September 29, 2021

The Propane Nightmare Before Christmas: Tight Fundamentals Will Dampen Propylene Margins

The notion that global supply chains have been severely impacted by COVID is not new, as consumers have been dealing with scarcity of home appliances, automobiles, and other goods. But even within this context of supply chain challenges, the potential price spikes pertaining to propane/propylene/polypropylene could prove to be unprecedented and could severely impact margins across the supply chain.

One main culprit behind the expected price increase is the current US stock levels, which are at their lowest in five years, because of lower-than-usual supply coupled with additional global demand. Additionally, the low stock levels are occurring at the same time that the market is entering the highest seasonal demand period, which typically spans between September to February of each year.

It is also important to consider what has happened from a global perspective, including the impact of COVID-19 on the propane markets. Worldwide refining activity started increasing towards March of this year once the jitters associated with the second wave of COVID-19 settled down with the onset of vaccinations. Consequently, global refinery production of LPG increased significantly towards June 2021. However, with the impact of the Delta variant, the rebound in refining activity stagnated, and has been further affected by normal maintenance schedules starting in August and September. The combination has resulted in a decline in refinery-provided propane.

With regards to demand, during the pandemic US propane demand actually increased. There was also significant seasonal withdrawal during the winter of 2020/2021 because of the unusual cold weather that affected not only the northern part of the US, but also the southern part of the US, reaching all the way down to the Gulf Coast. Demand growth is expected to remain strong through the rest of the year and through 2022 (see Global NGLs). 

An additional impact on the propane balance was the result of elevated US propane exports experienced during the 2020/2021 winter when exports to Asia were especially robust because of the colder-than-usual winter.

All these elements combined are poised to create a challenging environment for propylene producers, who will struggle with high prices and propane availability.

https://stratasadvisors.com/insights/2021/0930201-propane_propylene-insight