How US Olefins Markets Shape Price Discovery

Michael Camarda: Today, we'll be discussing the structure and pricing of the US ethylene and propylene markets and how these markets function, how buyers and sellers kind of establish prices. My name is Michael Camarda. I'm the senior editorial lead for the US Olefins team. And joining me today is Craig Barry, our lead ethylene and propylene consultant at Argus. Welcome, Greg.

Craig Barry: Hey, thanks, Michael. I'm looking forward to our discussion. You know, one other point, you know, while people often focus on, you know, price and understanding how these markets are physically and commercially structured, I think is equally important. So we'll get into that some too during our discussion today.

Michael Camarda: Sure, sure. Well, obviously, we're in the US, so we'll start with the US market. It's a special market. You know, I've covered this for nine years. What kind of makes it different from the other major markets of the world, Europe and Asia particularly?

Craig Barry: You know, there are a couple of things, and you know, I've always stressed this, you know, during my, you know, career in olefins over the, you know, multiple years, but I think some of the key things is that, you know, most of the US afflane market, if not, you know, probably 90 plus, 95% plus of it or even higher, it's all concentrated in the US Gulf Coast. And You know, we have extensive pipeline networks, which have recently grown, you know, the pipeline networks with the recent build out we've done, you know, with all the, you know, new ethane and Permian gas. We have a lot of underground storage. You know, a lot of our producers are large integrated producers. And during the last round of expansion, we even had what I would call historical buyers sort of back integrate into ethylene production. And I think the other one last comment I'll make is that there's, you know, there's also significant third party players. I'll call those the traders, which provide a lot of liquidity to the spot market. Michael, You know, when people talk about the US ethylene price, they often think about, you know, a single market. But in reality, that's not true.

Michael Camarda: No, no, no, it's not. You know, we at Argus, we assess 2 daily prices A day. One is kind of the Texas price and one is the Louisiana price. But even within those two states, there are multiple prices, you know, more minor, of course. But, you know, obviously the most important place for the US athlete market overall is Mont Belvieu, Texas. It's a major hub. It's very transparent. There's about 600 million pounds of storage there. If I'm not mistaken, I think it's at least 8 pipelines that pump in to that location. And from, obviously, that's very centrally located for ethylene production, just being to the east of Houston. But within Texas as well, there's also, we have South Texas pricing that appears every so often. The Baymark pipeline had been built to kind of extend down for some of the build out that you had mentioned earlier in the early, late 2017, 2018, 19. time frame. And then within Louisiana, of course, the Choctaw hub owned by Boardwalk, we assess on a daily basis. That's along the Mississippi River corridor. But if you know Louisiana, the Mississippi River is not the only place for major production. We also have around Lake Charles. And we have the Sulphur Cavern, just a little bit to the west of Lake Charles, also operated by Boardwalk. We also get deals there. We had one just a couple of weeks ago. So multiple locations and the pricing can be different in these places.

Craig Barry: You know, and I guess too, you know, it's a lot different from when I was buying and selling ethylene years ago. But, you know, I mean, I would imagine that these regional differences are important to buyers and sellers, especially when there's, you know, outages and constraints in the market. They can really assess where, you know, where the market is long. or the market may be tied. Is that true, Michael? I mean, having all these regional differences give a lot more insights and transparency. How would you comment on that? I mean, what are your thoughts about that?

Michael Camarda: For sure, for sure. You know, obviously, there's more production overall in Texas, and there's quite a bit more, I think, relatively speaking, derivative demand in Louisiana. So, you know, we have multiple pipelines generally that run pushing ethylene from Texas into Louisiana. You know, the Evangeline comes to mind, Boardwalks pipeline that they bought from Chevron back in 2020. You know, I think Dow, Lyondell also have connectivity. And, you know, generally you see that transportation premium is kind of worked in there. It's roughly about two cents or so. But, you know, and just yesterday we had between a two and three cent premium for Louisiana, which is fairly typical, but that doesn't always That's not always the case. You know, sometimes you can even get a discount, which will kind of speak to imbalances in the market like that. So those regional dynamics can help us understand who's long, who's short, and what's going on.

Craig Barry: Yeah, you know, I think one thing when I look at the US market and, you know, I kind of compare it to the other major regions like Western Europe and, you know, you know, I'll throw in the Middle East and even Asia, I think this, you know, this infrastructure, you know, the extent of the infrastructure, and I think, you know, one thing people may not appreciate is that, you know, while there's a lot of public infrastructure, when I say public, I mean it's open access. You mentioned companies like Boardwalk and, you know, Enterprise and Energy Transfer and others that have pipelines, but there's also a lot of, you know, private infrastructure as well, right? I mean, so this is, you know, I know a lot of companies have pipelines that run, you know, all across Texas. Not all the major producers, but a lot of them have pipelines that are pretty extensive. So there's private and public systems. And I think that creates a lot of liquidity in our market that you don't really see in other markets. A lot of those deals are, you know, a lot of that stuff is done on cargo. So it's kind of like back-to-back. You don't really have, as I mentioned, these third party players that come in and take, you know, take physical storage positions. There's a lot, a lot more speculation and and liquidity in our market. What do you think about that, Michael? Do you think, are you seeing it the same way I do?

Michael Camarda: Yeah, I mean, you know, generally, you know, the US affiliate market is a brokered market, like I said, so the transparency is there from what we see. But a lot of these deals, like you said, are private. They're between companies. You know, you and your experience at Dow probably can tell us even better how they work. But yeah, that's definitely another layer of of deal making that goes on as companies support each other. Even sometimes, you know, rival companies will make deals to support each other in times of outages and things like that, especially when they're located and it makes sense, very close to each other. So.

Craig Barry: Yeah, and I think those deals normally get reported too, though, right? When we look at our, I mean, they, I would say the majority of those get reported to PRAs like Argus and other companies, because I think everybody wants to have a true reflection of what's going on. There's always an occasion maybe where something doesn't get reported, but I know the vast majority of even I would say, I always refer to them as direct deals, you know, the direct deals that are not brokered, you know, find a way into the market. I would say discovery process so everyone kind of knows what's going on.

Michael Camarda: Yes. Yes, correct. We do get companies to reporting directly to us on their direct deals, you know, when they're not being brokered. So that does happen quite frequently. Yeah, let's just switch over to pricing right now. You know, how would you describe just overall the ethylene pricing dynamic, the whole how does the market work, would you say?

Craig Barry: You know, I think there's been, you know, when I first started in over 20 years ago or 25 years ago, I mean, it was it was more of a contract market. I mean, we had all this infrastructure that I was talking about, but you know, it was it was mostly in, you know, private hands. There was some open access stuff, but it was mostly in private hands. So a lot of the market was, it was mostly a contract market. And that contract market still exists. And a lot of that's for, you know, long-term relationships and long-term commercial agreements. And, you know, and there's, you know, there's a monthly settlement. process for that. And I think the industry has done a great job probably over the last 13, 14 years, at least for Ethlene. You know, you know, we have a mechanism and a methodology and a process to get to a monthly contract settlement, which I think works for everyone. And I think what drove that was
I think I mentioned, you know, earlier in our conversation that a lot of the merchant buyers like, you know, Shintech and Oxy and a few others that may be slipped in my mind, they all back integrated into ethylene production. Now, there's still, you know, net buyers, but when that happened, we just didn't. you know, have the, you know, we didn't have pure sellers and pure buyers. Everyone was sort of a producer seller or producer buyer. So we created this method index that really helped with the monthly settlement process that's really based on both cost and sort of spot. So the monthly contract price changes with changes in spot ethylene, changes in cash costs to produce ethylene. And that's worked very well for the industry. So I think having a driver that helps simplify the, you know, the monthly contract settlement has served the US market extremely well. I think the one thing that also has grown up over probably the last you know, primarily over the last 10, 15 years is that the smart market has really blossomed. And I think, you know, a lot of the things I mentioned earlier about, you know, the third parties that are willing to speculate on positions, you know, build inventory, hold inventory, and sell that, you know, through turnaround, sell that through unplanned outages, even major events like hurricane has given us a lot of liquidity, but also a lot of transparency. You know, I talk to some of the, what I would say, major buyers here in the US. Most of them, or not all of them, but some of them don't contract most of their volume. They leave most of it on a spot basis. And so they have a mixture of spot and contract, but I would say it's probably 70-30. They buy, you know, 70% of their internal needs or merchant needs on a spot basis and have a small piece contracting. But, you know, Michael, you know, I would say that, you know, contract pricing isn't really the whole story. Can you give me your thoughts on the importance of the spot market? I kind of shared mine, but what are your thoughts about the spot market?

Michael Camarda: Sure, yeah. I mean, it's a robust spot market. In the nine years I've been covering it, you know, we get trades practically every day and in multiple locations. And it really does speak to the transparency that this country and the overall kind of just overall capitalism, I would say, provides and how much it helps everyone, everyone in the process to make good decisions. And you know, the spot market beyond that, it also sets the underlying 50% of the formula for the contract market. So it's the contract is not some sort of amorphous thing that's just kind of created from on high, but it's based on actual deals, actual trades that happen in real time, and they're covered by multiple PRAs, including Argus. You know, and it's just there as a backup for the industry. If somebody goes down unexpectedly, the spot market is there. It's readily available. to backfill and to keep units running. And again, it provides a lot of transparency so the market even knows what's going on, even if that one producer who's having the issue doesn't want everyone to know, it does let the market know. And it just makes for fairer and better pricing. And honestly, it makes our job pretty easy at Argus to assess on a spot basis. especially for the ethylene market. So it's very, very robust and it's been a pleasure to cover. Just one more thing about spot values. Why do you think that market participants should care that much about spot values, again, if most of the market is still contracted?

Michael Camarda: Of course, of course, of course. And I guess we can kind of, you know, I already mentioned a little bit of the difference between propylene and ethylene. You know, at least in my view, I think ethylene is a little bit more mature in some aspects. What other differences do you see kind of between both the ethylene and the propylene market in the US?

Michael Camarda: For sure, for sure.

Michael Camarda: Yeah, I mean, that market has, as a spot market, really dried up over the last year, year and a half or so. And Argus has kind of had to fill the gap with a way to price a market that has kind of stopped trading up. You know, there were some structural things. We had a refinery shutdown. We had a splitter startup, which really kind of
dried up the spot market. Not that it was ever really that robust to begin with. You know, we usually would have maybe two or three trades a month at most, but that was enough to kind of get you through. But, you know, we haven't had a trade since January, and even that was a bit of a one-off. This extends back to the spring of the prior year. So what we did was kind of looked at splitter economics and was trying to find what would be a fair assessment for, you know, kind of converting RGP into PGP. And we kind of settled at a six and a half cent difference. And so in lieu of trades, which we haven't had any, Argus continues to price RGP, unlike a lot of our competitors actually who have stopped. the pricing of it entirely. And it's based, when it doesn't trade, like I said, kind of on a six and a half cent discount to our propylene contract index, which we can talk more about in a little bit.

Michael Camarda: I would, I would absolutely. And I would say, you know, given your prior question, I think we've seen more of a push towards the importance of indexation or a need for indexation in the propylene market than even in the ethylene market. Yeah.

Michael Camarda: I, you know, I could I could talk to the the propylene contract index that we've developed here at Argus.

Michael Camarda: Right, so it's again, it's largely contract, it's largely deal-based. So, you know, these are all the deals that we've collected over the course of the calendar month. It's a, you know, it's a weighted average and we assess it on the, we put out the price on the 3rd Friday of the month. So it kind of leads into the contract settlement, which usually happens right now, it's been happening almost on the last day of the month, but usually the last week of the month in more normal times. We have a little bit of an adder that we add to that volume weighted average for the month. And we also make sure that it's minimum volumes of at least 3 million. on each one of these deals, but we feel really good that it's deal-based. You know, no one can argue about a deal. You know, you could argue about other things, but deals are solid. And it's really been good in tracking the overall contract index price over the last year and a half that we've had it. It's a very, very small overall differential, if you look at it. as on a cumulative basis. So it's been, and it's really filled a need because both buyers and sellers, both sides of the contract have said that there was a need for this kind of marker, this indicator to kind of lead them and to give them something more than just a straight out negotiation, just throwing a number at you and somebody throwing a number back at you. So Hopefully it kind of speeds up the process, gives a little bit more clarity to the process. And we've even seen a couple of people in the industry, some propylene buyers have kind of adopted this and are using our numbers, which is very encouraging.

Michael Camarda: Absolutely, absolutely, absolutely. I know we're kind of drawn to a close here on time. I just wanted to kind of ask you, what do you think of the kind of the future of the U.S. all of its market over the next several years? What are the kind of the big issues that people are going to be looking at to see where this is going?

Michael Camarda: Sure thing, sure thing. And thank you all for listening to Chemical Conversations with Argus Media. If you'd like to learn more about our Oathens coverage or pricing services, please contact Argus Media or visit our website.