US PP contracts are generally formula-based and are set at polymer-grade propylene (PGP) values plus an adder.
Entering 2018, market participants have expressed concern that strong PGP values will push domestic PP prices to levels high enough to encourage greater import penetration or even some inter-polymer substitution.
PP is used in a wide variety of applications including caps and closures, consumer packaging, kitchenware and automotive parts. For some applications at least, converters can substitute PP for other polymers, such as polystyrene (PS) and polyethylene (PE).
The US is a net exporter of PP with imports typically accounting for only around 5% of the market. However, buyers have turned to imports in the past in cases where US formula-based pricing has moved far enough above global average prices to create favourable arbitrage opportunities for US buyers.
US buyers generally will not switch to imports unless arbitrage windows remain in place for a period of months and promise a substantial savings given the risks involved with purchasing cargoes that will be delivered in four to six weeks versus prompt domestic material.
The arbitrage window to the US from Asia has been open for much of 2017 and expanded considerably in the fourth quarter as supply woes generated by Hurricane Harvey lead to a considerable jump in domestic PP prices.
However, no major inflows of overseas PP were observed in 2017 as buyers were reluctant to assume the risk of imports. Additionally, buyers commented that the offers they had received from overseas sellers were not competitive after taking customs duties and inland freight costs into consideration.
PP sellers had announced proposed margin expansion of 3 cents/lb ($66/tonne) on top of their existing adders in August 2017 with the market negotiating these proposals throughout the latter half of 2017. ICIS implemented a cumulative margin expansion of 1 cent/lb above existing adders.
Heading into 2018, sentiment suggested that further margin expansion plans would not gain traction in the market as elevated propylene costs resulted in prohibitive numbers for monomer plus contracts when adding additional sellers’ margins. However, producers may attempt another round of margin expansion proposals sometime in 2018, assuming that feedstock propylene costs retreat from the elevated levels seen late in 2017.
A slate of new crackers along with new propane dehydrogenation (PDH) units will lead to some easing of propylene tightness in the coming years. US producers are evaluating some additional PP plants, although these plants will not come online until 2020 or later.
The following table shows new US PP plants currently either under construction or under evaluation:
|Braskem||450||LaPorte, Texas||Q1 2020||Construction underway|
|Inter Pipeline||525||Alberta, Canada||2021||FID H2 2017|
|Pembina/PIC (Kuwait)||544||Alberta, Canada||Unknown||FID late 2018|
|Formosa Plastics||250||Point Comfort, Texas||Unknown||Evaluating|
Major US PP producers include Braskem, ExxonMobil, Formosa, INEOS Olefins and Polymers, LyondellBasell and Total Petrochemicals.