US polypropylene (PP) contract prices are expected to remain higher for much of the first quarter of 2021 as ongoing tight supplies, strong demand and feedstock limitations allow producers to hold onto recent margin gains.
PP producers were able to push through 6¢/lb of margin expansion in September-November and are finding acceptance of an additional 4¢/lb margin increase for December. Additional increases have been announced for January, as buyers are still struggling to find the resin they need to meet increased demand.
With ongoing PP maintenance problems and feedstock supply shortages caused by reduced refinery operations, propane dehydrogenation unit outages and less byproduct propylene coming from ethylene crackers running lighter feeds, the tight supply conditions are expected to continue well into the first quarter.
Market participants are counting on higher propylene prices, which reached two-year highs in December, to drive more propylene production from refineries and crackers, but that will take some time. In the meantime, the market is trapped in a cycle of short propylene supply driving propylene prices higher and limiting PP production, which is driving PP prices even higher.
Further compounding the tight supply situation is strong demand, with applications such as furniture, rigid packaging and textile applications used for personal protective equipment and medical applications experiencing double-digit growth in 2020. Other applications, such as compounding and injection molding related to automotive demand are still showing steep year-to-date declines due to factory slowdowns at the beginning of the pandemic, but have experienced rapid demand improvement in the last quarter as those factories ramp up production.
Producer inventories were depleted by heavy exports during the first wave of pandemic-related shutdowns and then by multiple hurricane-related shutdowns, leaving PP stocks at the lowest levels since January 2013. With no sign of a slowdown in demand, producers will find it difficult to replenish inventories.
"We are running on fumes when it comes to inventory, and demand is just so high," said one US producer.
Imports, which in recent years have been used to help offset short supply in the US, have been less of a factor in 2020 because of high international PP prices as well as freight rates from Asia, which have in some cases more than doubled due to container and vessel shortages. In 2020 through October, US PP imports were down by 41pc from the same period in 2019, according to data from the US International Trade Commission.
Even the addition of the 450,000 t/yr Braskem plant in La Porte, Texas, which came online in September, has done little to rebuild inventories, as the new production has only served to offset production losses elsewhere in the US.
But once propylene supply increases, PP operating rates should improve. If demand begins to decline by the second quarter of 2021, as many market participants are expecting, the US market should return to better balance. By the second half of 2021, the US could again face an oversupply that narrows PP margins.
