Plunging US propylene roils downstream, producers squeezed by lag

HOUSTON, April 23 - The accelerating plunge in US spot propylene prices this month is roiling downstream markets, where producers are being squeezed by the lag in their ability to pass on the feedstock's jump in the first quarter, market participants said on Friday.

Shane Fleming, CEO of specialty chemical maker Cytec Industries, said that the volatility in propylene has made it difficult to set prices on derivative products.

"We re just starting to price our materials with the higher propylene values now, but our customers are hearing of lower propylene prices, Fleming said in an earnings conference call.

US refinery-grade propylene (RGP) soared 48% in the first quarter due to a combination of multiple cracker shutdowns, the trend toward lighter feedstocks and low operating rates at the oil refineries that account for around two-thirds of US propylene supply.

But with the concentration of shutdowns now passed and refinery run rates picking up ahead of the summer driving season, RGP has been sinking fast.

An RGP deal at 39 cents/lb ($860/tonne, ?45/tonne) on Friday was down 18% from a week earlier, and down a whopping 43% from a peak around 69 cents/lb in the last week of March.

The rollercoaster ride has outpaced the ability of producers to pass on the feedstock costs in derivative markets, because they are still dealing with rises in contract values for chemical-grade (CGP) and polymer-grade (propylene) that were settled for April.

Although the slump in RGP points to lower CGP and PGP contracts for May, that relief for feedstock buyers has not yet arrived but the sentiment among derivative buyers has already turned sharply.

"Producers seem nervous," a polypropylene (PP) buyer said.

Producers were now facing an uphill battle to get buyers to accept already nominated price hikes in a range of markets, including isopropanol (IPA), methyl isobutyl ketone (MIBK), monopropylene glycol (MPG) and polyols.

With buyers having already been forced to swallow chunky cost-driven hikes since the start of the year, their resolve to resist is stiffening, sources said.

Producers of IPA and other solvents would continue to push for their previously posted price increases for 1 May, but some softening could occur later in the month in response to the decreasing cost of feedstock propylene, a large chemical distributor said.

Polyols buyers say the hikes of around 10% that producers were currently seeking could not be justified, given the turnaround in propylene.

While buyers were digging in their heels, producers were also seeing an opportunity to rebuild margins by hanging on to the earlier cost-driven price gains.

MPG producers in particular would be tenacious in their efforts to improve margins, a trader predicted.

In the acetone market, the propylene gyrations have held sellers back from announcing May prices, which would usually have been issued by this time of the month. Those prices had been expected to be higher, but ideas were being lowered.

The propylene slide did not look like giving much relief to some derivative markets, such as methyl methacrylate (MMA) and butanediol (BDO), because chronic tightness remained the dominant factor.

"Propylene prices falling doesn't seem to matter much, I'm afraid," one MMA buyer said. "What fun times!"

Another MMA buyer conceded that producers would likely achieve most of the further increases they were seeking, while a third MMA buyer saw little chance of sharing in the benefit of the propylene decline.

"Producers are tough in making sure they get the raw material increase, plus a bit more," the buyer said.

($1 = ?.75)