Houston — A year after a record-setting natural disaster led to a lack of clarity for the US petrochemical industry, it again finds itself entering a new year with more questions than answers.
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No longer feeling the effects of Hurricane Harvey, polyethylene markets in the US are now instead fixated on Asia and a simmering trade war with China, all the while wondering when key export markets will reopen and bearish sentiment will subside.
All three grades of commodity-grade PE assessed by S&P Global Platts reached 2018 highs late in the first three months of the year, as high-density PE film peaked at $1,477/mt FAS Houston on March 14, a day after low-density PE reached a peak of $1,400/mt FAS. Butene-grade linear-low-density PE, meanwhile, was assessed at its highest point of the year on February 5 with a close of $1,345/mt FAS Houston, according to Platts data.
US PE markets spent much of the first quarter of 2018 recovering from Harvey's impact on production and logistics, with domestic and export PE prices rising as a result. By March, they saw an opening salvo in the US' ongoing trade war with China, with President Donald Trump announcing import tariffs of 25% on steel and 10% on aluminum.
China responded swiftly and severely via retaliatory tariffs, with the two global powers subsequently ratcheting up the blows to $50 billion apiece and including petrochemicals. And while China's tariffs on US-origin PE did not take effect until August, the impact on demand and pricing was felt almost immediately after China in April announced plans to target PE.
Not too long after that, export and domestic pricing in the US began to feel pressure from several angles -- including weaker buying sentiment tied to uncertainty surrounding the trade war. Depressed global PE pricing made US-origin resins somewhat uncompetitive in the early part of the second quarter of the year, and a decrease in exports to Asia began to take hold in June and July when China increased the pressure.
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By December, all three grades of PE had reached record lows and some traders began to plan for the long haul with no resolution in sight.
LDPE export pricing entered January at $926/mt FAS Houston, down 21.5% compared with the first assessment of 2018, while butene-grade LLDPE was down 22.8% at $893/mt FAS Houston, according to Platts data.
HDPE grades also opened the year at record lows, skidding between 14.3%-19.8% compared with the first assessments of 2018, with film opening at $1,058/mt FAS Houston; blowmolding at $937/mt FAS Houston; and injection at $904/mt FAS Houston, according to Platts data.
China's initial shot at the US petrochemical industry in April targeted only LDPE, which is by far the nation's smallest PE sector, relatively speaking. After a resolution with the US could not be reached and President Trump doubled down with more tariffs, China responded by replacing LDPE with LLDPE and HDPE, both of which are more widely used globally and account for a considerably higher share of total existing and planned US capacity.
The 25% Chinese tariffs on LLDPE and HDPE took effect in late August, but trade flow shifts began in the months that proceeded as US-based traders and buyers in Asia began to grow weary of the potential for additional costs.
US exports of PE to China peaked at 74,295.1 mt for all grades combined in July, but dropped steadily to 22,564.3 mt in October, according to the most recent US International Trade Commission data. The shift came as the US was seeing record PE exports, the result of a surge in production and weak domestic demand.
US exports of all grades of PE totaled 441,232.1 mt in October, up 13.2% month on month and 70.9% year on year as well as being an all-time high, USITC data show. Total US PE capacity, meanwhile, rose 19.7% from the beginning of 2017 through the end of the third quarter of 2018, from around 20.3 million mt/year to around 24.4 million mt/year, according to the most recent American Chemistry Council data.
USITC data for November and December is not expected to be released in the immediate future due to the ongoing partial US government shutdown, but the figures available from the ACC paint a bearish picture for US producers.
US inventory for all grades of PE rose by 5.4% between the conclusion of October and end of November, while domestic production fell by 0.8% in the same period. PE sales, meanwhile, fell 5.1% in the domestic market and 6.9% in the export market, ACC data show.
US producers were heard settling domestic US contracts at consecutive 3-cent/lb ($66/mt) decreases for November and December, the result of soft demand and struggles in the export market, sources said.
Those same producers, however, have started the new year with proposed domestic contract price increases of 5-6 cents/lb ($110-$132/mt) on the table, although the overwhelming feedback from the market is no support for a hike.
Instead, buyers entered January with ideas of another multi-cent decrease or at worst a rollover from December.
The US-China trade spat remaining unresolved at a time that even more additional PE capacity is slated to come online is a factor, sources say.
"Unless we get this thing with China sorted out and soon, there will just continue being a race to the bottom of the pricing barrel," a US-based trader said. "Projects are too far along now to adjust or abandon, and markets like Latin America and Vietnam can only take so much of what China is leaving on the US table."
To that end, there have been some shifts in global PE trade flows, with China sourcing material from non-US origins that in turn replenish their supplies with imports, sometimes from the US.
These "musical chairs," as some PE traders have termed it, just lead to more logistics and additional freight costs, further pressuring pricing.
As for how long the US and China keep up their tariff dance while the global PE industry's game of musical chairs drags on, sentiment is shifting away from expectations of a short-term resolution.
Many market players who initially viewed the tariffs as a negotiating or leverage play are now resigned to a more prolonged struggle, leading to more bearish sentiment and indecision.
--Phillipe Craig, firstname.lastname@example.org
--Edited by Keiron Greenhalgh, email@example.com