OPIS Insights

Barron’s Senior Energy Writer Laura Sanicola and OPIS Associate Director for Plastics David Barry discuss what’s ahead for plastics this week.

Watch this week’s episode for insights into the ramifications of the Iran conflict on chemical prices and, specifically, on plastics.

Transcript:

LAURA SANICOLA: Hi, everyone. This is Laura Sanicola, author of Barron’s Energy Insider, and I’m here today with David Barry, associate director for plastics at OPIS. David, thanks for joining me today.

DAVID BARRY: Thanks for having me.

SANICOLA: Yeah. So I figured it’s a good time to talk plastics because, obviously, for the first time in a long time, there’s been a lot of strength in chemicals prices, the chemical building blocks for plastics, and that’s very much related to the situation that’s gone on in the Strait of Hormuz. But how are things looking now that we’re, you know, past the two month mark? Have they stabilized? What’s your view?

BARRY: Yeah, I think the first two months of the conflict were a time of great panic and concern for petrochemical buyers, particularly in the plastic sector. We heard about processors, primary concern being that they were going to run out of material because of the supply chain disruptions. And just a little background, according to my CMA colleagues, about ten percent of polypropylene capacity is located in the affected areas in the Middle East, including Iran and the Gulf States, and about fifteen percent of polyethylene capacity globally is located in that region. So both of those two major commodity plastics and a host of other petrochemicals are produced in and around the Middle East.

And beyond that, you have these kind of second order effects where the producers, particularly in Asia and in Europe, who rely on naphtha feedstocks from the Middle East are not getting as much feedstock supply, and so they’re having to cut back their operating rates as well.

So it had all the ingredients of a kind of supply crisis when it began, and there was very heavy buying activity. I think the US saw very high exports in March and April, maybe even record export levels of polyethylene.

And since sort of the second half of April, that’s that’s died down, and the the international market seems to be in a little of hangover, I guess I would say, from from all that buying activities. So so we’ve seen a a little bit of a pullback in the spot prices that we track over the last few weeks as things have kinda calmed down.

SANICOLA: So what could really move the market either way here? And I know a big swing factor other than the Strait of Hormuz reopening is is China and its ability to produce lots of plastics from feedstocks at sources around the world, and it intends to keep prices capped at a certain level. You know, what would really move the needle one way or the other in your view?

BARRY: Yes. China is the world’s largest consumer of plastics. They have a huge manufacturing base for their domestic economy as well as for exporting finished goods. So what we’re seeing right now is a very interesting dynamic that China is becoming a low cost supplier of polyethylene to the rest of the world.

And not to get too far into the weeds, but I think prices from US suppliers, from North American suppliers went up so quickly.

We saw prices go from, for example, in the Houston railcar market from around thirty cents per pound at the start of the year to as high as seventy eight or eighty cents per pound, so more than a hundred percent increase in the span of a couple of months. And when you get that kind of price shift, it opens up opportunities for the coal based petrochemical producers in China to increase their operating rates and sell profitably, and also some of the conventional petrochemical producers in China to increase their operating rates.

And on top of that, would say demand is not particularly strong for Chinese manufacturers right now. So we’re seeing a lot of that surplus resin from China enter the international market where they would normally be a net importer of polyethylene, they’re actually exporting polyethylene at, for example, prices around fourteen hundred dollars per metric ton FOB, whereas the US producers had been trying to achieve prices as high as eighteen hundred dollars per metric ton. And there was this big price disparity between what US traders could sell and what Chinese traders could sell, and it’s really contributed to the pause we’re now seeing in petrochemical buying activity.

Now I think a bigger part of that pause is the big deleveraging of inventory where we saw all this inventory shifting from the producer level to the customer end user level after the war began, and so the market still needs to find an equilibrium and this current pullback may be part of that process, but I could easily see petrochemical prices regrouping at some point this summer and moving higher, particularly if the Hormuz remains closed. That’s the big question mark.

SANICOLA: It’s the big question for, all of the Opus analysts across the spectrum, and the world watching as well. Well, listen. Thanks so much for explaining this and breaking it down, and, we’ll see everybody next week.