US Housing Market Index Slumps as Mortgage Rates Soar, Impacting Propylene Oxide Prices

The US Housing Market Index (HMI) consecutively fell in the month of October due to high mortgage rates. Mortgage rates continue to rise due to the rising consumer price inflation hike recorded in September. In this context, Propylene Oxide prices fell in the US for the third consecutive week as consumer sentiment continues to remain subdued.

US Propylene Oxide prices fell to USD 1540/MT FOB Louisiana in the week ending on 13th October 2023. At the same time, feedstock propylene prices continued to show their bullish trend along with natural gas and ethylene prices since the beginning of the month. US officials announced that Natural gas prices are expected to rise further due to reduced supply and diversion of supply for heating purposes as temperature across the US fell significantly. Major gas producers in the Gulf of Mexico wells have started raising their prices as the US's demand increased for Natural gas.

Natural gas is a major feedstock for ethylene and propylene production in the US, causing significant cost transfers down the value chain. While ethylene and propylene producers saw a gradual increment in their prices, Propylene Oxide prices continued their bearish trend since the last week of September. Market participants revealed that destocking activities due to weak demand recovery in the real estate sector are forcing the price decline of Propylene Oxide in the market. Prices of polyurethanes remain deflated in the given timeframe. Housing market experts revealed that producers continue to face dwindling margins due to falling housing prices and rising costs. Similar behavior was observed in Propylene Oxide markets as input costs continue to rise with falling Propylene Oxide and polyurethane prices. Inflation is expected to stay north of 4% in the month of September and is expected to rise further in October due to geopolitical situations in the Middle East and rising gas demand. Though the US continues to show resilience and a good economic recovery with gradual improvement in consumption, market players argue for a long recovery. While releasing their Q3 results, major producers hint at a longer recovery as sales volume continues to be negative on a YoY basis while improving on a MoM basis. September data reveal that export volumes between Japan and the US improved on an MoM basis.

Propylene Oxide prices in Europe continue to stay elevated despite falling demand as input costs and supply disruptions continue to pull up the prices. Inflation in Europe, despite relief, continues to stay north of 4.5% and is expected to increase as Natural gas, crude, and feedstock prices go up. German markets continue to remain weak, and activities declined in the month of October. European Central Bank's last interest hike further led to a fall in prices of polyurethanes and plastics like PE as chemical margins deteriorated significantly. Propylene Oxide inventories in Europe, especially from major manufacturers like Shell INEOS, remain on the lower end due to rising inventory costs and tight labor markets. Demand continues to remain weak despite easing inflation as the European Central Bank mandates forced homogeneous orders across the EU. The Netherlands continues to suffer despite weaker inflation, rising interest rates, and being a major exporter of Propylene Oxide due to the weakening of the Euro. Propylene Oxide prices in Asia continue to stay weak due to oversupply and weak demand from China. The Middle East continues to be the largest supplier.

High input costs, imported inflation, and weak demand continue to persist in the Propylene Oxide value chain. Propylene Oxide downstream continues to hold significant inventories across the globe, which is keeping the prices down. Rising prices on a temporal basis are not supported by good demand rather than rising input cost and inflationary pressure, which brings long-term recovery pressure in the prices. ChemAnalyst's internal study on Propylene Oxide prices reveals that demand factors continue to govern production planning despite rising costs as manufacturers expect cost recoveries in the coming cycle.