The petrochemical market is reacting to volatility and widespread price increases for the past few consecutive months, leaving many buyers wondering what the reasons are behind it. Companies are especially feeling this added pain just as manufacturing makes its attempt at recovery in the post-pandemic world.
Simply stated, there are two primary factors driving these increases: Supply & demand and transportation availability. However, the complexity and interrelatedness of what is going on in the market requires a little more explanation.
2020 was a rough year for petrochemicals in many ways. Oil refineries turned down production last year in response to weak demand for gasoline and jet fuel due to the pandemic. OPEC decided to cut production last spring after the price dropped due surplus product in the market, and in turn the price per barrel of oil steadily rose and is now at its pre-pandemic price.
Also, at the end of last summer the U.S.’s petrochemical corridor was hit by two consecutive hurricanes that caused damage to infrastructure and the power grid. With inventories low, output simply is not meeting up with demand as manufacturing ramps back up and demand increases. Many products have been put on allocation or sales control by manufacturers.
In particular, many are feeling the pinch on propylene and its downstream products. Propylene is the petrochemical building block for a whole range of chemistries including isopropyl alcohol, acrylates, glycols, and some plasticizers. Propylene has seen over a $0.30/lb increase since last spring, and in turn, its derivative products have also seen increases.
While this alone is enough to drive price increases, the global logistics industry has thrown another wrench into supply chains causing often unpredictable bottlenecks in raw material availability. Due to shipping container shortages, extreme port and rail congestion, chassis shortages, and disruptions air cargo as well, manufacturers currently do not have the luxury of relying on a global economy for consistent and reliable supply of raw materials. Materials that used to take 8 weeks to arrive have now been pushed out to 12-15 weeks, creating a void and drying up local inventories.
Ocean & air freight are not the only sectors of transportation which have seen rate increases. Domestic trucking capacity was already a challenge due to a lack of qualified drivers before the pandemic, and the driver shortage has now been compounded by COVID-19 and further decline in qualified CDL-A drivers. The recent surge in manufacturing has reportedly outpaced demand to trucking availability at a ratio of 6:1.
While to some it seems 2021 is off to a rocky start, let us end on a note of optimism that these problems are only being seen because manufacturing is entering a stage of global economic recovery following the worst recession since World War II. Economists report that the global economy will grow 4-5% this year as long as we can weather these challenges to the new year.