After the storm, confusion
We wish we could say that resin buying will be simple as the Great Recession recedes -but it won't. Overcapacity of some of the major commodity and engineering resins will force low prices; with others, low supplies will allow sellers to raise the cost to just below import levels. Inside, we tell you which is which.
November 1, 2010 by Mark Stephen, editor
“It’s a strange time for plastics processors,” remarked James Virosco, one of the speakers at the 15th Canadian Plastics Resin Outlook Conference in October. “Two years ago, you had the materials and not the orders; now, you have the orders and can’t always get the material to fill them.”
Virosco’s comment gets at the heart of the uncertainty that surrounded not only this year’s resin event, but resin purchasing in general. In 2009, conference attendees knew they were in the midst of an almost unprecedented financial meltdown; this time around, no one knew what to expect, either in resin prices or the plastics manufacturing sector in general.
And that uncertainty was reflected in the various pricing forecasts. Looking for an overarching theme? You won’t find it. Instead, from polycarbonate to polypropylene to PVC, factors specific to each material, and the various markets they’re used in, are making for unique pricing trajectories.
For buyers of some resins, there might never be a better time to pick material up at reduced costs. For others, it’s the sellers who hold all the cards.
THE BACKDROP: ECONOMIC, COMMODITY PRICE OUTLOOK
How bad a year was 2009? Stephen King never wrote anything so frightening. “In 2009, the world economy actually contracted, the first such contraction since the 1920s,” said Patricia Mohr, vice president, economics, at The Scotiabank Group. “This year, there’s been a substantial recovery in world GDP growth, and GDP will be at about 4.4 per cent.” The bad news: the pace of growth in the U.S. and Europe will slow in the second half of 2010, Mohr continued, and be even slower in 2011, with a two per cent growth rate projected for the U.S. “Recovery will be slow because this was not a typical recession, having been triggered by difficulties in the mortgage market and not, as usually happens, by high interest rates,” she said.
Canada had a mild recession in 2009, Mohr continued, with three per cent growth in 2010, and slightly slower growth project for 2011 because of the projected slowdown in the pace of the American recovery.
China -the 800-pound gorilla in the economic recovery room -experienced a slowdown in late 2008, but never went negative on a year-over-year basis. “The Chinese government ramped up the economy again in early 2009 through massive bank credit expansion, and the country’s economy is now fully rejuvenated,” Mohr said.
Turning to oil and its effect on commodity pricing, Mohr described the oil market as not tight currently. “Oil inventories are fairly high, but they could tighten in the second half of 2011 as the global economy continues to move ahead,” she said. “Scotiabank predicts only about 300,000 barrels a day of new supply from non-OPEC producing regions.”
Canada is rapidly expanding its pipeline capability into key markets in the U.S., she continued, and in the next 12 months will have additional capability to export down into the Houston refining centre, displacing a lot of Venezuelan, Mexican and Saudi Arabian crude. “I’m worried, however, about the fact that the actual demand for petroleum in the U.S. will grow only very slowly in the next few years,” she said. “Canada should get going very quickly on building new pipeline capability on the West Coast to serve a variety of Asian markets, which is where the real demand growth is going to be.”
The availability of natural gas shouldn’t be minimized as a resin-pricing factor either, she continued. Natural gas prices will be lower for the next three or four years because of the development of new shale plays across the U.S.,” she said. “This is a big, and positive, factor for Canada’s plastics industry and all petrochemical users, as prices will be more competitive.”
One of the most popular of today’s resins, polypropylene (PP) is used in a wide range of consumer goods: appliances, automobiles, food packaging, housewares, medical components — yes, even diapers.
Until the latter half of 2009, PP prices were on a sharp decline as plant-operating rates dropped below 70 per cent and plastics processors reduced inventory. More recently, the low-priced natural gas feedstocks referenced by Patrica Mohr have had a seesaw effect on PP prices. Where will it stop? Not where the buyers would like. According to the afore-mentioned James Virosco, Nexant Chemsystems’ manager of special projects, strategy divison, PP prices are heading upwards. “Lower cracker by-product production should result in reduced propylene supplies, leading in turn to higher propylene and PP pricing,” he said.
If current demand trends continue, both North America and Europe could be net importers of PP within the next two years, Virosco continued, as older production units are shut down and the Middle East and South America grow their respective production capacities. This same importer/exporter pattern is taking hold with polyethylene (PE), which will mark a big shift in the global PE net trade. “The Middle East has become the major exporting region of PE; by 2015, the region is set to have net exports of over 11 million tons per year, rising to over 16 million tons per year by 2025,” Virosco said. “Western Europe will see net PE imports rise to just under three million tons by 2025, and North America –although currently enjoying a significant export position — is forecast to become a net importer by 2015.”
In the shorter term, however, abundant quantities of our old friend natural gas close to home are forestalling the need for imports and keeping PE made in North America competitive on a global basis. “We’re near the bottom in the PE pricing cycle, which is surprising given that global demand for the material is high,” Virosco said.
In its long struggle to compete with PP, polystyrene (PS) has often seemed like the poorer cousin — poorer, that is, by being more expensive. This is about to change, according to Esteban Sagel, director, polyolefins and polystyrene, North America, with Chemical Market Associates Inc. “The PS industry has suffered in the past decade partly due to less expensive PP, and also by pricing itself out of a number of markets,” he said. “But as benzene prices become more stable and PP becomes more expensive, PS will become increasingly competitive, with a corresponding fall in PS prices.”
Indeed, these are shaping up to be heady days for PS. “The domestic PS market is soft but holding, while global demand outlook is positive,” Sagel said. “Consumer goods such as six-packs of yogurt, that used to be molded from PP or HDPE, are moving into PS.”
The only dark clouds on the PS horizon are in the form of environmental pressures. Measures against PS continue to be a threat, Sagel noted, although recent good news came when California’s attempt to classify styrene as a carcinogenic was blocked.
Sagel expects PS demand growth to be almost flat from 2010 to 2015, with regional PS operating rates at between 80 to 90 per cent in 2011.
“In the end, PS will be a material segment with an improved profitability situation for the next few years, since — with the exception of PET — competing materials are not as competitively priced as they used to be. The PS industry will score a victory simply by remaining the same.”
On the surface, these look like troubled times for some North American producers of polyethylene terephthalate (PET), symbolized by big guns Eastman Chemical Co. and Invista putting their businesses up for sale. But looks can be deceiving. Capacity continues to be added at other facilities around the world, with almost 16 million tons of PET produced in 2009. And other North American producers are ramping up production, with North America set to be a net PET exporter in 2011 after having been a net importer in 2009 and 2010.
The result? For buyers and processors, it’s a good time to be in PET, according to José Rangel, manager, aromatics and derivatives, with DeWitt &
; Company Inc. “The overcapacity being built in the Middle East and elsewhere is built for exports, with associated transportation costs already factored in,” he said. “North American purchasers will therefore enjoy a real pricing advantage.”
Regional PET prices were up almost eight cents per pound in mid-2010, Rangel said, but have since fallen to where they were at the start of the year, and should remain flat during 2011.
Rangel anticipates annual demand growth for PET in North America will be four per cent through to 2015. “Abundant feedstocks provide an excellent impetus for PET growth,” he said.
“Although we’re approaching the point where there’s not a lot of glass left to convert in the drink-bottle industry, new lightweighting developments continue to make PET attractive to bottlers.”
One of the lesser noticed side effects of the U.S. housing slump, according to Judith Taylor, an editor with ICIS, has been its effect on the polyvinyl chloride (PVC) sector. “PVC remains the plastic of choice for the construction industry, but the ongoing poor performance of the construction sector will continue to dampen demand into 2011,” she said. The silver lining? ” There remains a huge PVC demand in developing countries, and exports of PVC from U.S. manufacturers jumped by 32 per cent in first quarter 2010 from 12 months earlier.”
Indeed, the export market is so strong that Taylor expects it to contribute to higher operating rates for North American PVC producers for the next few years, which — of course — they’ll attempt to pass on to the buyers. “Presently, there’s a three cent per pound market price increase in the works by American PVC producers,” she noted. “This will be added to an almost five per cent PVC price increase from one year ago.”
But if the housing market is heading south — and, in theory, taking PVC demand with it — why aren’t prices falling? Because, Taylor explained, the material is gaining popularity as a replacement for ductile iron, concrete and other plastics in the houses and condos that are being built. “Seventeen per cent of all water pumped in the U.S. is lost via pipe leaks, and PVC — which leaks less than competing materials — is making inroads into this market,” Taylor said. “It’s also lighter and therefore less costly to transport and handle, and offers a 110-year life expectancy.”
The market stands to be hurt in future by “green” considerations, Taylor also noted, citing Procter & Gamble’s initiative to remove all PVC from its packaging by 2020.
As the U.S. automotive market roars back after stalling in 2009, producers and buyers of nylon resin should expect the material’s popularity to improve in turn, said Paul Blanchard, a senior consultant with Chemical Market Associates Inc.
The pricing results? “A combination of factors, including automotive recovery and anti-dumping duties, will allow local producers to raise their prices to just below import levels,” he said. “The European and North American prices are closer than they’ve ever been. If you’re having a problem buying nylon 6, you’re not alone; and if you don’t like the pricing, you’re definitely not alone.”
The growth of demand for nylon 6 in Asia has sucked supply out of other regions, Blanchard said, tightening the supply/demand balance. “There should be some limited nylon 6 relief in North America going forward because of new production investments, but not much.”
North American operating rates for nylon 6 resin should average approximately 94 per cent in 2010 and 90 per cent through 2011 and 2012, he added.
For nylon 6/6, Blanchard forecasts North American operating rates to hold at 70 per cent until the end of 2010 before climbing to 80 per cent by 2014. Pricing should remain tight. If the price of nylon 6/6 comes down, as Blanchard anticipates, thank China. “Suppliers in China are without a basic source of adiponitrile, and therefore have no choice but to move the prices up, making China the most expensive region from which to buy nylon 6/6,” he explained. “By contrast, North America and Europe are less expensive. You’re getting a bargain if you’re buying from these regions.”
Turning to polycarbonate (PC), Blanchard noted that, even with the automotive slowdown, North American PC manufacturers still managed a growth year of 3.5 per cent in 2009. Now, PC demand is showing a strong recovery in 2010, leading to a tight market and rising prices into 2011. “After dramatic price reductions during the recession and then a period of flat pricing, the price of PC started going up within the past few months, partly related to supply and demand issues like force majeures,” Blanchard said. “The PC suppliers will have a good year in 2011.”
With CD and DVD sales falling drastically in the digital media age, PC makers cut back on optical-grade PC output — only to be caught short in early 2010, Blanchard said, when megahit films Avatar and Twilight: New Moon were released on DVD. Prices skyrocketed by almost 50 per cent. Those exceptions aside, shrewd PC processors are already looking for the next breakout application. “Potentially, there’s a big opportunity for PC in automotive front windshields, although the glass industry has not yet agreed to give up this market,” Blanchard said. “It’s also a heavily regulated industry, and it’s still illegal for anything to be in a windshield other than glass. Time will tell if and when it opens up for the PC sector.”
AT A GLANCE
Lower cracker by-product production should result in reduced propylene supplies, leading in turn to higher propylene and PP prices in 2011. James Virosco, Nexant Chemsystems
As benzene prices become more stable and PP becomes more expensive, PS will become increasingly competitive, with a corresponding fall in PS prices. Esteban Sagel, Chemical Market Associates Inc.
Overcapacity of PET worldwide means that North American purchasers will enjoy a real pricing advantage. José Rangel, DeWitt & Company Inc.
A three cent per pound market price increase by American PVC producers will be added to an almost five per cent PVC price increase from last year. Judith Taylor, ICIS
A combination of factors, including automotive recovery and anti-dumping duties, will allow local producers to raise their prices to just below import levels. Paul Blanchard, Chemical Market Associates Inc.
After dramatic price reductions, the price of PC rose within the past few months. Suppliers will have a good year. Paul Blanchard