Propylene, polypropylene prices look to be less volatile
By Gordon Graff -- Purchasing, 4/5/2007 2:00:00 AM
After experiencing wild swings in 2006, prices for propylene and polypropylene are expected to show less volatility in 2007. Analysts forecast some upward movement in prices for both commodities this year, but they will be more subtle and punctuated by periods of flat or even declining rates at some points.
Key factors for buyers to watch in predicting price increase are rises in crude oil, an uptick in demand for polypropylene, a jump in polypropylene exports from North America, and plant maintenance shutdowns. Inventory adjustments and diversion of propylene into the gasoline pool during the summer driving season are other factors likely to impact pricing this year.
Currently, polypropylene demand appears to be improving, but not yet robust. Operating rates for the resin in the U.S. are anywhere from 85% to the low-90% range, reports Bob Dennett, an analyst with Houston-based Chemical Market Associates Inc. (CMAI). As for supplies of the resin, he says they are "not being strained" at the moment. Domestic demand for polypropylene in North America was "essentially flat" in 2006 compared to 2005, Dennett says. But because polypropylene exports from the region were up sharply during 2006, total demand for polypropylene from North American producers rose by as much as 2% over the previous year, he estimates.
Polypropylene prices tend to move in tandem with those of its monomer, propylene. And both more or less tend to track the price of crude oil. Industry sources say that the dramatic ups and downs of petroleum prices during 2006 were largely responsible for similar fluctuations in propylene, polypropylene and many other petrochemical products.
By the beginning of 2007, however, crude oil was still falling (it has since rebounded), while propylene rates were heading in the opposite direction. Dennett attributes this anomaly to two influences: a recent pickup in demand for propylene, and continued high levels of exports of the monomer out of the U.S. Both, he says, kept supplies of propylene in the U.S. "fairly snug," and put upward pressure on pricing.
Meanwhile, exports of polypropylene out of the U.S., which were strong in the final quarter of 2006, began to trail off in the first few months of 2007, observes Mike Smith, a market researcher with DeWitt & Co. in Houston. The main reason, he says, is that price increases for the resin in the U.S. outpaced increases in Asia and Latin America.
With exports on the wane, says Smith, "we are now a little longer in polypropylene, but not in a true oversupply situation." Despite less polypropylene exports, domestic prices of the resin have not fallen. One reason, says Smith, is that recent maintenance outages at several polypropylene plants have kept supplies of polypropylene just tight enough to allow producers of the resin to hold the line on prices and improve their margins.
Polypropylene Buyers have begun to replenish their inventories, which had dropped during 2006, according to Frantz Price, an analyst with Global Insight in Eddystone, Pa. This wave of buying will promote higher prices for the resin during periods of 2007. Inventory cycles, he adds, are a major influence on polypropylene economics.
Cyclical patterns are also part of the propylene equation. Of particular importance, say industry sources, are seasonal fluctuations in supply of the monomer caused by gasoline production. In the run-up to the summer driving season, an increased amount of propylene at oil refineries is diverted into the manufacture of high-octane alkylate gasoline, leaving less available for polypropylene production. This contributes to higher propylene prices on the spot market during the second quarter of the year.
Price sees tags for polypropylene increasing as 2007 progresses due to rising energy costs, increased polypropylene exports to Asia, and polypropylene producers raising their margins, which were dented during the resin's 2006 price slump. "Although there may be some corrections due to inventory swings," he says. Plant maintenance shutdowns during the first half of the year may also boost polypropylene prices.
Another factor promoting costlier polypropylene will be strong demand. "Polypropylene sells into so many markets, that its capacity for demand growth is so much bigger than other resins," he says. Recently, polypropylene demand has exceeded that of competing plastics such as polyethylene and polystyrene.
But any price gains in propylene and polypropylene in the course of 2007 may be modest, and tags may even plateau or even decline in certain periods, according to CMAI's Dennett. In the next few months, he says, "we're looking at propylene flattening and moving down some," with polypropylene likely to do the same. Then, around September or October there will likely be some tightness in the propylene arena, which will cause prices to come up, and raise polypropylene prices.
Finally, in the fourth quarter, Dennett expects propylene to decrease, with a corresponding decline in polypropylene. So, barring unforeseen developments, he says prices for both commodities a year from now may well be down as much as 4–5¢ from where they are now.
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