Specifically, in 2021 U.S. converters imported 740 thousand tons of polypropylene, the highest level in history. This record level was 26% higher than the prior record in 2018. And, surprisingly, this surge took place despite the global congestion in logistics. Let’s explore what drove this extraordinary event, and what we can learn from it.
How did the Surge Develop?
In 2021, polypropylene imports into the U.S. experienced an initial jump right after winter storm Uri (see next chart). After that, imports increased gradually, peaking in October at 80 thousand tons. During the first two months after the winter storm, North Asian and Southeast Asian exporters lead the surge in imports. South American and Middle East importers followed suit, with imports from those regions peaking in August and September respectively.
The U.S. Market After Winter Storm Uri
What was happening in the region after the February 2021 winter storm? As electrical power failures knocked down production in the U.S., domestic supplies of polypropylene were constrained. Subsequently, producer inventories got depleted. As supplies tightened, polypropylene prices started to increase. The next chart shows the record levels that North American prices reached in 2021.
Record levels were not the only feature of U.S. polypropylene prices. Regional prices split from the rest of the world, creating a massive arbitrage opportunity. For those of you unfamiliar with the term, an arbitrage opportunity is when the difference in price of a commodity between two regions goes beyond the logistical costs to move the material. When this situation develops, commodities from the low-price region make their way to the high-price region. Eventually, prices in the high-price region move lower as product availability increases, and the arbitrage opportunity closes.
While U.S. polypropylene prices were reaching for the sky, global logistical systems were gumming up. Between April and August of 2021, transportation costs between Asia and North and South America increased between 50 and 200% (see next chart). As high as those freight rates may seem, they still paled when compared to the polypropylene price spread between North America and Asia. In August, U.S. polypropylene prices were 40 cents per pound higher than Asian prices. Meanwhile, moving polypropylene from South Korea to the U.S. West Coast cost 20 cents per pound. There was certainly money (and savings) to be made from moving PP from overseas into the U.S.
As shown by the trade statistics, converters acted and increased their imports of polypropylene into the United States. Mind you, this was not their first rodeo; polypropylene converters had already seen this before and learned how to deal with it.
In 2015, U.S. prices split from Asian prices, but imports didn’t move (see next chart, that shows polypropylene homopolymer U.S. to Asia price spreads and imports into the U.S.). The next time something like it happened (2016), imports increased dramatically. And, ever since, when polypropylene prices in North America have split from the rest of the world, imports have also increased, helping close the price gap. 2021 was simply more of the same, but on a larger scale.
However, because how complicated logistics eventually became, imports were not able to fully close the price gap between regions. Transportation costs have remained below the regional price spread (see next chart), but other factors like delays, port congestion, as well as issues with domestic transportation, complicated matters for converters and imports fizzled.
What are the learnings from this experience? First, the U.S. is not impervious to imports, as previously thought (something we already addressed back in 2017). Second, when logistical systems reach a breaking point (as they did in 2021), arbitrage opportunities may remain open. And third, it takes time for efficient import avenues to be developed.
This last lesson is very important for polyethylene converters. U.S. polyethylene converters consistently pay the highest polyethylene prices in the world. Last year, the U.S. to Asia polyethylene price spread reached the same levels as polypropylene. However, imports didn’t rise accordingly. Abundance of domestic supplies have made converters complacent. And it will take time for converters to develop the connections and systems required to import efficiently from overseas. If 2021 was not a cautionary tale for them, not sure what else will…
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