Resin purchasing – a buyer’s market in 2010?

Speakers at the 14^th Canadian Plastics Resin Outlook Conference made it clear that – depending on the resin being purchasing – buyers can take advantage in the year to come of falling prices caused by substantial oversupply of commodity and engineering resins. For other materials, unfortunately, it’s business as usual, with rising energy costs and a falling U.S. dollar expected to keep prices high.

One of the most popular of today’s resins, polypropylene (PP) is used in appliances, automotive parts, diapers, food packaging, housewares and medical components. But according to Joe Congdon, director of global PP consulting with Townsend Solutions in Houston, Tex., global PP consumption is currently down 3.1 per cent, including down 8.4 per cent in the U.S., and a whopping 21 per cent in Canada between 2007 and 2008.

What happened? In a nutshell, oil speculation upset the market, Congdon said. “High oil prices worsened an already developing recession; speculative and derivative financial markets collapsed and there were record oil price declines in the latter half of 2008,” he explained. “As a result, PP prices declined by 70 per cent during 2009, plant operating rates dropped below 70 per cent and everyone reduced inventory.”

As North America comes out of the recession, Congdon predicted a period of rebalancing for propylene’s lasting between three to six months. “The propylene industry needs to shed some two billion lbs. of demand,” he said. “At the moment, there is ample PE and PP supply in North America and slow growth due to PP product imports and ongoing converter flight.”

The good news: this excess supply had led to competitive pricing – at least for ethylene, which should remain below all regions except the Middle East. The price of propylene in North America is expected to remain above the global price throughout 2010, Congdon said, with large volume PP homopolymer trading at between US$0.55 to US$0.65 cents per lb. through to 2011.

For long term consumption of both PP and polyethylene (PE), Congdon forecast major changes for net trade balances between regions, with North America and Europe on target to become net importers by 2012.

The key determinant for much of resin pricing lies in benzene, an important precursor to styrenics, nylon and polycarbonate (PC).

According to Esteban Sagel, director of polyolefins, North America, with Houston-based Chemical Market Associates Inc., the price of benzene shot up in 2009, reaching US$3.75 per barrel in August. Why? “The driver of the price upswing is supply constraint, brought about by higher energy prices, light feedstock cracking, refinery issues and trade pressures,” Sagel said. “As prices get out of hand, the level of imports rise.”

Sagel noted that there is currently an oversupply of styrene, with capacity growing beyond demand. “Globally, this oversupply is forecast to last throughout the value chain until at least 2014,” he said. “In North America, production is also forecast to run well below capacity until 2014.”

The reasons? Sagel described polystyrene (PS) as a product currently under siege. “The U.S. National Toxicology Program is considering adding PS to its list of carcinogens and several measures against the product in food packaging are being considered around the world.” Partly for this reason, there is a growing tendency for PS to be replaced by other materials.

Overall, Sagel noted, this trend is expected to depress margins, counteracting any price lift from increasing oil prices. Energy prices, however, are expected to keep styrenics prices elevated through 2010. Sagel forecast the price of benzene at just under US$1,000 per metric ton and styrene at approximately US$1,200 per metric ton.

But the news for PS isn’t all bad. “I expect PP prices in North America to remain higher than in the past, resulting in the relative price of PS closer to parity with PP than ever before,” Sagel said. “This results in a better cost position for PS relative to other materials.” The price of PS should hover at approximately US$2,000 per metric throughout 2010, he concluded.

The use of PET in the U.S. is under increasing constraints due to falling demand and lower pricing in Asia, according to Landon Feller, markets reporter with Houston-based ICIS. “PET purchasing was very slow in 2009, with isolated purchasing spikes only,” he said.

In common with several other resin types, there is currently an oversupply of PET in North America, caused in part by mild weather in the Gulf Coast that kept operations running high.

The good news for purchasers is that the seasonality of PET applications – used mostly in water or juice-based packaging – exerts a downward pressure on producers. So too does the fall of PET prices in Asia. “These pressures force North American vendors to sell at lower prices than they’d like, so don’t be surprised if they prove willing to make significant concessions to shore up waffling customers in 2010,” Feller said. “We’re heading into a buyers’ market in North America. Chinese and North Korean dealers have large quantities of resin that they’d love to sell here for as low as US$0.48 per lb.” North American PET prices should remain lower at least into February 2010, he concluded. “Looking further ahead, and considering Asian volumes, US$0.52 per lb. import volumes can be expected until at least October 2010.”

The immediate future of PET applications in North America seems to read like a good news/bad news story. “There is tremendous room for PET markets to grow, with new applications in food packaging, wine, teas and fruit juice,” Feller said. “As a result of the 2009 recession, however, the market growth in remains near zero at present.”

In the longer term, though, the future of PET does indeed look bright, as the material’s cost advantages and technical advantages shield it from loss of market share, Feller said. “Business should improve faster for PET molders than for those dealing in other commodity plastics,” he explained. “Most of the lightweighting that can be done has been done by this point. New developments have been hampered by issues with barrier strength, limiting the extent to which PET content can be reduced.”

PVC

Production and sales of PVC resins hit a low point in December of 2008, according to Kevin Allen, associate editor at Houston-based Platts, and North American producers reduced output to the point that sales actually surpassed production. “Export sales ticked up slightly in 2009, but were not significant enough to offset declines in domestic sales,” Allen said.

The primary factor affecting the PVC market throughout 2009 was the depressed construction and housing markets; and while U.S. housing starts are showing signs of recovery, Allen doesn’t expect PVC demand in North America to ret
urn to previous levels until unemployment and the threat of inflation subside.

What has this meant for PVC pricing? “Given the state of overall PVC demand in 2008 and 2009, U.S. producers have seen been relatively successful in passing through price increases,” Allen said. “Sellers were able to push through approximately US$0.12 worth of price hikes in the face of weak demand.”

Heading into 2010, Allen forecasted a return to more traditional patterns of PVC consumption.

“Demand traditionally falls off October and will likely remain soft throughout the remainder of 2009, with domestic PVC prices softening accordingly,” he explained. “Given the projected demand throughout the year, buyers will be looking for producers to give something back. Prices could drop between US$0.02 to US$0.04 per lb. by the end of that year.”

The by-now familiar refrain of softening North American demand in 2009 applies to nylon as well, according to Greg Smith, vice president, engineering resins, at Resin Technology Inc. in Forth Worth, Tex. “Fibre demand is off by more than 20 per cent this year, and the automotive demand has obviously been down quite significantly,” he said. “On the brighter side, film demand has remained relatively strong.” Also, demand for nylon in Asia has continued to rise, leading to export opportunities for North American nylon 66 producers.

The cost to produce nylon 66 increased significantly in 2009, but peaked in October, Smith said. “Nylon 66 is approximately US$0.10 per lb. lower than one year ago for the propylene route and about US$0.22 per lb. lower than one year ago for the butadiene route.”

Smith predicted wide ranges in nylon 66 pricing during 2010, but with the possibility of relatively lower prices when compared with other materials. “A price increase of US$0.10 per lb. was implemented in August due to feedstock cost pressures, but this increase is not gaining support as raw material costs dropped in September,” he said. An additional downward pressure comes from a benzene drop in September that led to a cyclohexane decrease of US$0.71 per gallon in September and a corresponding caprolactam decrease of about US$0.13 per lb. in the same month. “This has lowered nylon 66 production costs in the past few months, and smart buyers should insist on having these savings passed down to them,” Smith explained.

POLYCARBONATE

Turning his focus to PC, Smith noted that global demand growth softened during 2009, caused largely by a slowdown in Chinese consumption that reduced export opportunities for North American producers.

“Global PC capacity additions averaged approximately six per cent per year between 2005 and 2009,” he said. “More capacity additions in Asia and in the Middle East are planned between 2010 and 2012.”

Currently, he continued, the global PC plant capacity utilization rate is roughly 70 per cent, as a result of which some PC producers have shut down plants or idled production lines.

“During July and August 2009, buyers of PC heard rumours of an increase of up to US$0.10 per lb., but at many accounts there was no actual increase due to competition,” he said. “The threat of a price increase, along with higher feedstock costs, have actually served to flatten the market after PC prices steadily dropped as much as US$0.40 per lb. since the last financial quarter of 2008.”

PC producers lost margin in 2009 as feedstock costs increased and PC prices went down, Smith noted. “Margins are improving now due to the drop in benzene, and spot refinery-grade propylene (RGP) prices are now dropping. This will further improve PC margins during 2010,” he said. “In the end, buyers should remember that soft demand and oversupply of PC will persist during the next year, which means there will be price decreases in competitive environments.”