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Polyolefins Markets in the Americas are at a New Extreme
04 February 2021Terry Glass
The recent events in the Americas polyolefin markets have been
history in the making. Looking back six months ago, no one would
have predicted the impact of the 2020 hurricane season, COVID-19
impacts, and production issues plaguing the polyethylene (PE) and
polypropylene (PP) markets in the Americas. Likewise, no one would
have expected that the unique separation of trade in the Americas
from the Asian markets would result from what this author calls the
"Amazon Effect." Prices are at historic highs as PE prices have
increased 24 cents per pound (cpp) over the last 7 months, with
another 12 cpp nominated for January and February. All of these
events are contrary to the forecasts from just one year ago, when
new plant start-ups both in the domestic and international markets
were supposed to bring a glut of resin into the market, expand US
exports, and pressure prices downward in the domestic markets.
Given these events, what does this set of extreme circumstances
suggest for the next six months?
First, we will look at the supply and demand trends in the
US/Canadian markets for 2020. Figure 1 summarizes the PE domestic
sales and exports for Canada and the USA (CANUSA) from January
through November 2020 for all three PE grades (high-density PE
[HDPE], linear low-density PE [LLDPE], and low-density PE [LDPE])
collectively. The data shows that overall domestic sales during the
year actually declined slightly as November total domestic sales
were 1,194 metric tons versus 1,235 metric tons in January 2020,
about a 3% decline from the pre-pandemic level of January 2020.
Exports declined on average by 12% from the January 2020 to
November 2020 levels, suggesting that the overall exports for PE in
the US and Canada did not increase in 2020. Thus, CANUSA demand did
not increase from January-November 2020, and thus price increases
in 2020 were not due to a major increase in demand throughout
2020.
Then next variable to consider is production. At the beginning
of 2020, we were forecasting several new plant start-ups in the US,
including two new LDPE units (Formosa and Sasol) and one Hyperzone
HDPE plant (Equistar) that would increase domestic production by
1.3 million metric tons (5% increase). Figure 2 shows that 2020
production was actually flat in January 2020 (2,140 kilotons)
versus November 2020 (2,147 kilotons). Curiously, however, the
impact of plant operations during the peak of the COVID-19 pandemic
(April through August) saw declines in daily inventory levels as
determined by monthly production versus monthly domestic sales
demand. It was only in October that the industry showed any
significant increase in inventory levels following the economic
shutdown that occurred in April and May.
In August and September, the US Gulf Coast was hit with three
major hurricanes and several tropical storms that forced plants in
the Louisiana and Texas coastal areas to shut down, some for an
extended period of time (months, not days). September production
was 13% lower than January production, resulting in a cumulative
total of 4.5 days of reduced inventory for the period April through
September 2020. This unusual hurricane season greatly exacerbated
the availability of PE resins in certain key markets such as
blow-molded bottles, shrink film for packaging, and food container
applications. Only in October did the inventory levels start in
increase, with the January through November inventory movement up
3.5 days in total. However, at the time of this report, several
producers are still struggling to rebuild inventories to normal
levels and continue to operate under force majeure conditions. The
net impact has been very little spot resin being offered into the
domestic and export markets as inventory levels did not increase
significantly.
Production levels also did not increase as expected for a
variety of reasons, including natural events (COVID-19 and
hurricanes) and unplanned events (fires, explosions, extended plant
turnarounds, ethylene contract disputes, etc.). On balance,
however, the data as shown would suggest that the market should be
returning to a more normal supply/demand condition in the coming
months as production is showing increases back to January 2020
levels.
Therefore, on average, no major changes in production or
inventory levels developed from January through November 2020 that
might support major price increases in the domestic market.
However, another variable has developed that is unique in our
history, and that variable is in regards to freight rates.
Container freight rates from Shanghai to the US West Coast (Figure
3) have jumped 158% from one year ago. Spot freight rates on 24
January 2020 were $1,545 on average for a 40-foot container. As of
22 January 2021, the spot freight rate was $4,054 per 40-foot
container.
Certainly, there was a concern about increased fuel charges with
the implementation of the International Maritime Organization's new
emissions rule (IMO 2020) in January 2020 (lower sulfur
specifications causing an increase in fuel charges). However,
nothing like the increase shown in Figure 3 was expected. In the
simplest of terms, the higher freight rates are due to a lack of
available containers and ships moving product from mainland China
to the Americas (particularly, the US). The shortage is due to the
author's aforementioned "Amazon Effect."
The "Amazon Effect" is related to the COVID-19 pandemic as
consumer purchases of the top five categories of goods and products
from mainland China shipped to the US increased, on average, 37% in
2020 versus 2019. Figure 4 shows a more detailed listing of the
number of units shipped in 2020 and the relative percentage
increase for the top five categories. These items included
electronics and electrical machinery; toys, games, and sporting
equipment; optical, photography, and medical imaging equipment;
plastic articles; and washing machines, dishwashers, dryers, etc.
The pandemic has accelerated the growth of Amazon's distribution
footprint as more consumers buy everything from groceries to
furniture online. The company's commitment to growing its real
estate presence underscores its confidence that those consumer
buying habits will stick around post-pandemic and address demand
for deliveries that happen within hours of an order being placed.
The company said last summer that it had at least 70 logistical
facilities in development across the United States and that it
expected to boost its warehouse capacity by 50% before the end of
2020. By comparison, Amazon grew its distribution network by 15% in
2019.
The impact of this huge increase in exported goods to the US
created a shortage of available containers for shipping commodity
products such as PP or PE to the Americas. Commodity products must
now compete with higher valued finished-goods products to secure a
container for shipment. In essence, resin shipments are competing
against Walmart and Amazon for containers and transportation space
on ships.
This container shortage situation has resulted in competitive
bidding for containers, with reported prices above $1,000 per
container. Freight shipping companies are also charging $1,000-plus
to guarantee slots on the ships, so prices to ship resin from
mainland China to the US West Coast are reported in the range of
$6,000-8,000 per 40-foot container. Additionally, port congestion
in major ports of entry (Shanghai and Long Beach, California, for
example) has extended the delivery times to 4-6 weeks instead of a
more normal 3-4 week delivery time. Current freight rates for
westbound traffic from mainland China to the Americas are at some
of the highest rates in history, with only the 2007/08 period
approaching the current scenarios.
One final variable to consider is that very little resin is
shipped from mainland China to the US, so why would freight rates
from mainland China matter? In terms of supply and demand, the
impact is indeed limited. However, in terms of pricing, the impact
has been dramatic. Latin American (LATAM) countries depend on
product from Asia (especially mainland China) and the high freight
rates have made imported resin from the regions very expensive,
with significant risks associated with long delivery times.
Colombia, for example, has reported freight rates as high as
$15,000 per container, which equates to a premium of 27 cpp just
because of shipping costs. The end result is that the LATAM
countries need imported resin and their supply from Asia is highly
constrained, which has resulted in an increase in demand for
product from the US.
The complexities described above are not unique to polyethylene.
Similar problems exist for the polypropylene markets with similar
issues of unplanned shutdowns, high mainland China/Asia freight
rates, and strong market demand. Polypropylene prices have also
been impacted by higher feedstock costs as propylene monomer
production has been impacted by lower refinery operational rates
and PDH plant shutdowns. The higher feedstock costs are likely to
continue until fuel demand (gasoline, diesel, and aviation fuels)
returns to a level similar to the pre-pandemic 2019 period.
In summary, we are faced with a shortage of resin in the
domestic markets due to supply disruptions that continue even
today. The events associated with the shutdown of the Braskem Idesa
plant because of contract disputes with PEMEX and the Mexican
government dramatically disrupted supply in Mexico, which has added
to the shortage of resin in Mexico and increased demand for US
product. Asia (particularly mainland China) is not a desirable
option to source resin given the high freight rates, thus US
producers are able to increase prices without loss of market share.
This tight market is expected to continue through the first quarter
of 2021, and only when inventory levels return to industry norms
should we see some relief, and hopefully return to a more
traditional market that will include spot resin sales. In 2021,
some additional PE capacity will become available with the start-up
of the two LDPE plants (ongoing) and the completed start-up of the
Hyperzone plant, which should provide some relief to the tight
market; nevertheless, the tight market is expected to continue
through the second quarter.
As for the mainland China freight rates, that will continue to
depend on the mainland China regional economy, the long-term change
in consumer buying habits (the Amazon Effect), and the impact of
the pandemic on economic regions around the world. As long as the
freight rates remain at these historically high levels, domestic
producers in the US will see little downside pressure to reduce
prices under tight resin supply conditions. For the moment, we are
faced with a historically unknown relationship of a split market
between Asia/mainland China and the Americas, as the two regions
appear to operate independently in the polyolefin markets. In
addition, it appears the Amazon Effect may be a permanent shift in
consumer buying habits.
We also offer a long-term outlook on supply and demand globally
and on a country level, along with a live capacity database and
trade flow analysis on a country-to-country basis in our
World Analysis (WA) service. In addition, the WA now also
provides 10-year price and margin quarterly updates for North
America, West Europe, and Asia.
Posted 04 February 2021 by Terry Glass, Executive Director Plastics, IHS Markit
As the markets evolve, so do we. That’s why IHS Markit Energy & Natural Resources and S&P Global Platts merged to f… https://t.co/jM7Fdk3a5Y
Jun 08
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