Dow sees turnarounds supporting polyethylene price increases back to October peaks

Dow, the Michigan-based leading petrochemical producer, wants price increases for its polyethylene resin in both April and May that if buyers accept would not just help pay costly turnarounds but also take prices back to the October peaks territory.

MIdland, Michigan. Image courtesy of Dow.

Higher feedstock costs, “particularly for naphtha as well as tighter supply as we enter another turnaround season for the industry in the U.S. Gulf Coast and Europe should continue to support prices globally,” said Howard Ungerleider, CFO at Dow Inc., on April 21.

Dow “will begin a turnaround at our cracker and aromatics facilities in Louisiana, which are anticipated to be $125 million headwind in the quarter,” he said. Other Dow turnarounds in Europe in Stade (Germany) and Terneuzen (Netherlands) would demand another $100 million.

“Higher raw material and energy costs and tight supply and demand balances are expected to provide additional price momentum across our key value chains,” Ungerleider said.

Ethylene is the basic building block of the petrochemical industry. The biggest use of ethylene is to make polyethylene, omnipresent as plastic bags, milk jugs and shampoo or other liquid containers.

Price agreements by top producers and their customers through a system of monthly negotiations and settlements serve as a reference for the industry. Resin can be delivered to customers, mostly by railcar, with payment conditioned on the settlement.

Polyethylene prices ahead

“For the Americas, we've got $0.07 (seven cents per pound) out there in April and $0.07 out there in May. A little bit less in Europe and Asia Pacific,” Fitterling said.

“We´re expecting to see prices continue to move up in packaging and specialty plastics through the quarter,” added Fitterling, according to a transcript in Dow´s website.

“Our current nominations are $0.07 in the month of April and $0.07 in the month of May for North America; there's $0.07 on the table from Latin America, which is a carryover from late March; we've got EUR 400 (per mt) in Europe; and we've got $0.05 in Asia Pacific,” he said.

Even if the company were to only get 9 cents per pound of the 14-cents, two-month increase it wants for April and May, “we'd probably be close to that peak in the Americas, maybe a little bit shy of that peak in Europe and a fair bit off of the peak in Asia Pacific,” Fitterling said.

“The other way to look at it is if we were to get the whole $0.09, we would probably cover the turnaround costs in P&SP and that wouldn't be a drag on the quarter. That's not what we've got in the forecast, but it is possible that, that could happen,” Fitterling said.

Lower inventories

Polyethylene prices have seen strength since February 2021 in part due to challenges including those arising from production problems in the U.S. Gulf Coast petrochemical hub after Winter Storm Uri, as well as hurricanes both in 2020 and last year.

The weather events prevented enough inventory buildup to meet rising demand in 2021 as broader parts of the economy reopened following pandemic restrictions in the previous year. Producers reportedly struggled to build inventories throughout 2021, leading to price gains and bigger margins to reflect tightness.

As of April 2022, there are still challenges related to inventories.

“On polyethylene, as I mentioned, in the Gulf Coast, in the U.S. Gulf Coast, we've seen inventories come down. Inventories were down in March by about 200 million pounds,” Fitterling said.

“And half of that's due to third-party congestion and the other half is inventories that were built to cover turnaround season in second quarter, which is typically the heaviest turnaround season,” Fitterling said.

Volume only rose 1%

In January-March 2022 sales volume increased only 1% compared with the previous year, a period marked by the Uri storm.

“Volume, year-over-year, up 1% consolidated basis is one way to look at it. We were able to manage first quarter last year by selling out of inventory, but second quarter really saw the stronger volume impact from Winter Storm Uri,” Fitterling said.

Turnarounds involve closing the plant for weeks for cleaning, controls, and other maintenance. Some scheduled maintenances for 2020 were postponed into later years because of Covid-related restrictions and supply chain problems, according to industry experts.

Plastic producers enjoyed a highly profitable 2021 as they found the demand for resins inelastic to price hikes. In this context, producers in some cases achieved extraordinary and unprecedented margins and earnings.

The 2022 outlook is different.

U.S. consumers already faced in the first quarter some inflation indicators of levels unseen for the past four decades while the real purchasing power of consumers has eroded.

There is also significant new polyethylene capacity coming online in North America in 2022, about four million tonnes.

By Renzo Pipoli