U.S. polypropylene producers begin to face buyers’ market after exceptional year of 12% demand growth

ExxonMobil, LyondellBasell, Braskem and other polypropylene producers faced in late September a buyers’ market for the first time after a year of tight inventories and exceptional demand growth that more than doubled prices.

The propylene/polypropylene production center in Alberta, Canada of Inter Pipeline that will start up by the end of 2022. Image courtesy of Inter Pipeline.

“We saw quite a bit of discounting going on in the second half of September as producers tried to move excess inventory into the quarter pressured to hit inventory targets,” said a U.S.-based polypropylene trader.

The 12-month period completed in September saw average demand growth rate of 12% compared with the average 2% to 3% annual demand growth “for what would have been considered in the past a good year,” the source added.

On the supply side, the North American market may see as much as three billion pounds of new capacity by 2023. Whether or not the market can absorb that would depend of future demand rates that are currently very difficult to predict.

September turn a surprise

“It definitely got to be more of a buyer’s market in September than we would have anticipated,” said the source, who requested not to be named.

Since August 2020 demand became “much stronger than anyone would have anticipated,” the source said.

“That, combined with some supply chain issues in an incredibly tight market, allowed producers to push margins up to levels that we have probably never seen,” he added.

“What is starting to happen now is that a lot of these things that were causing the market to be so tight have started to unwind,” he said.  

2022 outlook very uncertain

Markets were tight in part because of some temporary shutdowns or slowdowns resulting from a winter storm Uri in February in Texas as well as summer hurricanes in Lousiana.

 “The questions now are:  is demand taking a breather?  Does it come roaring back once all these inventories have kind of adjusted? Or is this more of a fundamental shift  backward in terms of overall demand kind of gearing down towards where we have historically been?,” he said.

“Feedstock prices are extremely elevated. There are probably multiple reasons why that is true,” the source said.

According to figures released by the EIA on Sep. 30, the U.S. refinery net production of propylene reached in May a historic monthly high of over 10 million barrels for the first time since the series started in 2005.

Propylene production started in January 2021 with a 9.2 million barrel output. Propylene production in July was 9.25 million barrels

Polypropylene producers relying on propane for PDH (propane de-hydrogenator plants) are doing better than those that rely on refinery grade propylene, the source said.

Impact of labor shortage

Labor shortages have slowed plans by resin buyers to increase production of final converted polypropylene products like sports equipment or vegetable mesh bags.

“Labor in the U.S. is a huge issue for our customers. They have not been able to get enough people to work consistently and it has really sort of put a collar on demand,” the source said.   

The U.S. unemployment rate in September fell to 4.8% compared with 6.3% in January, according to the U.S. Bureau of Labor Statistics.

 This has combined with some natural slowdowns in some of markets that “have been so bullish for us since Covid-19 started,” he said.

Polypropylene is the material used in masks and medical protective equipment to fight Covid-19. Polypropylene is also the most common plastic found in vehicles.

Strong demand for polypropylene in past months also came from home improvement, fast food take out, and packaging, the source said. 

“Packaging is definitely taking a breather right now,” he added.

PP demand inelastic to prices

“There is less of an impact than I would have anticipated” from high polypropylene (PP) prices on demand, the source said.

“A lot of these are highly commoditized markets and very price sensitive. We’ve seen the price of PP more than double inside of a year,” he said.

“The market has been very inelastic to price. The problem is that some other materials candidates for substitution are just as tight, having their own supply issues,” he said.

“I don’t think we can see the kind of inflation in pricing and not have some effect detrimental effect to the demand but so far there has been less than you would expect,” he added.

New capacity

Canadian midstream company Inter Pipeline plans to start up a new PDH and polypropylene complex in Alberta, Canada by the end of 2022.

At least two other projects are advancing quietly, the source said.

ExxonMobil has long had in its portfolio a new polypropylene plant, the source said. A third project may be completed with as many as three new plants operating in North America in 2023, he added. 

“Between those three plants we are going to have three billion plus pounds new capacity,” he said.

“That would be quite a bit to absorb. At 10%, 12% certainly yes but with 2% or 3% annual growth rates it would be a very long market,” he added.

The last addition to production capacity of North American polypropylene was one year ago when Braskem started up a Texas plant.

Including the new Braskem plant started  in September 2020 in Texas, North American polypropylene production capacity had gone over 21 billion pounds of pellets,  source said at the time.

North American polypropylene demand in September 2020, at the time of the start up of Braskem’s plant which was the latest addition, was estimated at under 18 billion pounds annually.

By Renzo Pipoli