Influenced by falling feedstock prices, producers and players all along the resin supply chain had been on a major effort to liquidate high-cost resin inventories, which had helped to drive Polyethylene prices lower the first half of 2005. As pointed out in our June 1st Market Update, after a long period of price erosion and inventory adjustments, inventories were nearing a level of depletion whereby the producers could soon regain pricing power.

It seems we were right on target forecasting the imminent bottom of the market when we thought the surging energy prices would soon be just too hard to ignore and that the rest of the supply chain would have to take notice. The bottom of the Polyethylene market occurred precisely mid-June when producers, eyeing a turn around in feedstock prices, re-affirmed their desires to implement their pending $.06/lb price increase on July 1st.

Producers' spot offers then started to dry up as they prepared to take the market higher. As Natural Gas prices approached contract highs nearing $8 m/Btu, some quick buyers cleaned up what few ultra-cheap spot offers had been remaining, while others looking for similar deals were coming up empty and started bidding the spot market higher.

Mother Nature then added fuel to the fire, as severe storms in Western Canada knocked out significant Ethane and Ethylene capacity which lead to Nova Chemical's June 21st announcement of a Force Majeure for their Ethylene and Polyethylene products. As this news began to circulate through the market, there was a scramble to buy practically any and all Polyethylene that became offered

During the first half of June, railcars of offgrade PE were trading at a pretty good discount to generic prime prices. As the month drew to a close, offgrade prices had erased the discount by rallying $.05-.06/lb while generic prime went up $.03/lb. Polyethylene producers have now added another $.06/lb price increase for August, for a total of $.12/lb of summer increases.

We are now seeing signs of a potentially bullish imbalance between supply and demand developing and particularly in the international market. The widely anticipated summer Asian buying spree has started to kick in, while new and swift buying activity from the Middle East has emerged. This coupled with significant production capacity being idled in Europe, while reactor rates having already been throttled back in the USA, has led to rapidly increasing prices and declining availability in the spot markets.

Contract buyers thinking that they might be immune to a quick implementation of this $.06/lb might be in for a little shock. Many might not have been aware that the market has again turned higher, since so many still buy their resin based on trailing indices and their June contract prices actually came off $.02/lb while the spot market was experiencing a rapid rise. Now that the market has reversed, it will be interesting to see how the major indices peg July contract prices.

The timing of this price increase works very nicely for producers. Since the market has clearly bottomed a couple of weeks ago, the low-end prices are long gone. The last week of June saw very few fresh spot offers as it was not only month end, but also the end to a quarter. The first week of July will also be quiet because of the timing of the Independence Holiday in the USA. As everybody returned back to work today after a long weekend, thoughts of those cheap deals in June are already a distant memory.

In the beginning of June, producers might have candidly admitted that the pending price increase should serve to only stop the slide. Just past mid-month, there was a high level of confidence that $.02-.03/lb was realistic, but now there is a real belief that they could obtain the whole darn $.06/lb increase.