As resin availability plummets throughout the supply chain to grossly insufficient levels, processors wrestle with unprecedented price hikes.
The spot resin market maintained its breakneck pace the week of March 1, as material quickly came and went, and completed volumes again reached record numbers, reports the PlasticsExchange in its Market Update. Amid a pronounced shortage on the supply side, some price consolidation happened at ultra-lofty levels. While some buyers showed fierce resistance to the ever-escalating cost, others continued to procure material seemingly at any price to maintain continuity of supply. Even the most aggressive buyers have been stunned by the soaring costs but remain committed to their businesses and providing product to their customers, even if losses might be endured for this interim period of unprecedented pricing.
Plastics industry powers back.
The mighty plastics industry showed its resilience and began powering back up after extreme winter weather stormed through the petrochemical-producing gulf three weeks ago, shutting down some 80 to 85% of US resin production. When restarts began, there were, indeed, challenges to procure and deliver the all-important gases, feedstocks, co-monomers, catalysts, equipment, and repair personnel, slowing the return of production toward more normal levels. Consequently, dozens of plants along the supply chain have initiated restarts, while others remained largely offline because of damages sustained during the sudden shutdowns and restart complications.
In the meantime, the huge loss of resin production has been accumulating, as this last extreme disruption was only one among many freak events that have hit the industry over the past six months, reports the PlasticsExchange. The cumulative effect has resulted in resin supplies plummeting throughout the supply chain to grossly insufficient levels. While the mend has begun, we are not remotely out of the woods yet. Even as demand drops off while prices rise, every day more pellets are being melted than being made, and the hole in the supply trough has been getting deeper by the day.
For an industry that typically holds more than a month of material on hand at each level of the supply chain, massive drawdowns are estimated to have brought inventories for many materials down to less than a two-week supply, with some essentially at zero, according to the PlasticsExchange. Moreover, significant shortages of related materials such as gaylord boxes have backed up resin packaging. With upstream inventories spread among thousands of specific resin grades, processors have been forced to become more liberal with substitute material and packaging requirements and plant operators have become more creative to make it all work.
Polypropylene supply extremely tight.
For polypropylene (PP), where the resin shortage and price escalation have been more extreme, and for the better part of six months the import arbitrage has been wide open, an ongoing flow of international material has been landing on US shores. Still, with the onset of the additional mid-February supply shock, wholesale Houston prices for Prime PP co-polymer sometimes leapt a nickel at a time until gravitating toward the $1.50 level, with Prime PP homo-polymer trailing around a dime less.
While all PP grades are exceedingly tight, there are outliers with even larger premiums, such as high-flow Random Clarified and CoPP No Break grades, as few promptly available pellets can be found either in the United States, on the waters, or even overseas. For HoPP, high-flow grades have seen the most demand in the spot market, while Raffia grade orders have been revving up, as well — it is unlikely that this more typical export material will be initially targeted for US production as reactors come back online.
The timing of supply chain assets all perfectly returning on stream together was unlikely and the mistiming could be misleading, particularly for propylene monomer and polypropylene resins. For instance, spot PGP ran up to $1.05/lb in February, with a couple of small lots reportedly transacting as high as $1.25/lb before easing back down into the mid-90s toward the end of the month, reports the PlasticsExchange. Contracts settled up “only” $0.28/lb to $0.885/lb. As March began and refineries and PDH units started to return back on line, they produced PGP in higher volume than the slower to return PP reactors could consume — spot PGP prices tumbled, and hard. Prompt PGP fell as low as $0.55/lb amid heavy volume, before snapping back to end the week at $0.635/lb.
One might initially see the big break in monomer as major relief for PP prices, but that would only be partially and somewhat dangerously correct, according to the PlasticsExchange. Indeed, in the unlikely event that PGP prices were to remain for the duration of the month exactly where they ended this past week, March resin contracts could fall double digits accounting for the monomer component and then somewhat offset by the next $0.06/lb margin-enhancing increase, which will likely be implemented. However, only a portion of PP buyers have contracts directly tied to monomer. Others are tied to indices, and the vast majority of them are also on sales allocation, so most will also need spot resin to supplement their limited contract deliveries. Outright spot buyers will again have to fend for themselves, writes the PlasticsExchange.
The fact that monomer has fallen so sharply in early March signals that PP producers do not need all of the monomer that is being made, suggesting very low average resin reactor operating rates, meaning that not a lot of resin is being produced. This is also a strong indication that resin will still be exceedingly tight in March and April. Further, when PP reactors do return largely operational and are ready to consume much more monomer, we might see strong spot PGP demand and its price shoot back sharply higher again. So, if lower PGP prices are sustained, the cheaper costs will indeed pass through to contract resin buyers for limited deliveries. The PlasticsExchange reports hearing plenty of prognosticators offering early guesses that are all over the board. But the month is far from over, and given the complexities of restarts and other market dynamics, it is way too early to comfortably estimate March PGP and PP contract price levels.
Meaningful volumes of imports are expected to reach the United States in March and April through a multitude of supply channels. These imports will help ease the undersupply burden, but most of this resin has already been committed to buyers and is not expected to flood the market with material. Overall spot material should still remain very tight during this period and perhaps beyond, maintaining a bifurcated market with scarce prompt prime resin commanding a large premium to contracts. Buyers should also note that while spot resin will begin to appear as available, there will be a lot of startup material and rougher off-grade and transitional resin that could be offered at well-discounted levels. They are advised to be a bit more careful regarding the quality on newly produced off-grade resin: The price might not be worth it for those expecting high-quality off-grade material.
Polyethylene supply relief coming from south of the border.
Polyethylene (PE) supplies have been snug for months, and while prices had been consistently rising, it has not reached a level that warrants mass inflows of imported PE resin. So, while PE has now also started to flow toward the United States, any significant imports to offset lost production since mid-February is a new initiative with few uncommitted cargoes previously on the water. More substitute supply help will likely come from domestic producer inventories initially eyed for export that will ultimately remain in the United States and from the lack of fresh export sales made during the shortage, reports the PlasticsExchange.
A level of PE supply relief is expected eventually to come from south of the border. The recent fire at the Pemex facility, which initially shut down additional Mexican resin and feedstock production, brought the sparring supply chain partners back to the negotiating table, and the three-month stalemate appears to have found resolution. Critical ethane supplies will again flow to Braskem Idesa to enable resumption of its resin and feedstock production. When the Pemex plant damages are eventually fixed, both producers will be operating again.
Currently, all PE grades are very shortly supplied, some grades more than others. Average PE prices are racing toward $1/lb, and many grades are already well beyond that. High-density PE blow-molding materials are fetching the highest premiums, as the vast majority of production units are located in the affected gulf region. While low-density and linear-low-density PE production has also been massively shut down, there are unaffected assets producing these resins in Canada. Through the mental exercise of model building, assumptions, and estimations, PlasticsExchange analysts calculate that if PE reactors could quickly return to pre-storm levels, a good part of the production shortfall could be covered during the second quarter via reduced domestic demand as prices rise, an influx of imported resins, and limited fresh exports.
Not to douse the hope of eventual relief, writes the PlasticsExchange in its weekly report, but the March $0.07/lb PE should implement and some producers have nominated at least another $0.06/lb increase for April. PP producers also continue to nominate more margin-enhancing increases, and yet another previously unaffected PP producer declared force majeure last week. Crude oil prices just reached $66.42/bbl, the highest level since October 2018. There are also reactors, refineries, and crackers scheduled for maintenance and turnarounds this spring. On the bright side, the 2021 hurricane season will not begin for several more months!