2009 Review: Dedication to Stability
After suffering through 2008, one of the most tumultuous years in memory, commodity chemical market trends of 2009 were marked by a dedication to stability. More interesting than any one company’s dedication or market segment’s behavior is the collaborative dedication to stability, the resultant behavior of the invisible hand of the markets.
The increase in transparency and liquidity enabled more cohesive decision-making from those along the chemical supply chain, and their interdependence and reciprocal influence became clearer than ever before. The unspoken shared goal of efficient risk management was made possible in 2009.
The numbers, of course, tell the story.
Depending on your perspective, the story begins with ethane. Ethane prices were practically flat during the first quarter of 2009, often ignoring rallies in energy. Ethane started the year around 40 cents per gallon, and steadily rose to about 75 cents per gallon. On a per-pound basis, this represents a gain of about 15 cents throughout the year.
While this may appear to be a large price gain, consider that ethane prices fell from $1.40 in June 2008 to 40 cents by December. The price climb in 2009 was steady and controlled. In fact, the reaction to the volatility seen at the end of 2008 was so visceral that ethane prices were nearly unchanged for the first five months of 2009! Ethane was not even fazed by a brief run-up in ethylene prices in February 2009, and ethane’s calm demeanor soon brought ethylene back to a point of stability.
Because of this, ethane was the feedstock of choice for the chemical industry. Ethane demand was constant from ethylene producers, and ethane gains were therefore fairly smooth and very much in line with ethylene prices. As a result of the high price correlation between ethane and ethylene, ethylene production rates were also fairly steady throughout the year and margins were reliably positive.
Ethylene pricing saw two periods of relative volatility in 2009, but again, nothing comparable to the ups and downs seen in 2008.
Spot ethylene began the year at around 20 cents per pound, and quickly found its comfort zone of 25 to 27 cents per pound. After a few weeks at that level, the onset of scheduled maintenance turnarounds at several steam crackers in the Gulf — combined with a number of plants still shut from either poor economics in the previous quarter or from damages sustained during the hurricanes of September 2008 — supply availability became very tight and ethylene became a seller’s market, trading from 27 cents to nearly 34 cents during one week alone.
The rally didn’t last, however, and when many of the ethylene plants restarted in early March, the fundamentals weren’t there to sustain the price spike. Ethylene drifted back to the 23 to 25 cent range until the end of June. A spate of unexpected production problems again popped the price of ethylene to nearly 30 cents in a matter of days, but a dramatic drop in energy prices during the very week that the troubled ethylene plants restarted resulted in a sell-off down to 20 cents, where prices began the year.
From July through December, ethylene prices steadily climbed, and prices closed the year around 37 cents per pound.
A slowly rising market proved to be a great comfort to polyethylene producers.
From a macroeconomic perspective, the main story of price trends along the supply chain in 2009 was how polyethylene performed.
Polyethylene prices in 2009 were predictable and rose steadily, with the exception of one brief and mild dip during October. Polyethylene ignored ethylene’s volatility and resin producers kept operating rates matched to demand with a degree of discipline not ever seen before.
The reward was that while prices did not come close to touching levels seen in 2008, margins were consistent and healthy. Order flows were also consistent. When export opportunities were available, polyethylene prices found even more support for their steady ascent. It was a far cry from the 2008 market.
Staying a solid 25 to 30 cents above ethylene was a goal that polyethylene sellers attained, and the erasure of volatility greatly increased liquidity. However, a subtle tone change was seen in the 2009 resin markets, and it resonated most deeply in the broker markets. Historically, the polyethylene markets were about buyers. As a broker, if you had buyers, you had a business, because you could always find material.
The extraordinary discipline in keeping operating rates matched to orders turned this truism on its head.
In 2009, if you had a steady source of supply, you had a business, because you could always find buyers. Producers had enormous influence in 2009 pricing, and by stepping it higher on a gradual basis, they were able to achieve much of what they sought.
Export market opportunities enabled resin plants to operate at higher rates, but rates were consistently reduced once the arbitrage window closed, which was not like anything the market-at-large had even seen before.
Now what?
How the 2010 market will behave is of course not known, but it’s off to a potentially volatile start. Just in the first two weeks of the year, ethane has traded up 6 cents per gallon and back down 6 cents. Ethylene has traded up 5 cents per pound and then down 2 cents. Polyethylene saw a 4-cent jump early in the month and remains a seller’s market. Sometimes, volatility cannot be avoided, especially for a commodity like ethylene, which reacts swiftly to plant shutdowns. It will be interesting to see if the markets grow restless in 2010 after achieving a full year of intertwined stability in 2009.
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Contact:
Kathy Hall, Executive Editor
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