The Polyethylene market continues its trek higher into unchartered territory. Fundamentals supporting the market include: tight resin supply, solid domestic/export demand, and rising feedstock costs fueled by soaring energy prices. Current Polyethylene prices reflect a full implementation of the September $.05/lb and most of the October $.06/lb price increases, spot prices have now risen about $.20/lb since the spring.
Looking ahead, producers will likely continue to step up resin prices on future spot offerings as they work to enable the next $.05/lb increase recently nominated for December. Resin prices are already damagingly high and processors will resist another increase, but they are not negotiating from a position of strength. While the export market was largely responsible for pushing resin prices higher during the summer, it is new found domestic demand that is sustaining prices during the peak fall buying season.
Domestic resin buyers have generally been limiting their resin purchases and inventories hoping for price relief ahead. Polyethylene producers have also been cautious about building resin inventories at price levels above $.40/lb, these are historically high prices and neither want to get caught with expensive resin if they market were to fall.
By keeping production much in line with forecasted resin orders, producers have been able to keep the market snugly supplied without a lot of surplus resin to sell. Subsequently, the low inventory levels throughout the supply chain have created an environment where it is difficult for processors to hold out and resist producers’ price increases.
At the moment, the spot market is not flush with resin, but it can be purchased – at a price. Railcars of even low quality C&A; grades are now selling in the low to mid 50s. Railcars of good wide spec injection grade Polyethylene are mostly in the mid 50s+. Railcars of LLDPE Butene/Hexene/Octene are selling in the mid to high 50s and good LDPE clarity and EVA film grades are quoted into the 60s.
While the contract market has moved in chunks of $.05-.06/lb at a time, the spot market has moved higher in a more orderly fashion, generally rising about 1/2 cent per week. Since this trend began in the spring, when spot offers have been purchased they have been replaced with slightly higher priced offers. We expect this pattern of pricing to continue in the immediate future.
There is margin and capacity at the producer level, so it is possible to see some producers look to take advantage of the profitable production economics to achieve a market share shift. They could do this by making extra resin to sell to their competitors’ customers at discounted (but still profitable) prices. However, we have seen the producers remain very disciplined, enjoying their profits without risking the chance to disrupt the market.
During the summer, Natural Gas prices were falling and Crude Oil prices were rising which created great foreign resin demand because US feedstock costs and resin prices were much lower than their foreign competitors. Now that both oil and gas have rallied sharply everyone’s feedstock costs and resin are expensive.
Natural gas prices have nearly doubled in the last 2 months, reaching levels above $9.00m/Btu for front month November delivery, while the January contract has already traded well above $10.00 m/Btu, but prices have recently come off by as much as $2.00 mBtu. Crude oil is also off substantially from its $55/barrel level, but still at historically high prices.
These cost pressures have ethylene monomer on the rise again with traders anticipating $.40/lb offers for this important feedstock. Polyethylene producers are not ready to watch ethylene price increases erode the fantastic resin margins achieved this summer. Unless this trend of rising energy prices reverses sharply and prices really fall off, expect more Polyethylene price increases backed by the higher feedstock cost argument.