By Doug Smock
Sky high and extremely volatile propylene prices are causing fits for buyers of many intermediate chemicals, coatings, and basic plastics such as polypropylene, nylon, ABS and polyurethane.
The forecast is for more volatility for the next two years and then improvement as significant new North American capacity to produce propylene directly from propane come on line.
Propylene prices jumped 12% in January to $1,340 per metric ton, according to Platts Global Petrochemical Index. Prices had been $1,500 a ton a year ago, and then dropped to almost $1,000 a ton last summer.
The reasons for the roller-coaster market dynamics are complicated, and relate to gasoline production, growth of natural gas production in the U. S., and producer strategies to boost profit margins. Despite its importance, propylene has generally been produced as a by- or co-product of something else, and as a result has been whipsawed as fossil fuel economics and production approaches change.
But major users of propylene are fed up, and, in the case of Dow Chemical, doing something about it.
Dow is building a plant to make propylene directly from growing domestic supplies of propane through a process called propane dehydrogenation (PDH), and already feels it may build a second plant.
"We are proactively positioning ourselves to benefit from the aforementioned abundant propane supply and thereby mitigate exposure to volatile propylene prices that affect our thermosets and coatings margins – especially in the U.S., through our game-changing PDH project," says Andrew Liverus, CEO of Dow Chemical.
Here is a list of announced plants expected to come online by late 2015 to produce propylene directly from propane:
Until these plants come online, however, markets are expected to remain somewhat chaotic. That's because the sole PDH plant now is PetroLogistics's 659,000 metric tons/year unit in the Houston Ship Channel, and it represents less than 10% of the domestic propylene supply
At most risk has been polypropylene, which consumes about 60% of the total output of propylene in North America.
"Raw material costs represent a larger percentage of selling price than they ever have because the price of propylene has skyrocketed," Craig Blizzard, Vice-President and Industry Practice Director at Blizzard Consulting Group, tells My Purchasing Center in an interview. "There is structural tightness in the propylene market today because of the reduction in the amount of naphtha cracking given the abundance of ethane." When you crack ethane, you get a fraction of the propylene you get when you crack naphtha. Ethane has become more important due to fracking (hydraulic fracturing).
Also complicating the outlook recently has been temporary shutdowns of several propylene production units. Another factor is a concerted effort to manage basic chemicals' businesses more profitably.
Major chemicals producers traditionally emphasized supply and market share over margins. The results were catastrophic and triggered a major exodus from many chemicals and plastics.
It's very different today for many products, including the propylene supply chain, says Blizzard.
"Manufacturers independently are very orderly in their management of the production of polypropylene today. They are making enough, but just enough. They are working hard to avoid oversupply periods."
As a result, secondary markets are less important. Buyers used to find many bargains, including prime material labeled as "off-spec" from resellers, particularly late in the calendar year.
The reverse happened at the beginning of this year as PP producers announced price hikes of 15 cents per pound, and then announced another 6 cents per pound in price hikes. Much of the proposed increases did not stick, and the contract price for a homopolymer injection molding grade was around 76 cents per pound in late February, according to Plastics Today.
Prices are expected to be more stable for the next few months because of the seasonal nature of polypropylene demand. There's plenty of PP capacity in North America. Blizzard says there is enough capacity to meet growth in demand in North America for at least three or so years.
The two leading producers in North America are Lyondell Basell and Braskem, which bought Dow's PP plants in 2011. Other producers include ExxonMobil, INEOS, Total, Formosa, Pinnacle Polymers, ConocoPhillips, and Flint Hills Resources. Dow sold its PP plants to free up internal production of propylene for higher-value products such as acrylics. Phillips Sumika closed a money-losing PP plant in 2011.
While PP producers are anxious to boost profit margins, they also must be careful not to upset market equilibrium.
Injection molded polypropylene, for example, has won a majority of the stadium cups market from polystyrene, which also has undergone market instability. Rigid packaging is another particularly price-sensitive market. When prices are high, design engineers and processors step up efforts thin-wall products and generally reduce use of the plastic.
"Demand for polypropylene could contract some over the near-term," says Blizzard. "It used to be a very cheap polymer per cubic centimeter, and it doesn't have that attractiveness anymore."
Doug Smock is the former Chief Editor of Plastics World and Purchasing magazines (RBI) and the Former Editorial Director and Associate Publisher of Modern Mold and Tooling (McGraw-Hill). He currently writes a blog on plastics called TheMoldingBlog.com.
He is co-author of two leading books in supply management: "Straight to the Bottom Line" (2005, J. Ross Publishing) and "On-Demand Supply Management" (2007, J. Ross Publishing). “Straight to the Bottom Line” is now in it second printing. The books are available through the My Purchasing Center bookstore. He has a Bachelor's Degree from Case Western Reserve University, Cleveland, Ohio
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