US polypropylene (PP) margins are expected to narrow further in 2022, as rising imports, falling demand, challenging export logistics and improved output contribute to a supply overhang.
The supply situation at the start of 2022 is vastly different than a year ago, when feedstock shortages and PP maintenance problems combined to tighten polymer supplies. Major disruptions caused by the February freeze that shut production throughout much of the US Gulf coast region further tightened the market. Those tight supply conditions helped PP margins expand by 33¢/lb, widening from 15¢/lb over polymer-grade propylene (PGP) in August 2020 to 48¢/lb over PGP in June 2021. PP prices are typically discussed on a monomer-plus, or PGP-plus basis, so anything on top of the monomer price is the PP producer's margin.
As margins increased, so did PP imports into the US, driven by a wide-open arbitrage window as well as a shortage of US supplies that led US buyers to purchase overseas cargoes to help fill in supply gaps. At the peak in August, US PP copolymer prices were 86¢/lb higher than prices for the same grade on a cfr China basis, up from an average of 8¢/lb higher in August 2020.
The price differential meant US buyers faced little risk in purchasing imports, even as freight costs from Asia to the US reached as high as 30¢/lb. Imports began to flood into the US market in March and April and rose in September to 79,684t, the highest for any month in decades, according to data from the US International Trade Commission. Imports last year through October were more than double the same period in 2020 and were 32pc higher than in the same period two years earlier.
"That is a whopping big number," said one trader. "You are looking at close to 15pc of the market being supplied by imports."
While imports began to slow in October and are expected to have declined further in November and December, volumes will still be higher than average, due in part to logistics challenges, which have caused major shipping delays. While the arbitrage window has closed, material that is still arriving in the US was purchased, in some cases, months ago. That material is destined for warehouses, where it will sit until buyers again want to reload their inventories.
The high imports and slowing demand led US producers to throttle back output beginning in November and continuing into December. It also led to the US PP market's first margin drop in two years in November, as producers gave back 5¢/lb of that 33¢/lb of margin that had been added since August 2020. Another 5¢/lb of margin loss is expected in December, with the potential for more in the coming months.
What happens after January will depend on a number of factors, including whether imports finally slow, whether producers are able to whittle down inventories through exports or slowing operating rates, and whether demand in the first quarter remains as robust as market participants anticipate.
"If [buyers] all come back hard at the beginning of the new year, it will be interesting to see if we go short," said one trader.
But new capacity expected to come on line from Inter Pipeline's Heartland Petrochemical Complex in Alberta, Canada, in the second quarter of 2022, will bring new supply for the market to absorb.
