Market outlook: US polypropylene forecast to drop in Q2

US polypropylene (PP) has seen an unprecedented cycle in the past few years as supply has grown progressively tighter. At the same time, producer profits have increased from less than 5 cents/lb in 2013 to less than 9 cents in 2014 to over 19 cents/lb in 2015. For Q1 2016, integrated PP producers using naphtha-based feedstock saw profits of about 34 cents/lb. Propane dehydrogenation (PDH) producers have higher margins, averaging around 37 cents/lb since 2013, according to the ICIS Margin Report.

PP supply is tight because producers were not going to invest hundreds of millions of dollars to add needed capacity with profit margins at 5-9 cents/lb. While there are several producers seriously looking at new PP capacity, it will likely be 2021 before significant new capacity can alleviate the tight PP market. This condition has been coming for several years and market-savvy converters have plans to mitigate the impact of higher prices.

Buyers with aggressive import strategies have temporarily reduced domestic PP producers’ business volume and saved money in the process. This is likely to lead to sellers renegotiating current contracts with these buyers to regain market share and reduce inventory levels. This will be a temporary reprieve for buyers but a setback on seller margins that could delay the launch of new PP capacity projects.

6-8 CENT/LB DROP FORECAST

In the short term, ICIS Analytics & Consulting expects the PP index price for Q2 to drop 6-8 cents/lb (+/- 3 cents/lb) and reflects this in the US Polypropylene Forecast report. This will be necessary for US producers to compete with imports from Asia, where they are benefitting from attractive margins.

The drop from April is being driven by domestic sellers reducing prices to regain market share from much lower priced imports. Customers on monomer-plus contracts may see a 1 cent/lb decrease based on lower polymer-grade propylene (PGP) prices, and lower adders may also be negotiated.

SENTIMENT INDEX

The ICIS one-month Sentiment Survey indicates that market participants expect prices to be lower in June and lower in August. The ICIS monthly Sentiment Index poll is sent to hundreds of market participants. This month the survey was composed of 83% buyers and 17% sellers. The May results find that 40% of the participants believe the PP market price is 60 cents/lb, +/- 2.5 cents. Another 40% report 55 cents/lb as some buyers with import strategies are getting lower prices offered.

A high-level look at the North American supply and demand balance projects a less favourable trade balance of 240,000 tonnes in 2016 versus 19,000 tonnes in 2015. This is driven by US imports, which are expected to be over 42% higher in 2016 than in 2015 while production will be up 0.2%. At the same time, export volumes, which fell in 2015 from 2014, will drop another 20.6% in 2016.

Looking at raw materials, US paraffinic naphtha, the key price setter for propylene, was 16.7 cents/lb in April, up from 12.7 cents/lb in February. For each 10 cents/lb that naphtha increases, PGP typically rises by 9.2 cent/lb.

PGP increased to 32.5 cents/lb in April after reaching its lowest level of 30 cents/lb in February. PGP futures are up another cent to 31 cents/lb as they both closely follow refinery-grade propylene (RGP).

RGP was reported down to 19 cents/lb in April, despite higher oil prices, driven primarily by higher inventory numbers, but it is not expected to stay low for long. With the new normal spread being 13 cents/lb, this will put PGP at 32 cents/lb, indicating prices will drop by 1 cents/lb. RGP follows Brent crude with the following relationship: RGP $/lb = Brent $/bbl x .005 + $0.0275.

According to the ICIS Analytics & Consulting masterbatch cost model, color additives should have decreased in the past year by 10-30%. We will cover this more in future ICIS PP Forecast Reports.