Chemical prices retreated in May, while China's coal-to-olefin operating rates remained high

Overview

This report tracks chemical and distillate-related commodity prices in May, supply and demand in the North American and Asian olefins chain, macro demand indicators, and price changes in selected chemical products. The core conclusion is that after the sharp price surge in April, overall chemical prices slowed in May due to Asian plant restarts, incremental supply from China's coal-to-olefin facilities, and buyers delaying demand in anticipation of greater supply and lower prices.

Core views

Citi believes U.S. chemical companies can still benefit from the ethane feedstock advantage created by the relatively wide oil-gas spread; however, demand-side risks are rising, especially against a backdrop of higher energy prices and weak consumer confidence, where delayed demand or demand destruction could undermine cost-push price increases. In China, high operating rates for coal-to-olefins offset lower steam cracker operating rates, prompting producers to increase exports to Southeast Asia to capture better margins.

Analysis framework

The report mainly uses weekly and monthly price tracking, combined with feedstock spreads, plant operating rates, inventories, export prices, macro manufacturing and consumption indicators, logistics volumes, and company announcements to assess changes in chemical supply-demand fundamentals and profitability.

Methodology notes

• Commodities and cost curveFeedstock spread and ethylene margin analysis

  Compare margin differences across ethane, propane, butane, and naphtha routes.

  The report uses ethylene margins under different feedstocks to judge the relative advantage of U.S. chemical companies. Ethane margins are about 23c/lb, while naphtha is negative, indicating stronger cost competitiveness for the ethane route.

• Supply-demand trackingMonitoring operating rates, inventories, and export prices

  Observe supply-demand tightness through operating rates, inventory days, export prices, and regional spreads.

  High North American polyethylene operating rates, rising inventory days, and lower export prices indicate that increased supply and delayed demand are putting pressure on prices.

• Macro demand validationCross-validation using manufacturing, housing, and consumer confidence

  Use PMI, housing starts, and consumer confidence to gauge the end-demand environment.

  Manufacturing PMI improved but new orders declined, housing starts fell, and consumer confidence weakened, indicating that the demand environment is not unilaterally optimistic.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• U.S. chemical companies

  Benefit from the ethane feedstock advantage and the oil-gas spread.

  Strengths

  Ethane-route margins are significantly better than naphtha-route margins, providing strong cost competitiveness.

  Weaknesses

  If demand weakens, the cost advantage may not fully translate into prices and profits.

  Comparison

  Compared with the naphtha cracking route, the U.S. ethane route is in a more favorable position.

  Risks

  Delayed demand, weak consumer confidence, energy price shocks, and the duration of the SoH shutdown.

• China coal-to-olefins

  High operating rates increase olefin supply and affect Asian prices.

  Strengths

  The coal feedstock advantage keeps operating rates above 90%.

  Weaknesses

  Polyethylene prices have not yet fully reflected higher feedstock costs, and some companies need to increase exports to improve margins.

  Comparison

  Coal-to-olefin operating rates are higher than the roughly 70% utilization rate of steam cracking units.

  Risks

  Higher exports may depress Southeast Asian regional prices, and margins would come under pressure if the coal cost advantage narrows.

• North American polyethylene

  Prices have retreated from April highs, but April contract prices still rose sharply.

  Strengths

  April operating rates were high, and domestic demand was better than expected.

  Weaknesses

  Exports were below expectations, inventory days increased, and export prices declined.

  Comparison

  HDPE, LLDPE, and LDPE contract prices all rose significantly month over month, but export prices have already fallen from their peaks.

  Risks

  Supply recovery, rising inventories, and delayed buyer purchases may continue to pressure prices.

• Methanol and lithium chemicals

  Weekly prices of some chemical products weakened.

  Strengths

  China methanol prices were flat week over week, showing relatively stable regional pricing.

  Weaknesses

  Weekly prices for U.S. methanol, lithium carbonate, and lithium hydroxide all declined.

  Comparison

  U.S. methanol prices fell while China prices were flat, and lithium chemicals saw more pronounced declines.

  Risks

  If supply increases or end-demand is insufficient, prices may remain under pressure.

Key data

• North American polyethylene export priceDown about 13 cpp from the April peakThe price decline reflects increased supply and delayed demand in May.
• North American polyethylene April operating rate95.6%Domestic demand was better than expected, but exports were below expectations.
• North American polyethylene inventory days41.4 daysAbout 0.8 days higher than in March.
• China coal-to-olefin operating rateAbove 90%The coal feedstock advantage supports coal-to-olefin production.
• China steam cracker utilization rateAbout 70%Lower than coal-to-olefin facilities, with some output compensated by coal chemicals.
• Weighted average U.S. ethylene spot marginAbout 23c/lbDown about 1c week over week as of the week ended 5/14.
• Ethylene feedstock margin rankingEthane 23c, propane 6c, butane -5c, naphtha -22cEthane remains the most advantaged feedstock.
• U.S. April HDPE contract price95c/lbUp about 30c/lb month over month.
• U.S. April LLDPE and LDPE contract prices94c/lb and 99c/lbBoth were up about 30c/lb month over month.
• U.S. April propylene and polypropylene pricesPropylene 59c/lb, PP 79c/lbPropylene was up about 12.5c/lb month over month, and PP was up about 19.5c/lb month over month.
• Methanol priceU.S. spot $537/ton, China $404/tonU.S. prices fell about $23/ton week over week, while China was flat week over week.
• Lithium chemicals spot pricesLithium carbonate about $23,248/ton, lithium hydroxide about $22,271/tonAs of the week ended 5/22, they fell by about $1,498/ton and $1,371/ton, respectively.
• S&P Manufacturing PMI55.3The preliminary May reading was above the prior 54.5 and the highest since May 2022; input prices rose to 79.5.
• University of Michigan consumer sentiment44.8The final May reading fell 5 points from April, with more respondents saying higher prices were eroding personal finances.
• North American chemical rail traffic volumeUp about 1% year over year as of the week ended 5/16Year to date, the U.S. is up 3.6%, Canada 5.4%, and Mexico 10.6%.

Impact & implications

From an investment perspective, the ethane cost advantage and the oil-gas spread still support the relative outperformance of U.S. chemical companies; however, if delayed demand further evolves into demand destruction, price support may weaken. High operating rates for China's coal-to-olefin sector increase regional supply and may affect Southeast Asian polyethylene prices and regional margins through higher exports.

Risks

• Delayed demand may further evolve into demand destruction.
• Consumer confidence remains weak, and higher energy prices may continue to erode end-market purchasing power.
• Asian plant restarts and increased output from China's coal-to-olefin sector may expand supply pressure.
• Rising North American polyethylene inventories and insufficient exports may pressure prices.
• China's polyethylene prices have not yet fully reflected higher feedstock costs, and producers may seek better margins through exports.
• The duration of the SoH shutdown is uncertain and may affect energy and chemical costs.

What to watch

• Whether China's coal-to-olefin operating rates can continue to stay above 90%.
• Whether China's steam cracker utilization rate recovers from around 70%.
• Changes in North American polyethylene export prices, inventory days, and operating rates.
• Differences in ethylene margins across ethane, propane, butane, and naphtha routes.
• U.S. consumer confidence, housing starts, manufacturing PMI new orders, and input prices.
• Whether North American chemical rail traffic continues its year-to-date growth.
• The impact of changes in NOAA's El Nino and hurricane season forecasts on agrochemicals, fertilizers, and the energy chain.