Pricey Polymer
Feb 14 2011 - The price of polypropylene, a versatile polymer, is soaring. It increased by 22% in January alone—and has risen by 133% over the past two years. The price run-up is a headache for many companies. Some have shifted into other products: according to Plastics News some American fast-food chains are switching back to paper cups for fizzy drinks. Some makers of polypropylene products have been able to pass the price increases along to their customers. Others have just had to swallow the extra cost.. (The Economist)
Background and Implications
Resins, a complex group of commodities derived from oil and increasingly in demand in China, have seen higher prices and volatily. A key factor in the market is the ability to use natural gas feedstock rather than oil for some polymers. North America and the Middle East benefit from natural gas feedstock bias compared to Europe and Asia creating a potential long-term cost advantage. Natural gas feedstock advantage in the United States should be sustainable thanks to lower cost drilling techniques that have created excess supply of natural gas in the United States. At a spread of 8x, natural gas has a feedstock pricing advantage- recent spreads have been above 20x . This has reduced the correlation between oil and some polymers, spoiling some hedging strategies, and has had some other unexpected effects on the market. For example, ethylene and propelyne are produced jointly from oil. However, ethylene, but not propylene, is readily produced from natural gas. This has led to the bottleneck and price run up in propylene. There are technologies to further refine ethylene into propylene, but there is a shortage of capacity and signficant lead times and capital are required to get those on line.
