prices will re-open arbitrage to Asia for polypropylene (PP).

Arbitrage for ethylene has remained strong with Dow Chemical disclosing that 20% of its US production went to Asia during Q1

US propylene contracts for May settled at a reduction of 12 cents/lb ($265/tonne, Euros209/tonne), according to a report by Houston-based colleague William Lemos on ICIS news last week.Polymer grade C3s settled at 63.50 cents/lb and chemical-grade propylene at 62 cents/lb.

The drop, the first in contract prices since October 2009 and only the second in the last 17 months, was the result of weaker demand and a decline in spot values.

But will it last?

At the same time as propylene has fallen, so has ethylene due to the easing of supply constraints. US ethylene contracts for April have slipped by 3 cents/lb ($66/tonne, Euros50/tonne).

The settlement, which leaves the monomer at 52.50 cents/lb, is the first drop in the monthly contract since July last year.

“According to producers and buyers, cracker feedstock is getting light again as ethylene values have dropped and producers are no longer able to crack any feed (both light and heavy) and make money on ethylene and co-product propylene, C4s, etc,” Willliam told the blog.

“So, it seems crackers here will go back to the mom-and-pop routine of cracking NGLs (natural-gas liquids) to keep costs down and preserve their margins as long as possible.

“I heard a consultant say NGLs jumped to 85% of the feeds in April, compared with 80% in March. A caveat would be the start-up of Petrologistics in late July.”

This is a propane dehydrogenation plant in Houston that will add 544,000 tonnes/year of propylene capacity to the market, added Willam.

“Crude could be another factor. If prices stay in the mid-70s/tonne it could help keep costs down and encourage heavier cracking in the months ahead.”

Yesterday, though, crude jumped by around 2% on confidence over the EU Greek rescue package, in line with the huge rebounds in global stock markets.

You hardly have to be an Einstein t forecast a lot more volatility in days and weeks to come.

An industry source agreed that propylene costs would soon increase again in the States.

“US gasoline stocks are at record highs and the US is exporting lots of gasoline right now. Stocks are very high ahead of Memorial Day (May 31) which should not be the case if we are going to have a strong US driving season,” he said.

“So I don’t see the recent increase in US refinery operating rates and therefore the lower propylene prices being sustained. I see C3s going up again and so no arbitrage to Asia.”

He added that the situation for ethylene economics was more complicated.

“True, supply constraints are easing for ethylene which has pushed the price down, but the ethane sellers are charging quite a high premium over Henry Hub right now and with gas-oil so cheap (because of very long overall middle distillate markets), this makes cracking gas-oil attractive.”



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