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Global PP market divide may rebalance painfully

ICIS, Uncategorised
By Jeremy Pafford on 10-Sep-2021

They say a picture is worth a thousand words, but I can prove the one here is worth 1,034.

How so? Because my colleague John Richardson wrote that many in his excellent 5 September blog on the yawning gap between NE Asia and US polypropylene (PP) prices, and the reasons behind that.

Without knowing those markets, you can infer a couple of important points just by analysing the graph.

  • These two regions’ PP prices have tended to track each other, until 2021.
  • Something major must be impeding that historical relationship.

Of course, that “something major” is disjointed shipping situation that has global container shipments in particular out of whack. A year ago, container shipping from China to the US West Coast cost under $4,000/container. It now can cost almost $20,000/container, and that is if you can find a container. Demand for PP is weak across Asia, keeping resin prices low, but elevated container shipping prices that can add upwards to $1,000/tonne to the PP price – let alone lead times that now can be measured in months and not weeks – are deterring acting on what is an open arbitrage window.

Still, some are being brave enough to transact on this opportunity. US PP imports rose by 89% in the first half of this year compared with the same timeframe in 2020, according to the ICIS Supply and Demand Database. Where did those imports come from? Asia, as South Korea, Singapore and Taiwan were the top sources of that imported PP.

Perspective remains key here, as the imports amount to a drop in the bucket compared with US domestic production, as Chemical Data, part of ICIS, noted in its August Monthly Petrochemical & Plastics Analysis. While US imports hit a record 155m lbs (70,308 tonnes) in June, US domestic PP production in the same month was 1.688bn lbs (765,672 tonnes). But in a market as tight as US PP has been this year amid resilient demand from consumer durable and non-durable goods sectors, every tonne added to the supply heap matters.

The question now though is, how long will this Asia-to-US opportunity exist? Unfortunately, the question is fraught with possible negative outcomes.

If consumer demand remains resilient – and as steadily strong as it has been over the past year, who is to say it will not – then it is likely container shipping prices will continue to escalate. If yesterday’s and today’s lower prices did not destroy demand, why should tomorrow’s higher price? At some point the shipping price would rise to where the arbitrage is no longer workable economically, which could escalate US domestic PP prices further amid tightening supply, creating demand destruction, while depressing Asia PP prices further and leading to supply destruction there. Not a good outcome for either continent.

If consumer demand wanes due to the end of government stimulus programmes and decreased economic activity, that would help rebalance the container shipping market, but at what cost? The collateral damage would be slow-to-no economic growth, or more likely recessionary conditions that benefit neither consumers nor PP markets. Again, that is not an outcome that benefits many.

Of course, we could have a wave of new containers and container ships arrive on the scene to support resilient demand and normalise PP markets global supply, but that feels rather optimistic and simplistic a solution. Adding more ships does not also mean adding more ports to load and unload materials and goods; in fact, it would exacerbate the current backlogs at the ports.

Unfortunately, extreme situations such as the wide disparities among regional PP market situations do not glide into a calm resolution but instead change with a resounding development. Here’s hoping that development is of the positive variety, but be prepared for it to be the other way around.

Disclaimer: The views in this blogpost should in no shape or form be taken as actual forecasts and are my personal views only.