Nowhere to hide: Global polymer prices plunging after two years of growth

It took a global pandemic's pent-up demand, supply disruptions on extreme weather, cheap borrowing costs and Russia's invasion of Ukraine to send worldwide polymer prices to all-time highs since mid-2020. But record-high inflation, rising interest rates, acute supply chain clogs and recession fears threw ice on that sizzling demand, prompting swift price declines and market uncertainty.

The turning point was in May.

China, the world's second-largest economy, had emerged from various pandemic- related shutdowns earlier in the year that hindered manufacturing and port operations and siphoned polymer demand.

But demand remained sluggish as China's production ramped back up. China began cutting prices and aggressively exporting to maintain output despite surging cracker feedstock naphtha costs that spiked alongside crude after Russia's military aggression. Southeast Asian competitors followed suit in the race for market share.

At the same time, container freight rates out of Asia began retreating. Combined with sharp price decreases, that reversal restored the region's competitiveness in global polymer markets, which record-high freight rates in 2021 had squashed.

US polymer prices, which had spiked amid an extreme weather-driven supply squeeze throughout 2021, plummeted to compete in markets increasingly looking to Asia for cheaper supply.

However, logistical logjams emerged in late 2021 eroding typical transit time advantages for US volumes, particularly to Latin America. A chassis and truck driver shortage left packaging warehouses full of export-bound material for weeks – some even months – prompting producers to cut prices further to entice wary traders to buy more despite fat landlocked inventories.

Meanwhile, Europe remained somewhat of an island in the polymer price wars.

Russia's invasion, drought, weak demand and occasional COVID-19 relapses exacerbated energy shocks that emerged with record-high costs in late 2021. European producers reduced exports while grappling with expectations of natural gas rationing, a recession and how bad it will be.

LyondellBasell on Sept. 1 was the latest producer to announce a surcharge to cover higher energy costs at its European polypropylene, high density polyethylene and low density PE manufacturing sites, according to a customer letter seen by S&P Global Commodity Insights.

"There's nowhere to hide," said Rob Stier, senior lead of global petrochemical analytics at S&P Global Commodity Insights. "There is no longer any strength I can point to in olefins and polymers."

Rate cuts

Global petrochemical giant Dow Chemical on Aug. 24 informed customers that the company would cut global PE production rates, citing logistics constraints in the US and Europe.

"Given continued global logistics constraints, including port and rail congestion in the US Gulf Coast and dynamic conditions in Europe, Dow is reducing operating rates across our polyethylene assets, resulting in temporarily lowering 15% of our global polyethylene nameplate capacity," according to a customer letter seen by S&P Global.

Dow's letter said its PE production cutbacks were expected to help balance high inventories at key global ports and in packaging warehouses, particularly in the US Gulf Coast during August and September – when the region typically witnesses strong hurricanes.

But for the first time in 25 years, August passed without any named storms forming in the Gulf of Mexico. In 2020 and 2021, hurricanes forced weeks of shutdowns at plants in southeast Texas and Louisiana. And earlier in 2021, a deep freeze had also forced widespread weeks-long shutdowns in Texas, parts of Louisiana and the inland US.

Mrket sources have repeatedly said a 2022 hurricane could force shutdowns that could potentially allow some easing of fat inventories.

"If we get a hurricane this year, it probably wouldn't affect prices," a source said.

Other significant rate cuts in the US have yet to be formally announced by producers, but market participants expect output to retreat.

Tony Chovanec, senior vice president of Enterprise Products Partners, said in early August that US ethylene supply is long and downstream derivative plants were "taking economic run cuts."

In April, Europe-based INEOS declared force majeure on PE and polypropylene produced at its US manufacturing sites in anticipation of reducing rail shipments because of congestion and backlogs, according to a customer letter seen by S&P Global.

Hot demand cooling

Polyethylene is used to make the world's most-used plastics, from grocery bags and milk jugs to shampoo bottles and food packaging. As such, PE demand is more resilient in economic downturns than more durable plastics.

Durables include construction staple polyvinyl chloride, used to make pipes, window frames and vinyl siding, and polypropylene, which is heavily used in the automotive industry as well as carpet and linings for refrigerators and washing machines.

Demand for durables soared from mid-2020 through early 2022 amid a housing construction boom fueled by cheap borrowing costs. However, rising interest rates pushed the average 30-year fixed mortgage rate from 3.22% in January to 5.81% in June, according to Freddie Mac. It dipped below 5% in early August and rebounded to 5.66% by Sept. 1.

In January 2021, the average rate was 2.65%, the Freddie Mac data showed.

Also, April 2022 US housing starts reached a 36-year-high of 1.805 million units, US Census Bureau Fed data showed. July housing starts reached 1.446 million units.

By mid-summer, US homebuilders were starting to slow new home construction and offer buying incentives amid rising contract cancellations.

"As we adjust to current market conditions, we expect the pace of our sales price increases to slow during the fourth quarter and for our incentive levels to increase from historic lows," DR Horton CFO Bill Wheat said in July.

US vehicle sales have also fallen from 18.78 million in April 2021 to 13.8 million in July 2022, according to the US Bureau of Economic Analysis.

All these forces have pushed down prices. US export PVC prices have plunged more than 54% since late May, while polypropylene prices have fallen more than 45% since early May. US export high density PE prices fell nearly 39% in that period. Prices in other regions also declined, though some not as dramatically as in the US.

"Stagflation has taken over as the primary driver, since May, of global petrochemical prices," Stier said.

While market participants look for a floor on price declines, more capacity is slated to come online in the coming months amid stagnant demand growth demand and potentially adding more logistics pressures, Stier added.

Global PE capacity will reach 146.5 million mt/year by year-end, largely on additions in China and the US, according to S&P Global's Petrochemical Analytics. By 2024, global PE capacity is expected to grow another 7.7% to nearly 157.9 million mt/year, according to S&P Global projections.

"The real kicker is the next wave of capacity coming online," Stier said.