H2 2021 PETROCHEMICALS: Polypropylene to face logistics, weather, COVID-19 challenges

Mixed market conditions across regions is expected to raise the level of uncertainty for polypropylene in the second half of 2021. Factors supportive of prices in the first half of the year, such as healthy downstream demand and tight global supply, are expected to extend into the second half. But their impact may be diminished by Europe's persistent logistical woes as the US braces itself for the upcoming hurricane season and new startups in Asia.

Also, the fresh wave of COVID-19 infections spreading through Asia have tampered expectations of an improvement in the region's PP demand going forward.

Rising COVID-19 uncertainty in Asia to curb downstream demand

The Asian polypropylene market is seen mixed in the second half of this year as firm demand for downstream medical and packaging applications may be offset by an increase in supply, new COVID-19 outbreaks and persistent issues in the container shipping sector.

A total of around 7.04 million mt/year of PP capacity is expected to either come online, or restart, from June through to the end of 2021 in Asia and the Middle East. This includes 4.3 million mt/year of capacity in China and another 2.74 million mt/year in other regions.

There are uncertainties surrounding the actual progress of some expansions, and the impact of these projects on supply in Q4 2021 could spill over to 2022 given potential delays.

During the global PP shortage earlier this year, Chinese producers demonstrated the feasibility of exporting PP, which has helped increase export channels and market acceptance for competitively priced Chinese PP, sources said.

Although it is not typical for a China-export arbitrage window to remain open for an extended period, such as the one observed from February to April, Chinese suppliers are likely to continue to explore export opportunities, particularly for homo-polymer commodity grades as capacity expansions pick up pace, sources said.

While the continuous demand for medical, hygiene and packaging related applications, as well as, increased vaccinations and recovery in certain economic sectors will aid PP demand, there is growing uncertainty following the new wave of COVID-19 infections in Asia, in particular India, which is the continent's second largest demand center.

PP to remain firm along the US Gulf Coast as hurricane season looms

In H2 2021, the US PP market is expected to be tackling key issues that include healthy demand, tightened supply and the upcoming hurricane season.

Market participants face supplier hikes of 8 cents/lb ($176/mt) announced for June, in addition to potentially higher prices amid a rebound in feedstock monomer prices.

A boost in supply is expected to be met with strong domestic demand for resin, leaving export availability muted through 2021. The market anticipates prices to be pressured lower as operating rates return to normal in June, but this sentiment has since diminished following the climb in prices through the second quarter.

Platts FAS Houston marker has gained $783/mt, or 53%, since Jan. 4, when it was assessed at $1,466/mt, as the region's winter freeze shut many production plants and aggravated an already tight supply. The marker reached an all-time high of $2,734/mt on March 10, Platts data showed.

Prior to the cold winter, the PP sector was already reeling from two hurricanes in August and October 2020 that had affected plants and curtailed production. Market players are likely to keep an eye on the USGC, while carefully managing inventories to avoid further supply erosion.

The US hurricane season begins June 1 and runs through Nov. 30.

Supply uncertainty in Europe as imports challenged by global container shortage

The PP supply in Europe is expected to face headwinds as the shortage of containers globally limit Asian imports. Nevertheless, new demand could emerge following the successful rollout of vaccines across the continent and as consumption behaviors change with the lifting of coronavirus-related restrictions.

Healthy orders for PP in the first half of 2021 sent prices to record highs, with the PP homopolymer NWE spot price gaining 83% to peak at Eur1,960/mt in April amid a supply shortage. Market participants agree that PP prices may have hit a ceiling in H1 and could correct downwards going forward.

"If I look to pricing, the peak in the market has been reached, but I don't think there will be a big dip in demand or in pricing, I expect prices to be more controlled coming down," a producer said.

As for the remainder of the year, Europe's PP market will require a remedy for the shortage in global containers, which had caused supply chain delays and additional logistical costs in H1, for the market to balance.

Both producers and converters will look to take advantage of the traditional summer lull to build up stock levels in preparation for an anticipated pickup in demand later in H2.

The easing of lockdown restrictions in Europe is also expected to inject fresh demand into segments of the services sector, while an uptick in demand for packaging will likely carryover from stay-at-home trends. But the outlook on demand from the automotive sector is unclear given the uncertainty surrounding the extent of the recovery in European car sales.