Reasons Behind the Recent Propylene Price Bungee Jump
In H1 February, propylene market prices fluctuated within a wide range, mainly affected by supply-demand fundamentals. Heading into H2 February, propylene market prices may return to rational levels, and those will mostly show a strong trend in the short term.
In February, propylene market prices in Shandong showed a bungee jumping-shape trend.
In the first two weeks, the propylene market price in Shandong continued to fall from RMB 6,700/mt in early February to RMB 5,750/mt, down RMB 950/mt or 14.18%, and it reached the lowest level in recent three years.
From February 17, the propylene market price in Shandong continuously rose at an average daily price of RMB 200/mt. As of February 21, the propylene market price in Shandong increased to RMB 6,600/mt, and it cumulatively increased by RMB 850/mt or 14.87%, which basically returned to the same level as early February.
The follow analysis was based on the chain of oil products-propylene-direct downstream products-end products:
Decreased price trend: the inventory in the industrial chain continued to increase, and upstream and downstream operating rates declined synchronously.
Propylene producers in Shandong are mainly refineries, and propylene is the by-product, so the operating rates at propylene producers depend on the diesel inventory. After the Spring Festival holiday, the logistics and transportation were unsmooth, and the demand for gasoline and diesel was extremely soft, causing the inventory pressure of gasoline and diesel on refineries to surge. In addition, due to the delayed production resumption of producers, inventory in the industrial chain was consumed slowly, and the transaction among direct propylene downstream market, end market and propylene market was nearly stagnated. Therefore, the propylene inventory pressure on refineries was also heavy, and more refineries and downstream producers in Shandong stopped production.
Why does the decline in upstream and downstream operating rates cause propylene market prices to plummet?
Although the upstream and downstream operating rates fell synchronically, the propylene market remained under oversupply. The shutdown of refineries consumed the huge cost, so the competition among the propylene producers in production rose significantly. Propylene offers continuously dropped, and propylene market prices in Shandong decreased the lowest level in recent three years.
Increased price trend: propylene market supply shrank greatly, and the end demand warmed up.
It was said that propylene is a magic product, and it only took a weekend from oversupply to short supply. As the inventory pressure on refineries continued to mount up, Shandong refineries intensively shut down the propylene units after entering mid-February. The major propylene producers also shut down the units, so the propylene market supply shrank greatly in a short time. According to SCI’s research, the propylene output in Shandong has fallen below 40% of normal levels.
At the same time, the logistics and transportation improved, and end plants successively resumed production. Thus, the end demand for propylene warmed up. The operating rate at some downstream producers inched up, and the propylene prices were low, so downstream producers and traders engaged in bargain hunting. In just two or three days, the propylene market in Shandong suffered short supply, and some refineries even temporarily halted delivery without stock. From this point of view, it is not surprising that propylene market prices in Shandong continuously rose at an average daily price of RMB 200/mt.
Future market: the upstream inventory will determine the propylene supply, and the downstream inventory will determine the demand for propylene.
From the chain of oil products-propylene-direct downstream products-end products: although the inventory pressure on the propylene market has been eased, the inventory of upstream gasoline and diesel and downstream products will need to be consumed.
Propylene is the by-product of refineries. Although the propylene inventory is consumed, the specific restart time of refineries mainly depends on the consumption of gasoline and diesel inventory. At present, players in the gasoline and diesel market intend to raise the price, and the reduction in inventory pressure is more of a transfer process. That is, the propylene inventory is just transferred to traders or downstream producers, and the consumption needs some time. Therefore, in the short term, the production resumption of refineries still needs a process, so the propylene market supply will remain tight. From the end of February to March, the operating rates at refineries will gradually improve.
Since the supply pressure is not great temporarily, the increase in propylene prices will rely on the demand. The current propylene inventory is mostly accumulated at hedgers between the direct downstream producers of propylene and end plants. End plants are numerous, and the production resumption of them is slow, so the consumption of the propylene inventory needs a process. The inventory of some downstream products have been consumed somewhat, driven by the rise in propylene prices. However, the cost pressure on main downstream PP and oxo-alcohols producers increased, and they suffered losses. Besides, their product inventory needs to be released. If propylene market prices continues to grow sharply, it will be hard for downstream products to follow the uptrend. Severely, some main PP and oxo-alcohols producers will reduce the operating rates again.
In summary, the continued rise in propylene prices will not be a long-term solution. On the one hand, the inventory from directly downstream producers to end plants still needs to be slowly consumed. On the other hand, main downstream PP and oxo-alcohols producers are facing large cost pressures, and the continued rise in propylene prices will lead to the resistance of downstream producers. Therefore, SCI reckons that propylene market prices may return to rational levels from this week and will show a strong trend in the short term.
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