OUTLOOK ’15: PP producers to fight for more margin again in 2015

HOUSTON (ICIS)–A major problem for US polypropylene (PP) producers in 2015 will be one they made little headway against in 2014, which is the cost of their major feedstock, propylene.

PP production in the US has become a fixed-margin business, because pricing is tied to the cost of its major raw material. As goes propylene, so goes the derivative. PP producers usually cut prices when the feedstock goes down.

“And the market just keeps beating the margins down, down, down,” a producer said.

PP watchers should look at what happened in the fourth quarter of 2014 to extend into the new year, says resin guru Michael Greenberg at the Plastics Exchange in Chicago.

“Barring an unforeseen event, [producers] will likely find further pressure in the first quarter.”

PP producers tried to lock in a few extra pennies of minor margin expansion at the end of December to offset the 10 cents/lb drop in PGP, but the ongoing plunge in energy markets and spillover effect on propylene may well extend into 2015 and spoil the effort, Greenberg said.

While PP producers have succeeded in adding a penny or so of extra margin in January of the past three years, the extra pennies have not been a game-changer.

The average contract margin in 2014 for an integrated PP producer using naphtha was about 9 cents/lb, according to ICIS. Compare that to the average contract margin for a polyethylene (PE) producer using ethane, which was more than 62 cents/lb.

That comparison explains why one producer called the PP market a “sub-optimal business without any re-investment economics.”

Another indicator is that some of the new ethylene cracker projects also include adjoining PE plants, but not PP projects.

Producers dream of disconnecting PP from the feedstock the way PE producers have loosened the link with ethylene, but the fact of the matter is that it pays to make your own feedstock. Many PE producers also make their own ethylene, while most PP producers generally buy their propylene.

Most PP sources say it’s unlikely that producers will find a way to cut their dependence on the price of propylene in 2015.

“It’s 90% of the game,” a PP buyer said. “That’s been the history for the past five years.”