IHS has published an article on US polymer markets with a specific focus on polyethylene. US domestic polyethylene prices have increased by more than $500/t over the last seven months and producers are seeking additional increases of around $250/t in January and February.  IHS expects little downside pressure on US prices in the current environment.

Key drivers of prices are the following:  

  • IHS shows that US and Canadian demand for polyethylene declined through 2020 while exports were also generally lower at the end of the year compared to the start of the year (i.e. price increases did not result from major increases in demand).
  • Production did not grow much in 2020 despite three major new startups.  Production growth was impacted by the hurricanes , COVID-19 and other related production events (fires, explosions, shutdowns etc).  Inventory levels were  drawn down through the year and only started rebuilding in October.  Inventory levels remain below average.
  • Significant increases in Chinese exports of finished goods to the US has contributed to a significant increase in freight rates, from China to the America’s in particular.  Low value commodities are competing with higher value products for container space which has resulted in competitive bidding for container space.  Latin American countries, which normally import polymers from China have switched to US producers to supply polymers.
  • The shutdown of a large plant in Mexico and disrupted supply in the country have also caused polymer shortages and increased demand to move US product over the border.
  • IHS expects the current dynamic to persist through 1Q2021 and spot sales should only normalise when inventory levels return to normal.  The ramp-up of three new plants should assist in normalising inventories.
  • As long as freight rates remain at current high levels there will be little pressure on US producers to lower prices.

From a Sasol perspective we highlight:

  • Sasol should be a direct beneficiary of higher polyethylene prices in the USA.  With ethane prices currently around 25cpg the US integrated polyethylene conversion margin has increased to $1143/t, the highest since early 2018.
  • LDPE prices are around $200/t higher than LLDPE prices and we believe the LCCP LDPE plant is still ramping to full production.  The mix effect will have a small negative impact on Sasol’s gross margin for the remainder of FY21.
  • If current prices persist we would expect EBITDA in excess of $200mn at the LCCP in FY21 and more than $600mn in FY22.
  • Sasol is no longer in control of where and how its product will be sold as Lyondell has taken over the marketing of the polyethylene from the LCCP.

Current high prices appear to result from temporary bottlenecks however and in the longer term, lifting of these constraints should see prices lower.  The current pricing environment and commensurate profitability will however assist Sasol in strengthening the balance sheet which is the immediate focus for the compnay and its investors.  It does however highlight the unfortunate timing and selling price of the disposal of the LCCP units.