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Logistics will signal pathway to market normalisation

ICIS, ICIS Pricing, Uncategorised
By Jeremy Pafford on 12-Jan-2022

It is understandable if this week’s story regarding the first reading of the New Year for the ICIS Petrochemical Index (IPEX) elicits thoughts that markets have started their journey towards balance. However, the 1,000-words worth of information in the picture file below still shouts that we are far from normalisation, and that whatever pathway taken towards an old or new normal will still be marred by volatility.

Prices precipitously falling from their highs after months of feverous run-up is typical commodity market behaviour, but the conditions in which the current moves are occurring remain unusual. While indexes in the three major IPEX regions fell, the yawning gap between them remains atypically wide with little indication of towards deviating back to the historical norm.

That historical norm is that global commodity chemical prices in the three major regions ebb and flow in tandem, never getting too far out of line from the others. In normal times, global trade flows of lower priced products moving to regions where they can get the highest price creates parity – or close to it when you factor in shipping costs – to regional prices for materials such as benzene, butadiene and polyethylene (PE). For markets that especially rely on container shipping, we do not live in such times today and have not since about the middle of 2021.

We will know we are on the return voyage to normalcy when the three regions’ indexes take pathways towards each other and not simply rowing in the same direction. Lower shipping costs, optimised (and fully operating) ports and greater ship/container availability would cause the Asia index to soar higher as low-priced materials from the region sweep into the US and Europe. That would tighten Asia markets, raising prices there while lowering prices in the regions where exported product finds willing buyers.

And that needs to happen, for the health of Asia chemical producers and possibly the sanity of chemical buyers across the rest of the world. Just look at the graph below comparing polypropylene (PP) margins in northeast Asia and the US. More than $1,000 in profitability difference between the two regions in producing that important polymer, and more importantly, production margins in northeast Asia are actually negative.

That is an arbitrage opportunity on steroids. And while US imports of PP were on pace to finish 2021 at double the amount from 2020 and 39% higher than 2019, it is not enough to narrow the Asia-US price gap, even with a noted sizeable increase in exports from South Korea and Taiwan.

Logistics remain the main culprit. As ICIS US PP Editor Zachary Moore recently wrote, imports are coming to the US but with significant delays. Cargoes bought in August and September did not make it to the US until November and December. Where once the Asia-to-US shipping lag time was measured in days and weeks, we now measure in months, and if faced with paying substantially more to buy domestic product that will arrive sooner than months from now, who can blame you for paying that premium?Securing supply remains the foremost job of supply chain and procurement managers, with price a very close second but still second.

When logistics challenges start to unwind, resourceful – and somewhat brave – supply chain personnel will take the first steps in bringing balance back to global chemical markets by making interregional deals for PP and other materials where the arbitrage windows are so inviting. Those sellers and procurers stand to make or save their companies hundreds of thousands if not millions of dollars, while those who wait too long after markets start to deviate back to the norm stand to perform much worse than their brave peers do.

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