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US propylene market eyes more length in 2017

Global Propylene Outlook

By Nida Qureshi

The US propylene market is bracing for another bearish year in pricing and more exports as a major capacity addition in the US Gulf Coast is expected to further lengthen supply in 2017.

A key factor driving the bearish outlook is the upcoming startup of Enterprise Products Partners' propane dehydrogenation unit in Mont Belvieu, Texas, during the first quarter. The 750,000 mt/year propylene-capacity unit, only the third of its kind in North America, was originally scheduled for completion by Q3 2015.

"Propylene exports will increase next year as new supply enters the market and oil prices strengthen," a source with close ties to the industry said. "There will be more exports."

The US propylene market has switched from tight to long over the last couple of years. The startup of Dow Chemical's 750,000 mt/year PDH in Freeport, Texas, in late 2015 was a significant capacity addition. While its production is meant for captive use, it nonetheless has added to the length in supply, sources said.

Strong refinery run rates over the past two years, resulting from weak crude prices and increased gasoline demand, also contributed more propylene.

A significant amount of propylene in the US is sourced from refineries.

Refinery utilization rates averaged 89.96% through mid-December, according to US Energy Information Administration data.

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Further pressure on propylene came from a buildup in inventories. US propylene inventories at the end of Q1 were 1.841 billion lb (834,894 mt), reaching their highest levels since Q4 2008, data from the American Fuel and Petrochemical Manufacturers showed.

Length to the market has come amid a low crude-pricing environment, and the two factors combined to pressure prices down more than 50% over the past two years.

Spot polymer-grade propylene, the basis for monthly domestic contract pricing, averaged 32.56 cents/lb ($717.82/mt) on a free-delivered USG basis through mid-December, according to S&P Global Platts data. By contrast, spot PGP averaged 68.79 cents/lb in 2014.

Spot refinery-grade propylene, which tends to trade at a 10-12 cent/lb discount to the higher-purity PGP, showed a similar trend, averaging 21.69 cents/lb through mid-December, compared with 26.52 cents/lb in 2015 and 58.35 cents/lb in 2014.

Spot PGP pricing in 2016 was bearish from the start. It opened the year at 29 cents/lb, its lowest open in seven years, per Platts data, and dipped below 27 cents/lb in mid-February, when oil hit 13-year lows, before rebounding in Q3 on planned and unplanned outages.

March through July saw a period of stability -- with pricing between 30-32 cents/lb -- that also saw exports ramp up. Pricing shed as much as 32% since hitting an 18-month high of 43 cents/lb in mid-September, with spot assessed at 30.50 cents/lb by December 15.

The length in supply and relatively weak pricing compared with other regions allowed for exports. Propylene exports stood at 364,182 mt to end the year, 33% higher than in 2015 (273,654 mt), data from the US International Trade Commission showed. Exports in 2014 were 99,155 mt.

With the market expected long again in 2017, exports are likely to continue to be seen from the USGC, sources said.

Downstream demand, mainly from polypropylene and acrylonitrile markets, started strong in 2016 but quickly dwindled. Demand from acrylonitrile fell as domestic pricing reached 80-month lows in late February amid weak demand and falling propylene pricing.

Acrylonitrile supply quickly tightened in Q2 on production outages late in Q1. A force majeure at a Texas plant in July further tightened supply and domestic pricing reached a 15-month high.

In the polypropylene market, the biggest demand pull for propylene, domestic business was affected by a wave of imports stemming from expanding margins.

Spot PP pricing hit 86-month lows as imports more than doubled year on year in June. PP producers spent the later part of the year trying to incentivize customers to buy domestically sourced resin at the expense of margin expansions.

Several small- to medium-sized PP capacity enhancements were carried out in 2016, sources said. Among them was a 5% capacity expansion (50 million lb/year, or 22,675 mt) at Pinnacle Polymers' Garyville, Louisiana, facility.

Despite the additional PP capacity, even if demand from the resin side is strong, no major expansions are scheduled online for at least the next two years to absorb the recent and upcoming additions on the propylene side, further feeding the bearish outlook, sources said.

Next article: Asian expansion to increase European propylene imports

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