2009 Markets Review - The Year So Far
Like the general economy, the chemicals industry has seen better years than 2009. Climbing back from the depths explored in the fourth quarter of 2008 has been a challenge all along the chain. Within that statement, however, the second quarter of 2009 has seen the two major chemical chains again split dramatically at the midstream level, largely due to factors that are increasingly a part of these chemical markets in recent years: refining economics and daily inventory management. Thanks to the painful lessons of 2008, a greater sensitivity to the midstream markets has led to some improved practices for limiting volatility — and the cultural changes that resulted from last year’s margin bloodbaths promises to keep manufacturers nimble and profitable.
The midstream has told the story that is not so apparent in the plastic resin markets, or in the petrochemical feedstock markets of natural gas liquids. Ethylene and propylene have been so dramatically cleaved apart by refining economics as pricing chains that the least important factor in the very pricing of resins in 2009 could be domestic resin demand itself. When major manufacturing purchasing departments need to monitor refinery operating rates and gasoline profitability in order to purchase resin wisely, it’s a sign that the 2009 markets could be another one for the history books.
Resin producers have never seen prices drop as swiftly as they did at the end of 2008. They responded by slashing production rates and closing plants. As their own purchasing of raw materials stopped, those prices decreased and by January, a modicum of profitability was restored.
Still, the converter community had a lot of high-priced inventory to work off in the early months of 2009. Once a price bottom was found for polyethylene and polypropylene, some stability was found — and 2009 has so far been a relatively smooth ride. Continuing to keep output matched to orders with a rigid discipline has kept margins slim but positive and sales slow but reliable. However, the midstream ethylene and propylene markets have shown some volatility due to this supply-side management.
Operating a resin plant or a processing plant is less complex than operating a steam cracker or refinery. With operating rates trimmed back so much for steam crackers and refineries, the risk of running short on monomer and feedstock supply due to even the slightest upset has kept many in the olefins market on edge in 2009.
By February of 2009, order seemed to be restored to the chain. Polyethylene prices were in the low-to-mid-40s cpp range and polypropylene prices were in the high 30s cpp. Their monomer markets were in the 20s cpp. But the stability was to be short-lived. Two unexpected production upsets in mid-February popped ethylene prices up 5 cpp, and the uncertainty behind the fragility of supply security in a market with production rates below 70% caused a bit of a buying panic. When the ethylene production issues were resolved in March, prices again crashed to correct their overbought status from February. And then crude market kicked into a rally, leaving natural gas largely in its dust.
With crude oil values staying far above natural gas, and continuing to rise, many are concerned that a repeat of the second half of 2008 could be ahead.
While the chain remained profitable on an academic basis, the reality of everyone holding expensive inventories all but stopped commerce, and buying was reduced to record low levels.
Polyethylene producers have shown a discipline of matching output volumes to orders in 2009 that has not been seen before. While this discipline has kept resin inventories very lean, and for some has supported efforts to raise their selling prices, it has also resulted in another swift decline in their monomer costs.
Ethylene market participants at the end of May are fairly bearish for the balance of the year, and are themselves keeping operating rates cut back to limit their own margin losses. But with a rising crude market and the annual uncertainty of hurricane season in the Gulf Coast, it may be another year of managing operations and positions with the assumption that all fundamentals could change quickly. At the same time, the memory of keeping market conditions so precarious as to create the record drops seen in October of 2008 keeps daily tensions high.
The propylene chain is suffering a different set of tensions. Very little propylene has been available for much of 2009, owing to refinery operating rates largely staying around 80% so far this year. However, the demand for polypropylene has been so poor that it has consistently been priced below polyethylene, an unusual condition. No one producing polypropylene had missed the reduced output.
Still priced several 5 to 10 cpp below polyethylene, polypropylene began climbing back in the second quarter of 2009. The low price in March elicited overseas interest for US polypropylene and US plants increased their output in April to satisfy this demand. The bullish condition of this market intensified when its raw materials supply became short. While polypropylene producers had been immune to upstream supply constraints as demand was very poor, this incremental increase in demand exposed how dire the feedstock supply situation had become, and propylene prices as a result went soaring.
The majority of polymer grade propylene prices are determined by a negotiated contract price which is heavily dependent upon the raw propylene price, for refinery grade propylene. Since the PGP contract prices are typically settled at the start of each month, the RGP pricing trend at the time of their negotiation tends to set the tone. June PGP contract prices have not been set at this writing, but significant increases are expected. In May, the effects of a strong gasoline season and crude prices that rose from the $40/bbl range to above $60/bbl kept much of the refinery grade propylene in the refining stream, and unavailable for chemical industry use. In May alone, refinery grade propylene prices jumped 10 cpp.
Polypropylene prices have risen, but not nearly as much – and the rising price has all but ended the export interest that began the run-up in the first place. With inventory so tightly managed, polypropylene has again become a seller’s marketplace.
While the 2008 market is one that no one wants to live through again, the comfort (if there is one) is that historical models have largely proved useless in predicting the future as the past several years have defied theories based on economic cycles that all tiers of manufacturing had come to rely upon. Looking forward and planning for all possibilities has kept profitability in the pricing chains, albeit requiring some quick reactions.
For example, the quick turnaround in propylene prices, has inspired steam cracker operators to increase their inputs of propane rather than relying on the relatively cheaply priced ethane. Ethane maximizes ethylene output and in a falling market, limiting output while increasing the attractively-priced co-product has become a popular choice for olefins plant operators in the seocnd half of May. If propylene becomes oversupplied, however, this feedstock slate could quickly revert to favor ethane once more. The effect of this trend can be seen in May as ethane has languished around 40 cpg while propane has steadily risen from 64 cpg to nearly 74 cpg.
Resin buyers who did not plug into their upstream market trends in 2008 did themselves a grave disservice, and the habits of purchasing managers throughout the US have changed to include a greater awareness not just of energy price trends, but of the subtleties that lie in the midstream markets of ethane, propane, ethylene and propylene.
Ethylene and propylene prices touched historical lows at the end of 2008 and have been clawing their way ever since, through the diligence of inventory control and operating rate management. The industry has become more nimble and quicker to react to supply and demand changes from the nuances of gasoline demand to resin arbitrages to Asia. Forecasting has become near impossible, but the cultural shift to understanding that fundamentals are no longer something that a monthly report can predict has served the markets well in 2009 and this new-found sensitivity is an efficiency that will likely continue to limit volatility and can better ensure profitability along the manufacturing chain.
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The PetroChem Wire is a daily newsletter serving the petrochemical industry. It counts every major chemical and refining company among its subscribers, as well as many major manufacturing concerns, global conglomerates, industry consultants, equity analysts and government agencies.
Contact:
Kathy Hall, Executive Editor
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Copyright 2009