Polyethylene
The polyethylene market is moving higher again, driven by tight inventories, record exports, and rising energy prices, all of which is somewhat countered by poor domestic demand and only a modest increase in ethylene costs.
Polyethylene producers successfully implemented a $0.03/lb price increase on May contracts, and an additional $0.03/lb will likely take hold for June. If so, 2009 contract prices will be up over 35 per cent YTD for a total of $0.13/lb. However to keep this rally in perspective, remember that average commodity polyethylene prices are only back up into the high $0.40s/lb, and are still at least 40 per cent lower than the $0.85/lb peak average price seen in 2008.
It has taken some time for the market to regain its composure after tumbling so hard during the latter part of 2008. The spot market is still shaken, and inventories throughout the supply chain have been reduced as many are cautious to hold a position. Polyethylene producers have become amazingly disciplined, keeping operating rates throttled back so far this year to 80-89 per cent of capacity despite apparent economic incentive to run harder. This has helped PE producers regain and maintain pricing power, thus increasing selling prices and expanding margins.
In a rare occurrence, some PE export prices are now exceeding domestic spot resin prices. The extraordinary export demand and excellent sales netback is diverting spot material away from the domestic market. Polyethylene supplies are very tight and some producers claim to be sold out of discretionary resin through July.
PE producers claim that the later half of 2008 was so bad, that they need to make up for it any way possible. So, on top of the $0.13/lb price increases essentially secured during the first half of 2009, PE producers have nominated an additional $0.08/lb price increase for July contracts. This should help secure the $0.03/lb June price increase and perhaps make for some interesting meetings at NPE.
Polypropylene
The polypropylene market is pushing higher again despite weak economic demand. Higher monomer costs continue to be the main driving force behind successive increases. PP producers on average raised May contracts $0.025/lb and have nominated as much as $0.12/lb for June.
With June propylene monomer contracts settling $0.085/lb higher, it seems that will also be the average increase implemented for PP contracts. This will put polypropylene contracts $0.21/lb higher for the first half of 2009, maintaining stable and minimally acceptable margins over monomer.
Tight propylene supplies have resulted from a huge disparity in the price of crude oil and natural gas, and their respective NGLs propane and ethane. This has limited propylene monomer production as crackers favor 6the light feedstock ethane to make ethylene, leaving inadequate supplies of propylene for the market.
Operating rates (for PP resin) were over 93 per cent in May, the highest since July 2007, albeit capacity has since been reduced by nearly 130 million lbs per month.
As they have fore several years, changes in polypropylene contract prices will likely continue to follow that of propylene monomer.
Spot resin prices and availability will likely maintain their own market based on short-term supply and demand, but generally follow contracts fairly closely over time. So keep an eye on the spot propylene monomer market as a guide to contract price changes for both monomer and resin contracts.
