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The concerns about supply chain inflation hurting chemical demand are likely very end-use specific. While the packagers and consumer goods sellers are seeing significant inflation in all raw materials, not just polymers, the packaging is a minor component of the cost and value of what they are selling and while it may hurt their earnings, it is unlikely to stifle demand – none of us is likely to stop buying milk, orange juice or cookies if the prices rise a couple of cents because the manufacturers are trying to cover some of their higher costs.
As we highlighted in yesterday's report, ethylene continues to weaken (see chart below) in the US and it is the one product with a true supply/demand-driven problem today – there is simply more capacity to produce ethylene in the US than there is the capacity to consume it. This is a recent phenomenon and has been clouded by the various storm-related outages, the delay in the Sasol start-up. We began to see the length in the ethylene market lats last year and physical export volumes jumped dramatically – fully loading the terminal in Houston for loadings from November through January. This was based on pricing from October through December that created a significant arbitrage to ship to Asia – partly because a few of the China integrated projects had ethylene derivative projects complete before ethylene units were complete. The risk for US ethylene is that it could go much lower – barring outages – as there is no one left in the US who can take a marginal ton, most likely, and China seems well supplied. For more details please see today's daily.
The relative moves in ethylene and propylene prices are not surprising given the news flow – propylene is likely being influenced by concerns around refinery cutbacks again – this time because of the colonial pipeline issues, while ethylene should continue to see downward pressure as the US oversupply emerges from all of the recent production difficulties. See our Daily Report for more.
The volatility in propylene was something we predicted months ago – there are simply too many moving parts in the market today to predict incremental supply/demand dynamics. We remain of the view that refining rates will improve further over the coming months to address the increasing demand for gasoline and this could swing propylene back in the other direction. See today's report for more on this.
The auto industry dynamic is fascinating not least because the US is sucking up new and used vehicles as fast they can – driving the price inflation that we see in the exhibit below – but because this is happening at a time when many Americans are looking at lower vehicle utilization going forward as at least some of the working population will embrace the work from home opportunities that have been introduced because of the Pandemic. It is an interesting exercise to do in any part of the country, but we suspect that if you walk around any US neighborhood today you will find vehicles parked on streets and in driveways that look like they have not been touched, or have been barely driven in months. The argument that the vehicle is a sunk cost holds water in many cases, but the annual cost of insurance and maintenance makes no sense for a vehicle that travels less than a thousand miles a year, especially with low-cost alternatives like Uber and Lyft. See
today's daily report for more.
The headlines that are of most interest to us this week are the ones that continue the narrative of very strong demand, as they continue to point to materials inflation. While the auto producers have some raw material price protection in their contracts, the very strong results for 1Q 2021 suggest that they are not having to compromise much on pricing, as the demand is there, interest rates are low and consumer spending power is higher because of a year of incrementally adding to savings.
The movement down in ethylene in the exhibit below is significant, as it begins to show the overhang that the US has with ethylene supply. The price has to fall further before ethylene is likely to find any interested spot buyers outside the US (note that the US exported significant volumes of ethylene from November through January). The more important question is whether the weaker ethylene price starts to undermine derivative prices, especially polyethylene. We believe that will happen either late this quarter or early next, but only when US polymer buyers are satisfied that they have adequate inventory to meet what has been surprisingly strong demand. For more on this see our daily report.
We still believe that there is a good chance that 2Q 2021 is the peak for polymer profits in the US and Europe, but it very unclear how severe the downside could be, given the growth potential. Seasonal turnaround will keep markets more balanced in 2Q, and the major uncertainty beyond that will be weather in the US. A series of storms like last year could hold the market up through 3Q and into 4Q, but an absence of any weather events could expose US surpluses quite quickly, especially for ethylene and derivatives. The new builds in China have focused on ethylene and polyethylene (and some glycol), propylene and polypropylene, and PTA and PET, and this is where the potential weakness will emerge. There has been some new styrene capacity and that is also a vulnerable segment in our view. PVC, acetic acid, and large parts of the polyurethane chains look much more balanced to us and we have more faith in the projections being made by companies like Celanese, Olin, and Orbia than we do the major polyethylene producers. See today's daily report for more details.
While we see some residual strength in several markets, and note the Dow push for higher MDI pricing, the European ethylene price move lower may be a more important red flag. Rail-car data below shows that logistics are getting back to normal in the US. The upward momentum in US polyolefins spot pricing is losing steam and prices in China are weaker. Read more in our
Thursday Daily Report
This latest data point in the exhibit below highlights the May contract nomination from Methanex relative to the current spot price and compares it to the history of both and the implied contract premium. Based on a historic look at the contract premium, the May producer push for price hikes does not appear aggressive. For more coverage on methanol and multiple other relevant and timely topics see our daily report.