US production pushes propylene prices lower, keeps pressure on market

HOUSTON (ICIS)–Stronger production in the US continued to push propylene contract prices lower in January and is expected to keep downward pressure on the market in the near term.

Propylene contract prices fell in late 2018 as production increased from crackers, refineries and other sources and as year-end de-stocking hampered demand. Inventories rose to a more than three-year high by the end of 2018.

Heading into 2019, tighter supply had been expected to put some upward pressure on pricing due to increased demand from downstream re-stocking and as recent price declines had increased interest in derivative exports.

While demand has increased, strong production has more than kept pace in January. Propylene inventories continued to rise in 2019 reaching a seven-year high, according to data reported in the week prior to the January settlement and an all-time high reported following the settlement.

Propylene production from refineries improved in late 2018 following autumn turnarounds. Refinery rates remained high in December and January amid strong demand for US fuel exports, particularly to Mexico.

Refinery rates are expected to remain high in the coming months in anticipation of high diesel demand as shippers prepare for new regulations for bunker fuels.

Propylene production from crackers has improved as declining crude oil values and wider cracker margins have improved economics for heavier feedstocks.

As new crackers are expected to come online in 2019, and as crude oil values remain moderate, propylene production from crackers is expected to increase.

Production from propane dehydrogenation (PDH) units, of which there were several outages in early and mid 2018, also has been good in recent weeks.

While production from PDH units may remain volatile, outages should not have as great an effect on propylene supply as in 2018 when production from crackers and offerings from refineries were limited. Refineries are the largest production source of propylene in the US, followed by crackers.

Propylene demand is expected to continue increasing and could bring the market into a more balanced or tighter position in the coming months.

Recent declines has brought US propylene prices below prices in other regions, after the US spent much of the second half of 2018 as the high-priced region.

The lower US propylene costs has made derivative exports more competitive and is increasing demand for domestic propylene consumption. Export activity for downstream polypropylene (PP), the largest propylene derivative, is rising and expected to continue strengthening due to the increased competitiveness in international markets.

Additionally, the lower US propylene prices could spur demand for US propylene exports. Mexico, Colombia and Canada are frequent destinations for US propylene exports.

Upcoming Lunar New Year holidays in Asia may increase demand for US exports in other parts of the world in the coming months and a heavy turnaround season in Europe may increase demand for US exports in the second quarter.

Focus article by Jessie Waldheim