After stabilizing in April, Polyethylene prices gained ground during May, recouping losses sustained at the end of the first quarter. Motivated by the removal of the $.05/lb Temporary Voluntary Allowance (TVA removal = no price protection), spot PE offers quickly advanced 2-3-cents higher at the beginning of the month. Incredulous buyers were reluctant to chase the market early, but as the month moved along spot offers were sparse. Buyers sentiment turned bullish once they accepted that prices would be higher in June, so they bought up the available spot resin.
New offers came in about -cent higher per week and towards the end of the month, even at the higher prices, few spot railcars were around. Those few offgrade cars that were available were truly substandardnot downgraded prime. This is a good indication that producers cupboards are near bare. Very good demand left some buy orders unfilled, bidding the spot market about 4-cents higher for May. The strength of the spot market into the month-end indicates that contract buyers will also likely pay more in June.
High, and still rising, energy and feedstock costs continue to be the driving factor behind producers need for higher resin prices. Crude oil prices bumped up against $42/barrel, setting all-time record highs in the futures market, before falling back to current levels around $40 in very volatile trade. Natural gas prices for the summer months are around $6.50/mBtu and futures prices for next winter are already priced north of $7.00. Contract Ethylene prices continue to roll over at $.355/lb even as spot ethylene has come off to the high 20s. This has created a troublesome environment of high feedstock costs year-round, rather than just a winter spike of years past.
This sustained period of high energy and feedstock prices are arguably more harmful to producers than the extreme price spikes that we have seen in recent winters. When feedstock prices spike and retreat, perhaps a month of margin is lost from price protection. However, more recently we have been experiencing a resin market that is supported by sustained high feedstock costs, yet still succumbs to interim supply/demand pressures.
When prices break during this period of natural market volatility, losses of margin last longer through the markets time-intensive cycle of recovery. This time it took 3 months, while feedstock costs still remained high. As illustrated in the accompanying price chart, when Polyethylene prices fell at the end of the first quarter, it discouraged producers from making resin in excess of forecasted customer orders. Throttling back production allowed producers to work down resin inventory. Today, this subsequent tight supply again gives them the edge in the game of price.
Rising resin prices during the second quarter have caught many processors by surprise. Since many processors expected seasonal weakness in both feedstock and resin prices, they also have drawn their inventories down. Their low inventory levels now make them vulnerable, allowing for higher resin prices. It seems that resin producers have successfully recouped their margin and have now passed the burden downstream.
As individual businesses and the economy in general attempts to recover, there has been a tone of caution at the processor level for fear of losing coveted orders. With the belief that resin prices might have continued lower into the spring and summer, processors did not necessarily push to enforce higher prices to their customers.
Driven largely by Chinas seemingly insatiable demand for resin, international polyethylene resin prices have also been on the rise. If there was significant surplus resin in the US, it could now likely find a home offshore. Hence, underlying foreign demand is supporting the US resin market.
Spot market prices are again at the highs made earlier this year. In addition, major producers have issued yet another $.04/lb increase for July. Initially, this announcement will simply serve to reinforce the TVA removal, but it is too early to indicate whether the $.04/lb increase will come to fruition in July. We need to keep an eye on industry inventory levels and feedstock costs, and the spot market should give us a good gauge of supply/demand/price balance. For at least the next 20-25 days, it appears that the polyethylene market will maintain its strength.