Chemicals: Moderate Energy Prices and Improving Supply Make 2016 a Good Year for Buyers

Spend Matters welcomes this gust post from Ted Semesnyei, senior economist at IHS.

While chemical price pressures will increase somewhat in the near term, due to a heavy spring maintenance season, prices are expected to stay competitive for chemicals in 2016, as supply levels remain sufficient and energy costs are low. Thus, the window of opportunity remains open to restock inventories ahead of moderately escalating energy and feedstock costs longer term.







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Ethylene

The February Net Transaction Contract price settled at 25.75 cents per pound (cpp), an increase of 1.0 cent from the January contract price. The arbitrage window to Asia remains open with Asian prices well below those in the U.S., though export capacity out of the U.S. is limited. The price rise is in response to the spring maintenance period, as inventories have risen and will likely rise further in March to help cover for an extremely heavy turnaround season. Thus, expect prices to continue to rise through the spring, with strengthening derivative demand and feedstock costs adding to price pressures longer term.

Bearish Chinese economic indicators, as well as the recent fall in crude oil and naphtha prices have dampened consumer sentiment in Asia considerably. As a result, ethylene prices in the region continued to fall through most of February before rebounding somewhat towards month-end. This was because of the market starting to factor in increased supply tightness due to the cracker turnaround schedule beginning in March. Prices were last assessed at $900–$1,000 per metric ton CFR NE Asia. Despite turbulence in output, supply and demand look to be largely balanced, with prices expected to essentially flat line over the coming months.

Polyethylene

Contract polyethylene (PE) prices in North America settled lower by 2 cents per pound (cpp) in February after falling by 3 cpp in January. However, producers have announced their intent to increase prices by 5 cpp in March, a move that IHS expects to go through. This is due to improving demand and constrained ethylene production capacity, as U.S. based ethylene producers begin a period of planned maintenance.

PE producers may well believe that the March/April time frame could be their best opportunity to raise prices for quite some time. Anticipated market conditions in March suggest the timing of the proposed increase is aligned with a period when PE resin sellers will likely have maximum leverage in the domestic market. The seller-friendly market will be supported by turnaround-constrained ethylene production capacity, improving export opportunities and expectations that crude oil and naphtha prices have likely bottomed out.

However, after the expected bump up in prices in early spring, polyethylene prices are anticipated to slide back down for the remainder of 2016 and dip further in 2017. The reason for this change is the nearly 2 million metric tons of new PE capacity expected to come online during the balance of 2016. This new capacity represents an increase of about 10% over current North American production capacity. The increase in capacity is expected to trigger enhanced competition for domestic market share among North American PE producers. We expect to see both PE prices and margins erode as the new capacity ramps up.

Elsewhere, the outlook for Asian PE prices remains bearish, as prices are expected to continue to tumble well into the summer. The weak Chinese economy, coupled with the recent collapse of oil prices, is instilling a sense of uncertainty and fear among industry players. While demand is expected to be relatively healthy in 2016, supply will remain long, with additional capacity expected to be commissioned by North American PE producers using cost-advantaged feedstock from shale gas.

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