Plastics Industry Perspective 3rd Quarter 2015
Polypropylene (PP) prices likely to rise on tight supply
Polypropylene (PP) prices are likely to increase, as LyondellBasell Industries (LDI) has declared a force majeure after the company experienced a power outage at its Bayport, Texas, production facility. Bayport is the fourth-largest PP production facility in the U.S. with a capacity of 720,000 tonnes per year. Strong domestic demand coupled with lower operating levels has resulted in a supply shortage in the market.
Domestic PP prices declined approximately 26% year-to-date September 2015, from an average of 73 cents at the end of 2014 to 54 cents. Most plastics have experienced similar price reductions in 2015, mostly driven by falling oil prices. Approximately 5.8 million metric tons of propylene capacity through PDH plants have been announced, with a majority set to come online by the end of 2018.
North American PP sales volumes increased 5 percent year-to-date August with a 5.6% increase in domestic demand and a 11.5% drop in export sales. However, export sales are not a significant factor for PP resin manufactured domestically because the U.S. does not hold a cost advantage for PP and, thus, commands less demand for exported PP resin.
PP producers have been attempting to achieve margin improvement for at least a year with limited success. Producers such as ExxonMobil, Pinnacle Polymers, and LDI have announced planned price increases of 5 to 6 cents for October 2015, on top of any propylene price increases. Many similar attempts have already failed.
Propylene prices fell 26 cents year-to-date from 53 cents at the end of 2014 to 27 cents. Propylene prices rose slightly in October. With propylene prices falling more drastically than those of PP in 2015, some margin expansion has already been successful, though not as successful as PP producers would like. Propylene-based chemical manufacturers are faced with more challenges compared to ethylene-based manufacturers in the U.S. Although, falling oil prices and a strengthened U.S. dollar, have pressured chemical manufacturing more this year compared to recent years. Uncertainty in the oil markets and potential slower growth in China will continue to test chemical manufacturers in the near future.
Kevin Duffy is a Senior Valuation Director who specializes in the plastics industry. He has valued numerous plastics-related companies in North America that are involved in distributing, compounding, and manufacturing resins, films, sheets, and molds. Kevin received his B.A. in finance from Illinois State University, and passed the CPA exam in Illinois. Kevin has diverse business experience in accounting, banking, manufacturing, distribution, and retail.