Prices driven higher as logistics crimp supply, margins soar

By Nigel Davis, Insight Editor, ICIS

illustration: ICIS

Petrochemical prices have continued to move up in the uncertain operating environment with distortions to normal, inter-regional trade playing a key role in underpinning sometimes near record highs.

All eyes are on downstream demand which appears robust and, in the US, driven by stimulus and post-pandemic economic uplift expectations.

Timing is everything, of course, but currently, there does not appear to be an inflection point for prices in Europe and the US. Demand remains strong, supply is tight to adequate impacted in Europe by spring maintenance.

Much change
Looking across product chains it is difficult to see much changing soon but whether that means that buyers are happy with things as they stand or might be in a position to offer price inflation resistance, remains to be seen.

ICIS daily price index (source: ICIS)
ICIS daily price index (source: ICIS)

Equity analysts at Credit Suisse suggested this week that current commodity chemical product spreads are 20% above the mid-cycle April 2016 to April 2021 average.

US markets are moving on following the ravages of the winter storm that hit production and logistics on the US Gulf so hard.

US ethylene contract prices are high, the March to February month to month increase being the greatest since October 2005, and as with other upstream products, derivatives demand remains strong. Planned and unplanned outages had crimped supply but that is expected to lengthen.

Something similar can be said about US propylene, with expected rising refinery utilisation leading to more availability.

It is sometimes difficult to square the reported impact of the pandemic on the economy with what is reported to be strong demand for olefins and aromatics derivates. Nevertheless, demand is helping to buoy prices alongside the distortions to supply that have been a feature across multiple products.

US polypropylene demand is reported to be strong, for instance, on healthy manufacturing activity.

Integrated HDPE variable margins, USD/tonne (source: ICIS)
Integrated HDPE variable margins, USD/tonne (source: ICIS)

The polyethylene market in the US is getting back to normal following the disruption caused by the winter storm but it is taking time. Importantly, demand into durables is improving while packaging demand has remained strong through the pandemic.

Price impact
We’re beginning to see the impact of higher prices in the first quarter, and stronger demand, fed through into quarterly earnings.

Dow has this week reported stronger than expected sales and earnings for the first quarter. Output volumes were hit by the storm but sequentially the company reported a 14% gain in prices with “improvements in all operating segments, businesses and regions”.

CEO Jim Fitterling said that the company had seen “demand growth as the economic recovery continued to broaden, most notably in packaging, construction, mobility, electronics and consumer durables end-markets”.

As US plants have come back onstream following the storm outages, some pressure has been taken off prices. Styrene is a case in point with spot prices last week trending lower.

Some pressure is being taken off Europe which has found itself isolated from imports of various petrochemicals and subsequent further supply pressure.

As domestic supply improves, and the prospects for imports into what is now a high price region improves, so the upward pressure on price might be expected to ease.

Demand impact
A backlog in demand for derivatives, however, from the automotive markets and from end-sues in construction would be expected to maintain tightness through the second quarter. Despite lockdowns in Europe, demand for automobiles in Europe has risen. Manufacturers, however, face production problems because of the shortage of semiconductors, vitally important components in the electronics of a modern-day vehicle.

Demand for numerous petrochemicals and plastics into construction would be expected to improve through the late spring and early summer months as construction activity lifts with better weather.

In Europe, the ethylene market has been balanced to tight with planned outages underway.

Polyethylene prices soared in the first half of April and there were shortages of some grades. Sentiment might change but imports from Asia have been difficult because of shipping and logistics issues. Europe is attractive now, however, for polyethylene and polypropylene suppliers.

Polyethylene terephthalate (PET) prices have soared, but end user demand is not seen as strong. The price increases have been driven by low availability of PET and of purified terephthalic acid (PTA) due to technical problems at production plants and shipping delays.

A chemist by training, Nigel Davis is an Insight editor with ICIS and contributes regularly to the 24-hour online chemicals news service.