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Resin Report: Buyers in Holding Pattern, Anticipating Lower Prices

Resin buyers are thankful for lower prices and better availability, but not enough to actually place orders. They only placed truckload orders or none at all the week before Thanksgiving in anticipation of lower prices ahead, reports the PlasticsExchange in its Market Update.

Prices for polyethylene (PE) and polypropylene (PP) commodity grades, while under pressure, mostly held steady early in the week, but all grades then peeled off a penny on both Thursday and Friday, resulting in $0.02/lb losses for the week. Houston export prices continued to decline, inspiring export interest through international traders. While US prices have already come down significantly, premiums to other regional markets were substantial, so there is still more discounting needed to open the high-volume incremental export arbitrage, according to the PlasticsExchange.

Oversupply pulls down contract PE prices 

Producers held back material during Q2 and Q3, rebuilding supplies after the devastating February freeze induced production disruptions, which also came under the guise of building a defensive inventory buffer in case this year’s hurricane season also proved to be disruptive. This kept the domestic PE market quite tight, enabling the implementation of a series of 2021 increases totaling $0.41 to 0.43/lb through July. While some storms and disruptions came this year, the season was deemed benign overall. Logistical constraints, including a lack of personnel and displaced equipment largely caused by shifts in international trade patterns this past year, have created bottlenecks and complicated exporters’ ability to move material from Houston warehouses, many of which are now full, onto outgoing container ships. PE contract prices were steady in August and September, but given the mounting oversupply and lack of incremental exports, high PE prices were no longer sustainable and contracts finally gave up a nickel in October. The current negative momentum will pull November PE contracts down another nickel, with more price relief possibly coming in December. 

The Chicago-based PlasticsExchange anticipated a dismal Q4 for the resin market and price erosion. The resin clearinghouse notes in the current Market Update that it seemed possible that producers would be able to liquidate enough of the inventory overhang, which has swelled to record highs, to regain pricing power as early as January. “However, that feat is starting to look like a large challenge at this point,” it reports. “Still, there are five weeks to go this year and the transition to the new year has sometimes enabled a change in market direction, particularly ending a down-cycle leg, reversing pricing power back into the hands of producers. At this point, we are not so sure that the December/January cusp will be the turning point for this cycle, but we believe that, at some point, likely during Q1, producers will better handle the supply/demand balance back in their favor, albeit from a lower price point. So, for now in the short term, we see further price weakness ahead,” writes the PlasticsExchange.

PE spot resin prices decline across the board

The continued and expected decline in PE spot resin prices affected all major grades. Lower volume commodity resins like low-density (LD) PE Injection maintained the strongest premium amid the down trend, followed by linear-low-density (LLD) PE Injection and Rotomolding material, which also commanded strong premiums due to their limited yet slowly improving availability. Supplies of some high-density (HD) PE pipe and film grades remained strained following the force majeure in Texas earlier in the month. Other supply challenges also remain, adds the PlasticsExchange, with a handful of allocation programs still in place.

Overall, most PE grades were readily available with three weeks of notice; however, relativity few suppliers or trading partners have large volumes of material ready for prompt shipment. Those that do will maintain a sizable premium to market quotes for three or more weeks out. As many suppliers recognize additional downside price risks they are likely to continue holding minimum supplies, so this trend probably will continue for some time.

Deep discounts on some PP grades

The PP spot market continued to be pressured as resin supplies improve. A very strong flow of mostly off-grade and some down-graded prime domestic railcars rolled into the spot market at deeply discounted prices. Material availability for immediate pickup actually can be a challenge to source, according to the PlasticsExchange, specifically high-flow co-polymer PP resins. These materials had maintained stronger pricing and have not fallen to the extent of other PP grades. As supplies improved, homo- and co-polymer PP prices have consistently eroded, reaching net cumulative declines of $0.34/lb since the market peaked in June. This reversal took spot prices from a steep premium back toward a more historic discount to contract prices. To date, they have only decreased around $0.125/lb, which is mostly attributed to the decrease in monomer costs rather than a reversal in production margins. 

Traditionally, the PP contract market has been in lockstep with changes in monomer costs. During the past year, however, producers were able to implement more than $0.20/lb of margin-enhancing increases due to material-shortage-related pricing power. While the major indices might not quickly unwind the margin increases, the PlasticsExchange notes that it is, indeed, seeing high PP price erosion beyond the decrease in monomer costs. If this persists, the resin clearinghouse expects processors with a flexible supply to return to the spot market for cost savings rather than simply for availability, as was the case during the first half of 2021.

Read the full Market Update, including news about PGP pricing and energy futures, on the PlasticsExchange website.

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