Spot homo-PP prices in China have been trading close to par with spot propylene prices on an FOB Korea basis since the beginning of August, resulting in significantly squeezed margins for non-integrated producers. Spot PP prices regained some premium over propylene this week as spot propylene prices tumbled at the start of the week as buying interest thinned following the recent drop in energy costs, although spot propylene prices have since regained some of the ground lost earlier this month.
Spot PP prices have closely tracked movements in propylene prices over the past few months. Both PP and propylene steadily declined from mid-May to the beginning of July before stronger propylene prices pulled PP prices higher from the beginning of July until the start of August. The PP market felt the effects of the early August plunge in energy costs sooner than propylene prices did as PP prices began to slump two weeks ago while propylene prices remained firm, leaving spot PP prices briefly trading at a discount from spot propylene prices. PP regained its premium this week as spot propylene prices reacted strongly to the decreases seen in upstream costs while PP prices witnessed smaller declines.
PP producers have been struggling to maintain a healthy premium over propylene for much of this year after enjoying strong premiums over propylene during the latter half of 2010. Producers normally target a premium of $170/ton over propylene on their homo-PP prices to China in order to cover freight costs from South Korea as well as conversion costs. Homo-PP prices traded at a premium of $200-300/ton over propylene from October 2010 to February 2011 but have been unable to regain this level since. From February to July of this year, homo-PP prices traded at a reduced premium of $70-140/ton over propylene. After the premium briefly moved back to around $160/ton early in July, strong increases in propylene combined with lackluster PP demand have kept the premium below $100/ton throughout the month of August.
