Pressures to relax on high priced and tightly available polyethylene

08-Apr-10
Polyethylene buyers in USA are facing challenging times as prices rise after remaining essentially flat through H1-2009. Since H2-2009, PE prices have been on an uptrend while supplies have dwindled amid sluggish domestic demand for downstream polyethylene products as per Purchasing.com. And while some market watchers are predicting price relief for polyethylene buyers this year, its magnitude remains uncertain. Liner-grade low-density polyethylene (LDPE) is up 18% in February from June 2009, while prices for general-purpose linear low-density polyethylene (LLDPE) leaped by 24% in the same period. Additionally, US polyethylene producers have sought average price increases of 6¢/lb in March and 5¢/lb in April. These rates are expected to stick due to inadequate supplies of ethylene monomer and tight polyethylene production margins. The type of inflationary pressures affecting polyethylene is different this year from last year. In 2009, “a tremendous amount of polyethylene was being shipped from the U.S. to Asia, and particularly China,” says Howard Rappaport, global business director for plastics at Chemical Market Associates Inc. (CMAI). One reason, he explains, is that the abundance of cheap natural gas in the US allowed domestic polyethylene producers to undersell their foreign competitors for the Asian market. (Natural gas is a source of ethane, which is converted into ethylene, the monomer for polyethylene) By keeping domestic inventories balanced to tight and shipping off their excess resin to China, U.S. polyethylene makers “were able to implement additional price increases that would not have been possible without the export option. Meanwhile, 2010 has not seen a big improvement in domestic polyethylene demand although we are seeing signs that things are starting to improve a little bit.” At the same time, Asian demand is cooling. Since the beginning of February, exports of polyethylene to China “have dropped off dramatically,” as per Michael Greenberg, CEO of The Plastics Exchange, because ethylene monomer has become tight and “very expensive” due to a series of planned and unplanned outages at US ethylene plants this past winter. (Some of the outages were due to the cold weather; others were planned maintenance turnarounds.) As a result, polyethylene prices from US producers have risen to the point where they are no longer attractive to Chinese buyers. Even if US prices moderate and Chinese buyers return, they may gradually switch to suppliers in the Middle East over the next few years, says Rappaport. The reason: new plants that produce low-cost polyethylene are now starting up in that region. In 2010, exports are not the prime influence on polyethylene pricing and availability, as they were last year, says Mike Burns, Resin Technology. Ethylene is definitely the driver now.” The year started with very poor polyethylene inventory levels largely due three factors: a wave of restocking by polyethylene buyers in January; exports which remained strong through the first three weeks of January and dropped back in February, and pre-buying by domestic customers who wanted to take advantage of low prices. The problems with ethylene have done nothing to bulk up those depleted polyethylene reserves. Beginning in February manufacturers stopped making as much polyethylene, either because the price of ethylene was too high or avails were too tights. Price of ethylene by late February shot up to 70¢/lb, higher than the price of polyethylene made from it. These adverse conditions have caused polyethylene makers in the US to cut back their operating rates to less than 90%, which is rare. Supplies are so constrained that the producers are putting some of their customers on allocation. Most analysts believe that ethylene prices will retreat to more normal levels as those shuttered facilities come back online this year. That should exert downward pressure on polyethylene. In particular, Burns advises his clients to pay close attention to spot-market ethylene prices, which he says are a leading indicator of future polyethylene price trends. One wildcard in the future polyethylene price equation is whether suppliers of the resin will scale back their output in response to fewer exports this year. Rappaport points out that producers in North America have recently exhibited “a new discipline,” quickly cutting their output of polyethylene when demand falls, which it has done since the Chinese slashed their U.S. purchases. Such prompt production cutbacks could curb severe polyethylene price erosion, even as ethylene falls.
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