Propylene Prices Fall
US Propylene Price Slide Continues; Polypropylene Reaction Is Slow
March 17, 2020
Refinery grade propylene (RGP) has seen a steep drop over the past week and a half in response to the current market turmoil.
Last week, March MtB-EPC pipeline refinery grade propylene (RGP) showed no reaction to energy markets or the COVID-19 situation on Monday until a trade was reported late in the day at 15cts/lb (65.25cts/gal). This represented a 9.1% decrease at the start of the week. The RGP market traded lower again on both Tuesday and Wednesday at 14.5cts/lb (63.075cts/gal) – and even lower on Thursday at 12cts/lb (52.2cts/gal). March ended the week on Friday offered at 11.5cts/lb (50.025cts/gal), representing a 30.3% drop for the week.
Yesterday, RGP matched its historical low when it traded at 10cts/lb (43.5cts/gal), bringing the decline down to 39.4% or 6.5cts/lb (28.275cts/gal). Its previous low mark of this value was seen on December 1, 2008.
RGP is a byproduct of an FCC. It is hard to imagine increased RGP production in that fluid catalytic cracker economics are so dismal. An FCC margin is calculated by comparing the cost of the vacuum gasoil feed (WTI plus a differential) to the value of the products produced (70% gasoline and 30% diesel).
After having fallen to negative numbers Monday, the margin improved to about $3.06/bbl on Tuesday (the price of vacuum gasoil fell precipitously) but consider last year at this time it was $13.55/bbl.
A new market has emerged for VGO however, as it can be blended into very low sulfur (0.5%S) bunker fuel, which is now the dominant grade of fuel for large, ocean-going ships worldwide.
On Monday, VLSFO into ships was assessed by the OPIS Global Marine Fuels report at $280/mt, the equivalent of $42.79/bbl. VGO by contrast was rated about $4/bbl over WTI, or 30.95/bbl. Add a margin of $3.06/bbl to the cost of VGO inputted to an FCC and you get a value of $34.01/bbl. So the refiner would make $42.79/bbl if the barrel ends up as bunkers.
All this means is that FCC inputs are going to be limited. It is hard to run an FCC at below roughly 85% of capacity, so the production of RGP (as a byproduct of cat cracking) is going to be limited, which could tighten RGP supply.
But for the time being, both raw and finished grades of propylene are seeing selloffs.
Spot polymer grade propylene (PGP) prices have fallen drastically. Last week, March MtB-EPC polymer grade propylene (PGP) ended the day on Monday with an implied value of 25.375cts/lb (110.4cts/gal). This represented a 3.375cts/lb (14.6813cts/gal), or 11.7%, decrease from Friday’s close. Higher bids emerged on Tuesday and Wednesday, showing some opportunity for upside.
Those two days closed at 26.5cts/lb (115.275cts/gal). Things took another turn on Thursday when March MtB-EPC PGP traded at 25cts/lb (108.75cts/gal) early in the day. The front month continued to get offered down throughout the day, until March MtB-EPC PGP traded at 23.5cts/lb (102.225cts/gal) minutes before close. By Friday evening, March MtB-EPC PGP closed with an implied value of 23.5cts/lb (102.225cts/gal) and traded slightly higher late in the day at 24cts/lb (104.4cts/gal).
If there were any hopes for an increase in pricing based on Friday’s trade, they were quickly erased when PGP traded at 22.5cts/lb (97.875cts/gal) yesterday. PGP is now down 21.7% from the start of the last week’s decline.
PGP hasn’t seen prices near this low since it closed at 24cts/lb (104.4cts/gal) on January 21, 2009; however, PGP’s recorded low closing price is 15 cts/lb (65.25 cts/gal) from December 11, 2008. These two previous lows coincide with significant downturns in broader financial and energy markets.
The ultimate demand for PGP rests with the polypropylene market, where spot prices have been slow to react. A raft of polypropylene plant issues and maintenance in 1Q has kept supply tight, supporting prices. Wide spec PP prices, usually the most volatile indicator of supply and demand, have held firm or even increased in recent weeks.
Some high-demand types of wide spec material have been bid above where prime contract prices are projected to settle in March, another sign of the tight supply. Resale pricing for wide spec PP has ranged from 40-48 cts/lb for delivered railcars, depending on the quality and type of resin. Generic prime HoPP injection resale pricing currently stands at 47-49 cts/lb delivered.
Traders expect PP supply overall to remain snug for the next 2-3 weeks, and there is some caution that the market could flip rapidly from short to long. Formosa in Point Comfort, TX and Phillips 66 in Linden, NJ, are in the process of restarting or have just restarted units from outages that lasted at least a month. Other PP suppliers are working to catch up after operating issues earlier in 1Q. In addition to improving operating rates at existing PP plants, Braskem is expected to bring online a new world-scale PP reactor in La Porte, TX towards the end of 2Q.
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