More price pressure
The upward push on resin pricing that began in 2002 will continue through 2003, according to the gurus speaking at our magazine's 7th annual Resin Outlook conference. The good news? The price increases will generally not be as sharp or as painful as 2002. The wild card looming ahead is the price of oil and energy in uncertain global political conditions.
December 1, 2002 by Andrea Aster
Looking through the crystal ball, some things are clear, some not so, judging by the presentations and comments of the experts at this year’s Resin Outlook conference. Clearly, it seems, resin is going to cost more in 2003. The exact amount of that increase for a particular resin, however, has a substantial range of uncertainty associated with it. Clearly, processors will face some continued economic uncertainty, although on the whole things seem to be on the mend. Less clear is the impact volatile political conditions in key areas of the world could have on the price of oil, energy and feedstocks.
On the positive side, a strong job-creating market and a hot housing market are two factors contributing to a forecast of moderate economic growth in 2003, said Peter Drake, vice-president and deputy chief economist, Toronto Dominion Bank Financial Group in Toronto. As well, there will be low inflation and a slow return to neutral interest rates, he predicted.
On the downside, he reports there is not a lot of buoyancy in the world markets.
“This is a grind-it-out recovery,” said Drake.
In the U.S., for example, consumers are shouldering bigger debt loads than ever, though that hasn’t slowed spending. While U.S. corporate profits have been notoriously hammered over the past year, Drake predicts a gradual recovery in the range of 2% growth. U.S. manufacturers “fought an inventory battle this year and demand is not strong now,” he said.
In Canada, the labor force is up 427,000 jobs this year, and consumer spending remains strong.
The “wild card,” said Drake, is, of course, Iraq. Assuming any U.S. action would be short, there could be a spike in oil prices, “not due to a shortage, but because the prices will be raised in anticipation of one,” he said.
POLYOLEFINS READY TO PEAK
The pricing for polyethylene and polypropylene will likely see an average increase of about US$0.05 in 2003, said Robert Bauman, vice- president, director of plastics business practice, Nexant Inc., White Plains, NY. The increase will be driven by a number of inter-related factors tightening supply.
Polyolefin demand growth will continue to be strong globally. The strongest growth will be seen in Asia, as spending for the 2008 Olympics in Beijing begins. In North America, demand will be stronger in 2003, while in Latin America, demand will be led by Brazil and Mexico.
Into 2004, global operating rates will improve, reaching 90% by year-end. That improvement will be driven mostly by inventory reductions, not new demand. The fly up in pricing is expected to continue through 2005, with inventory building continuing through the year. Debottlenecking will allow suppliers to keep pace with demand for a time, and prices could rise above the 1994-95 peak of $1,200 per ton.
Global polyethylene demand is projected to increase to 87 million tons in 2003, up from 54 million tons in 2002.
There are a limited number of new ethylene expansions. Most of the new crackers will be built by oil companies in the Middle East and China. No new ethylene crackers are planned for Japan, Korea, the United States or Western Europe.
“It takes three years to build an ethylene cracker, so the earliest we’ll see any new significant capacity is 2005,” Bauman said.
Looking longer term, new Middle East capacity will not be enough to meet forecasted demand growth and many new projects will be delayed. Propylene will be in short supply in the post-2005 period and polypropylene could become the most profitable polyolefin. All told, profitability into the next cycle could be much stronger, making polyolefins, and especially polypropylene, an attractive business for producers and suppliers again, noted Bauman.
Buyers should expect higher polypropylene prices in 2003, said Craig Blizzard, marketing director, polypropylene, North America at Basell Polyolefins in Wilmington, DE.
PP remains the world’s top thermoplastic and with a 21% share in the polymer market, PP has taken share from HDPE in injection molding, and from polystyrene in sheet applications. Blizzard projects there will be 10% growth in PP used for the rigid packaging segment over the next five years. There will be 7% growth in the consumer/industrial sector and up to 6% growth in the automotive sector.
There has been a significant change in PP capacity over the past two years due to poor profits. To balance the supply and demand situation, there has been a net decrease of 5% of capacity since 2001, and that’s expected to continue to tighten. Generally, the North American PP supply and demand situation will tighten over the next three years and in 2005, capacity will be sold out, said Blizzard. Further margin improvement is needed to bring about the reinvestment economics that ensure PP’s long-term growth.
PVC, PS GRAPPLE WITH MATURING MARKETS
In the short-term outlook, PVC prices will remain stable, but the big issue for PVC suppliers is the tightening supply of feedstocks like vinyl chloride monomer which could push up prices by the end of 2003, said Dave Durand, research director, plastics, Philip Townsend Associates, Houston, TX.
Durand forecasts a 3 to 4% growth in the PVC market, but said it will continue to lose share to newer materials in markets such as automotive. “There’s no question it’s a maturing market,” said Durand. “Margins are at a 10-year high but they won’t stay there forever,” he said. “Increases in prices of raw materials will decrease margins.”
Pricing over the next two years will follow the fluctuations in raw material costs. These costs may be up slightly, but it won’t be like the escalation seen in 2002, Durand reported.
Pipe and fittings accounted for 39% of the 25.5 million tons of PVC consumed globally in 2001. For 2003, Durand forecasts high growth (exceeding 4%) in applications such as siding, window frames and miscellaneous rigid profiles. There will be moderate growth in the 3% range in pipe and conduit, wire and cable, film and sheet, and rigid injection molding. Growth will be lower in applications for food packaging film and toys, due to regulatory and environmental pressures.
Polystyrene prices have peaked and will decline over the next year, said Alex Lidback, director, benzene and styrenics, Chemical Marketing Associates in Houston, TX.
In the short term, demand will be weak and there will plenty of available capacity with operating rates running about 80%. PS margins will continue to suffer in 2003.
China is key to future growth of the market, said Lidback. While three to five years ago, China re-exported 75% of its PS as finished goods, now, about half stays within the country. By next year, it is expected to be the largest PS market in the world.
Lidback doesn’t foresee a major recovery in North American PS demand. He said demand won’t be back to 1999 levels of three-million tons until 2004. That growth will constitute only about a 3% increase, and global overcapacity will continue to be a drag on the recovery.
DEMAND FOR NYLON, PC GOING STRONG
Looking at the next upward phase of the business cycle, in early 2003, processors can expect the prices of nylon engineering compounds to increase 3 to 5%, said Philippe Guinot, North American Director for Rhodia Engineering Plastics, Mississauga, ON. Exact fluctuations will depend on market and application segments.
Over the last two years, there has been a significant increase in prices of feedstocks for caprolactam, HMDA and adipic acid, said Guinot. This increase goes beyond cyclicity. There has been a structural shift of production costs upward which translates into upward price pressure for both mylon 6 and mylon 6/6 engineering compounds. Meanwhile, said Guinot, demand is steadily growing at a minimum rate of 2 to 3% above GDP. Automotive-related demand is 5% above 2001 numbers in the first three quarters of 2002.
“If demand continues to improve, as it has since April, there will be an upward pressure on polycarbonate (PC) pricing in 2003,” said George Paleos, product manager, polycarbonates, Bayer Corp., Pittsburg, PA. “We can expect to see a single digit
increase of US$0.05 to US$0.09, with capacity close to 90%.”
In 2001, electronics and electrical uses represented the largest segment of worldwide PC consumption (28%). One hot area of PC demand will be in water bottles, which is expected to grow to 100,000 tons in 2006. Other big uses are optical storage products such as CDs and DVDs.
Overall, there will be increasing volumes and decreasing margins in engineering thermoplastics, said Paleos. Decreasing profits as a result of smaller margins will only be compensated by participating in the market growth. Therefore, the necessity for suppliers to globalize business will increase.
Paleos predicts that the world consumption for engineering thermoplastics will increase 6% a year for the next five years. Specifically, Asian consumption (without Japan) will grow 8% a year, with Japan growing 3.5% a year. North American demand will grow 5% a year.
There will be excess capacity of PC until 2006, based on this demand forecast, said Paleos. Global consumption of PC is expected to outpace other engineering thermoplastics, increasing 9% a year until 2006, with Asia, including Japan, the largest region, consuming 42% of the total 1.9 million tons produced from 2000-2006. That represents a 15% yearly increase in market growth over the six-year period, compared to an 8% average annual growth in North America.
In summary, it should be noted that historically the speakers’ forecast given at the conference have matched up well with the pricing trends seen in the following year: In other words, it may be wise to budget in increased material costs for 2003.CPL
Andrea Aster is a freelance writer in Toronto.
Making bottles will be more expensive
Utilization rates will climb in the first half of next year and resin will be scarce in the second quarter, said Tom Brekovsky, US and Canada director for packaging resins, KoSa in Charlotte, NC. Raw material prices will climb four to six cents next year with neat resin price increases likely to follow.
After a weak 2000, the North American growth rate rebounded and saw strong first half growth this year of 8 to 9%. Growth rates in developing regions have been strong but global capacity growth should keep pace. There is, currently, a massive building trend in Asia. Over the next three years, Asia is forecasted to add almost 3,000 kt of the nearly 4,400 kt of new capacity globally. China will account for 54% of this new capacity. In South America and the Middle East several large new plants are planned. By 2005, Asia-Pacific is expected to constitute 40% of the PET supply base.
The demand side, however, is not growing in proportion to the supply. In 2005, North America will still be the largest user, comprising 33% of the estimated 11,000 kt of global PET demand; while Asia-Pacific’s demand share will grow to 24% from 21%.
The excess capacity in Asia will not have as big an impact on North American packaging resins as it will on European markets, said Brekovsky. That’s because NAFTA logistics will make it easy for Asian exports to go to smaller more fragmented markets in Europe first.