Market outlook: US PP will continue to be pressured by imports

US polypropylene (PP) prices have been on a roller coaster ride over the past two years. First oil started to crash in 2014, allowing producers to take huge margin increases in late 2015, even as PP prices also declined from their highs. Now prices are tanking after sellers overpriced their products, which forced buyers to import lower cost alternatives. Now all these imports have led to record-high inventory levels for domestic producers, as buyers are using imported PP.

So what can we expect going forward? While the propylene supply issues have improved with new propane dehydrogenation (PDH) capacity, polymerisation is now a constraint. US PP utilisation is in the low 90% range, which is high. At the same time, global PP utilisation is 89%, which puts it in the top 10 percentile of utilisation rates and higher than any other tracked polymer.

In the short term, ICIS Analytics & Consulting expects the Q3 2016 PP index price to be even lower at 54 cents/lb, +/- 3 cents/lb. Domestic PP producer inventories have increased again as high US prices are unable to compete with the Asia PP price at 40 cents/lb (about 51 cents/lb delivered in the US). This US PP price drop will continue until the gap between imports and US prices reaches 10-13 cents/lb. This will come from lower US prices and slightly higher Asia prices, as US demand lifts Asia demand as well as profits on Asia PP.

Since October 2015, when many US contract prices went from 10-13 cent/lb adders over polymer grade propylene (PGP) monomer, to 25-28 cent/lb adders, domestic PP producer inventories have increased by 21%. This is especially significant since it puts producers at full capacity on PP storage.

US PP IMPORTS DOUBLE

At the same time, PP imports in Q1 2016 were more than double the imports seen in Q1 2015. This resulted from converters fighting back against uncompetitive US producer prices by establishing relationships with foreign suppliers and ramping up imports, which prompted the US PP price drop seen over the last three months.

Imports will more than supplement domestic needs for now, but globally, PP supply is tight and as demand in Latin America and Asia return to normal, there will not be enough.

ICIS Analytics & Consulting publishes a Sentiment Index each month within its Price Forecast Reports. This anonymous survey of market participants indicates whether they expect future prices to go up or down.

In the July survey, the one-month Sentiment Index (-0.75) indicates strongly that market participants expect prices to be down in August. The three-month Sentiment Index (-0.50) indicates that market participants expect prices to be down in October 2016 from the current level of 59.5 cents/lb.

The ICIS Monthly Sentiment Index is normally comprised of 83% buyers, but was around 50% this month as many were out on vacation. In our July survey results, we see that a majority of participants believe the average PP market price is 53 cents/lb +/- 2.5 cents. If you are interested in participating in the survey and learning what percentile of the market your price is in, sign up here:

http://forms.icis.com/icis-sentiment-index

SUPPLY AND DEMAND

Long-term North America supply is expected to increase 3% by 2020, but demand is expected to increase over 8%. This will require PP imports until additional US PP capacity comes on line and even then, announced capacity will only help increase supply by about 4-6%. So higher margins and additional capacity announcements are expected, but will take three to five years to be in production.

PURCHASING ASSISTANCE

In our Purchasing Advisory service and the ICIS Advanced Purchasing Course, we teach the importance of having an import strategy. This has never been more important than now for volume PP buyers.

For more information on the ICIS Purchasing Advisory Service, contact James.Ray@icis.com and for more information on our Advanced Purchasing Course and Forecast Reports, contact Jason.Bean@icis.com.