US June PP contracts settle higher along with rising monomer costs

HOUSTON (ICIS)–US June polypropylene (PP) contracts were assessed 8 cents/lb ($176/tonne) higher from May, tracking an equivalent rise in June propylene contracts.

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US PP contracts are generally formula-based and set at polymer-grade propylene (PGP) values plus an adder.

This marks the second consecutive month of increases, with PP contracts rising by a cumulative 13 cents/lb.

Price volatility is emerging as a major concern as domestic contracts have risen or fallen by 5 cents/lb or more in five of the first six months of the year.

Participants are also concerned about the possibility of demand destruction as June contract prices stand at a four-year high.

Demand had remained healthy following the jump in May contract prices, but the additional jump in June may encourage more buyers to shift to imports or to trim their operating rates as a means of coping with higher raw material costs.

PP end-users typically have only a limited ability to reflect increases in raw material costs onto their end-product prices, resulting in a high degree of price sensitivity. Manufacturers of caps and closures, a major end use for PP, often elect to import finished products from Asia rather than manufacture material domestically during periods of sharp rises in domestic prices.

Import prices have been heard in the market at 68-69 cents/lb DEL (delivered) for July delivery and at similar levels on a CFR (cost and freight) basis for July shipment. Buyers are hesitant to purchase cargoes for July shipment, as these would not arrive until August or September.

Margin expansion proposals of  3-5 cents/lb on top of existing monomer plus contracts remain on the table, although negotiations regarding these proposals are likely to be deferred until at least the next month following the large jump in monomer costs in June.

Margin expansion proposals for 2017 were ultimately unsuccessful as a strong run-up in monomer costs during the second half of the year made margin expansions untenable as US domestic prices became uncompetitive globally after a late year surge in monomer costs.

ICIS assessed June contracts for homopolymer PP injection at 78-82 cents/lb delivered in bulk US while contracts block copolymer PP were assessed at 79-83 cents/lb with the same terms.

Major US PP producers include Braskem, ExxonMobil, Formosa, INEOS, LyondellBasell and Total Petrochemicals.