Podcast: Volatility in the Propylene Market
Financial & Capital Markets
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Luka Powell (00:10):
Welcome to the Olefins Weekly wrap-up. Today is Friday, March 17th, and I’m your host Luka Powell.
Pablo Giorgi (00:18):
And I’m Pablo Giorgi.
Luka Powell (00:20):
And together as Chemical Market Analytics, we recap the top events moving the ethylene and propylene markets over the past week. The design of this podcast is to compliment the content from the North America Light Olefins Weekly service, otherwise known as the Nalo Weekly.
Pablo Giorgi (00:38):
This week is the start of the College Basketball playoffs, also known as March Madness. The University of Houston is the favourite to win.
Luka Powell (00:48):
Although results in sports events are often unpredictable and volatile.
Pablo Giorgi (00:53):
Yeah, you’re right. But you know what else is volatile? The propylene market!
Luka Powell (00:59):
This week we welcome back a very special guest, Kathy Hall, to discuss the volatility in the propylene market.
Pablo Giorgi (01:06):
Hi, Kathy. Welcome back.
Kathy Hall (01:09):
Hello from New Jersey. I am very glad to be back.
Luka Powell (01:14):
Kathy, could you take us through the last few months of volatility in the propylene markets?
Kathy Hall (01:19):
Yes I can, and thank you for asking. Propylene, I believe in the second half of last year was really on a downward trajectory. As we were watching in many markets, that demand was weakening, and supply was lengthening. And this was happening very much in propylene that we saw the prices go from highs earlier in the year that were in the 60s and 70 cents range for the PGP, really reaching into the 30s by the time we were into the 4th quarter.
Now when the new year began, we did see a little bit of an uptick. But what I think is of a lot of interest because at OPIS PetroChem Wire, we’re also watching the forward markets and what is trading relative to the current month. So, when we look at the March 2023 market last year, that was also trading in the 50s, which is really, it was pretty consistent until we saw that drop into the end of the year where it was also dropping into the 40s.
Kathy Hall (02:27):
However, the front months for propylene had fallen into the 30s. So the market had taken a contango shape, meaning that the current price was in the 30s and the outer prices were in the 40s and 50s. That signifies that the front market is the weakest one at the moment.
Now, when we got into the new year, we didn’t see any spikes, per se, in the March market. But we did see that shape change in that the January prices were getting higher and higher, and they were getting higher than the February and March prices.
So when the market is backward, that means that your strength is gathering in the current month. What we saw on March 1st was that the propylene price got quite high. So, when the calendar turned, we went from the 50s straight into the 60s, straight into the 70s, within the first week of March.
But I think it’s very interesting to note that in April, propylene did not come up with it. It was the spread between March and April that widened out to 20 cents, which is really unusual and possibly historic. So the volatility seemed to be localized to the current month, but it was still–as volatility is–jarring nonetheless.
Pablo Giorgi (03:45):
Yeah, and it’s a very good point you’re bringing, Kathy and a very good job that you guys do, looking at how price curves are shaped and how this evolves over time. Clearly seeing contango like you said, a weaker front month showing that the market was long and incentivizing, holding product to sell for the outer months versus a sudden flip, meaning the market suddenly went from long to short, which you know was not predicted by anyone. I think there were a few disruptions, especially in supply that ended up either happening and unforeseen or taking longer than what was originally expected. You know, can you comment a little bit on all those supply disruptions in the last few months?
Kathy Hall (04:54):
Sure. So, again as we were ending the year, we were seeing very low operating rates in polypropylene and other downstream plants. And as a result, just running propylene units at normal rates was creating a supply overhang.
However, because the propylene market is much smaller than, say the ethylene market, so it is much more sensitive to supply disruptions. If you have supply disruptions either at the PDH or the splitter level, they have a more immediate and more dramatic effect than in other markets that have more production and capacity. What we saw in January was, you would have maybe some supply issues that were building in a little bit of concern, but also, we were seeing the downstream operating rates increasing.
So that happening simultaneously gave the feeling of a bit of nervousness that if the supply issues weren’t worked out, the demand was only going to increase because the operating rates at the polypropylene level weren’t measuring against the propylene outages at that point.
Kathy Hall (06:14):
So you really were watching into February with a very nervous eye to units that were down. Are they coming back the day they said they would come back? And really monitoring your own balances for February and March was creating kind of an air of a potential panic that in fact, I know I was surprised on March 1st to see a true price spike that once the month rolled over and new balances came into play and who owed what material out to who starting on the first of the month, that really did create that price spike from what we could see.
And then the question became how long would this feeling, or this need last? And I think at this point, in the middle of March, we’ve seen that front month price recede down to 60 cents and slightly below, but we still have the April market has stayed relatively steady in the 50 cents, I think yesterday, maybe to 49. I wouldn’t call the front as a collapse. It’s more of a panic had subsided. We didn’t really see much of an effect into April. So that was interesting to watch. But it is, as you say, Pablo, this is all about the impact of inventory in the moment.
Luka Powell (07:50):
So I guess the fact that the US propylene market has a much lower integration than other markets also plays a role?
Kathy Hall (07:59):
Yes. And I know this is something that Pablo and I have been talking a lot about because it is unique to the US propylene market. A common question he and I both hear from, the market and clients, is why isn’t this happening in ethylene?
And Pablo does a great job of explaining exactly what’s going on when you look at the fundamentals. So what are we bringing into this equation in terms of volatility risk? And that’s all about integration. So Pablo, if you don’t mind, can you walk us through the comparison between US ethylene integration and comparing that to the US propylene asset integration?
Pablo Giorgi (08:44):
Yes, of course. Thank you, Kathy. Ethylene as a product is much more integrated with its derivatives than propylene. Around 74 to 75% of the US ethylene capacity is integrated with derivatives depending on how you take into account the JVs and all other types of production arrangements. And what that means is that turnarounds are scheduled together.
Operating rates are looked at in an integrated form as well production planning, look at inventories. All of that is done together between the ethylene producer and the consumer when it’s the same company.
In the case of propylene, the integration between propylene and derivative production is only around 40% in the United States. Again, give or take depending on certain JVs and other types of production arrangements. But what that means is a lot of the times, all the integrated analysis doesn’t happen because it’s two different companies.
Pablo Giorgi (10:03):
So turnarounds are scheduled separately. There is not the same transparency when there are delays. Something you mentioned Kathy: panic buying.
If you are in the same company and you know how the turnaround is going in your supplier, which is in the same company, you already are taking steps to go around and complement your supply and take actions ahead of time versus a lot of the times when it’s different companies. You don’t have the same visibility. So definitely, the lack of integration plays a role in how the markets behave and the lack of integration in propylene makes the market more volatile. What bring us to this day and the structure of the market and Kathy, where do we go from here then? I mean, how do you see volatility in the US propylene market in the next months?
Kathy Hall (11:10):
Well, again, you know, my go-to is always looking at the forward markets, which are not a forecast. It really is a portrayal of where the people trading the market view the relativity of the value in the current month and the outer months. And, as I was saying before, it wasn’t so much that the entire propylene curve was volatile. It was the front month that became volatile in March. And it appears to me that in the process of subsiding, so the March-April spread is, is getting smaller where it had blown out to 20 cents a pound. So, 71 and 51 is pretty dramatic. 59 and 49 is less so. Not putting March into the equation, it does seem to be a fairly stable or flat forward curve in terms of that.
Kathy Hall (12:13):
Now, you know, things that you are more attuned to is not just the supply demand fundamentals in this region, but also the global picture because the exportability of the derivatives including things other than polypropylene. But that has a play into this as well as the exportability and, and international demand for US propylene itself could also shift things as we get into outer quarters. But with that, obviously anybody who’s trading a forward curve had really better be watching those forecasts. If you don’t mind giving me a glimpse into your crystal ball for short term – the next couple of quarters, and long term if you’re comfortable talking about, I always benefit from that. Thank you.
Pablo Giorgi (13:14):
Yeah, thank you, Kathy. Yeah, that’s a really good point on looking at the forward curve and the forecasts as one influences the other, but they are definitely not the same thing. And when we look into the future, you mentioned what’s going to happen in the next few months, especially as supply comes back to the market. But I would say, you know, looking a little bit more into the future, we have in the second semester of this year a situation where the US is going to be even better supplied, especially as now in the very short term, Dow starts up their FCDH unit, kind of a continuous process. PDH in Louisiana, it’s a smaller unit, but then in, in the end of the second quarter, we have enterprise probably starting up their PDH two, which is a bigger unit.
Pablo Giorgi (14:13):
And so we are going to be definitely better supplied through the second semester together with a global market, as you mentioned, Kathy, that is going to be pretty depressed in terms of margins and operating rates because there’s so much capacity coming online, especially in Asia.
And we have some big PDHs that have been delayed from the end of last year towards this year. We had one starting up in January. And the others are kind of on hold to start up as propane gets more affordable with the end of winter.
We’ll see what happens there, but at some point, they’re going to have to start up and it’s going to be a tough second semester in terms of global markets for US exports. And one thing that is important, as you mentioned, Kathy, there is the situation of supply and demand for propylene, but the demand for propylene is for derivatives that are also building new capacities and therefore having surplus for export.
Pablo Giorgi (15:17):
So what we call the marginal affordability that you need to take and consume, produce, and sell, that last pound of propylene in going to be destined into, export markets, right? In an environment where globally we will be oversupplied in propylene and its derivatives, it’s going to be a tough second semester. Definitely more oversupplied that, much more oversupplied than what we are now, because of both the propylene supply situation, but also the global markets for propylene and derivatives.
And then moving forward, we have ExxonMobil’s Vistamaxx unit starting up, still this year per their forecast. And it’s a unit that consumes a lot of propylene, despite technically not being polypropylene or any of the traditional derivatives. It’s a polyolefin elastomer, but it’s based mostly on propylene. So that’s going to increase demand, but still for the next year, we should continue to be in a well-supplied situation. That is until the domestic market’s growth catches up with the recent capacity additions. So, yeah. With that, I want to thank Kathy very much. Thank you for sharing all your thoughts with our listeners here.
Luka Powell (16:50):
Thanks for joining us, Kathy.
Kathy Hall (16:53):
It was my pleasure. And with that, let’s wrap up this wrap up.
Luka Powell (16:58):
Join us in San Antonio at the AFPM International Petrochemical Conference from March 26th to 28th. Visit our Hospitality Suite, Salon D, at the Marriot Rivercenter Hotel, and attend our Chemical Market Seminar, on March 26 from 1 to 3 pm, at the Salon I in the same hotel.
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