Price: Slightly higher
Spot Polyethylene markets were fairly active this past week. The market found some relief as most all producers have pushed their $.04/lb price increase until September, but have added a $.05/lb Sep 15th increase as support in case there are (weather related) supply disruptions. The possibility of such disruptions became very real in the later part of the week as Erin flooded areas of Texas and forced the shutdown of a few Ethylene crackers. The market ended Friday on a cautious note, with next week's weather likely to drive short-term trading decisions.
YTD domestic Polyethylene demand is now down 1.8% versus 2006; however, when awesome exports, which are up 31.1%, are factored in, overall demand is up 3.1%. With total exports now in excess of 20% of total North American Polyethylene sales, producers have been able to keep overall inventories at very comfortable levels, although they added about 66 million lbs during July.
Strong exports, which have continued to provide resin producers with pricing power, can also prove to be dangerous if they become too heavily relied upon for consistent demand. When domestic demand is soft, monthly sales can fall by a few percentage points, but export demand has the capability of virtually shutting off if it no longer provides economic incentive for international resin buyers. This is not necessarily the situation that lies directly ahead, but still something to keep in mind.
This is very important because US demand has been insufficient to drive Polyethylene prices higher by themselves, it has required strong exports to keep the price floor rising. Producers have responded by constantly asking slightly higher prices for exports, looking to maximize margin on these sales. In the past couple weeks, higher supplier offers and lower European trader bids have arbed out the easy export sale that was so prevalent in months past.
Many export sales to South America are still quite viable, and even when European traders begin to return from August holidays, we expect to see their good demand…but will producers lower offer prices to make those deals work? If producers are slow to react, Asian traders may again come to provide competitive offers for European trader consideration. The US domestic market has been propped up by exports, if the constant outlet is no longer there, the domestic market might find itself very well-supplied.
In the meantime, Polyethylene producers continue to hold the upper hand in price negotiations. They will put forth their best efforts to secure as much of the $.09/lb of price increases nominated for September. The market still does feel good for now and while it can press higher, prices are already at historically high levels and not all Polyethylene grades are snug.
A resurgence of exports and/or major supply (resin or feedstock) interruptions could send the market still higher, so we suggest a cautious and comfortable resin position, with a keen eye focused on changing market fundamentals.
(The Plastics Exchange)