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Polypropylene Price Dynamics: Input Costs or Downstream Demand?

This paper investigates price dynamics between polypropylene (PP), propylene, naphtha, and crude oil together with proxies representing PP using industries. We test the dynamics in the South East Asian and North Western European markets. The paper is motivated due to the importance of the propylene and PP market in various downstream industries and importantly to aid producers in having a better understanding of how input costs and demand drive the prices. We employ a vector error correction framework, which facilitates testing different dynamics among the upstream and downstream prices. We find PP prices in both regions to be endogenous, albeit with some evolution over time, i.e., input costs and downstream demand factors tend to drive PP prices. In both regional markets shocks to naphtha and oil prices tend to be driven mostly by each other's price with little effect originating from PP and propylene prices.

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Keywords: Petrochemicals, Polypropylene, Value chain, Price dynamics, Variance decompositions, Impulse response functions

DOI: 10.5547/01956574.38.4.ldem

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Published in Volume 38, Number 4 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.