US Propylene Prices Up Over 100%

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Spend Matters welcomes this guest post from Rajiv Joarder, knowledge team leader at Mintec.

U.S. propylene prices are making headlines yet again, with the steepest price incease in recent years seen this January 2017. At the start of Q4 2016, we reported on propylene prices rising due to factory closures in the U.S. Five months later, prices have risen for similar reasons. But only now are we heading into the peak season for global plastic demand, while the supply situation looks like it could be even bleaker in the near future, due to upcoming factory maintainance period in the E.U. Could this be the storm buyers fear?

U.S. propylene prices rose by 106% month-over-month in January, surpassing the highs seen in September 2016, on low supplies and higher demand. Prices of propylene have reached unseasonal highs, due to lower supply as a result of outages at manufacturing sites in the U.S. One of the more significant outages was at the ExxonMobil plant in Baytown, Texas, which was shut for maintenance following a fire in mid-January.

Prices of propylene usually track feedstock crude oil, as shown in the graph above. Whenever prices of propylene exceed that of crude oil, the market corrects itself and propylene prices fall. This is one of the reasons prices fell earlier in Q4 2016. Demand for propylene, which is a feedstock for polypropylene (PP), also fell during the same period as PP manufacturers stopped procurement to reduce the level of year-end inventories. But in January, as buyers came back to the market to restock in anticipation of the peak summer season, sufficient stocks were not available and prices rose.

Production capacity of propylene in the U.S. has been relatively stable over the last few years, with only a few companies proposing further investment to increase manufacturing. Since the sharp drop in crude oil prices from summer 2014, it seems everyone is taking a more cautious approach and delaying investment for propylene. Additionally, an agreement between OPEC and non-OPEC members to curb crude oil output may not bear fruit, and we could see yet another year of price volatility, resulting in further delays to investment.

Recently spot prices in the U.S. and E.U. reached a parity in terms of the U.S. dollar, but U.S. propylene prices need to increase further before imports are justified. In addition, European buyers are stepping up procurement to secure volumes before manufacturing sites in the E.U. go offline for maintenance. The increase in demand is expected to add upward pressure to prices in the E.U., which could spell bad news for U.S. buyers if they turn to imports.

Buts it’s not all doom and gloom in the U.S. New factories are scheduled to come online while existing ones will be restarted, which will ease some of the supply pressure. In addition, as prices continue to increase, buyers will likely wait and see where the price settles before going into contracts, which in turn will lower demand and force prices down. So the question we need to ask ourselves is: How soon will the price drop back to normal levels?

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