Resin Outlook 1999
By Jim Anderton, associate editor
Canadian Plastics' Third Annual Resin Outlook Conference is history, and the results suggest a very interesting 1999 for resin supplies and processors. Record attendance and a broad range of informati...
Canadian Plastics’ Third Annual Resin Outlook Conference is history, and the results suggest a very interesting 1999 for resin supplies and processors. Record attendance and a broad range of information were featured at this year’s conference, with presentations on general economic conditions as well as resin by resin forecasts.
THE OUTLOOK FOR 1999
Royal Bank economist Derek Holt launched the program with an overview of Canadian and global economic prospects for ’99. In general, the plastics sector can expect trends which parallel the economy as a whole: slowing growth, and continued concern over the Asian crisis. The difference is that this time, emerging markets, rather than the industrialized nations, are the source of the uncertainty. North America and Europe are well-positioned to weather the storm with enough room on the fiscal side (interest rates, for example) to soften the blow. “All the financial market turbulence that we’ve seen in the major economies across the globe is about to translate into the real economy, not just the developing world” says Holt. Wealth deterioration, due to the stock market correction and its effect on personal savings rates, is a key factor for 1999: “Uncertainty is the biggest problem in our forecasts for the next few years”. Holt believes the global economy is headed for recession, although the Canadian economy is still predicted to produce growth rates in 1999 on the order of two per cent (inflation adjusted) for both Canada and the U.S. Competitive currency devaluations are still a risk, although U.S Federal Reserve action will deflect some of the risk of “currency blowout” in the Americas. Holt notes that the Canadian dollar is definitely undervalued: “We’re looking at the low 70’s (cents per U.S. dollar) by the close of 1999”.
POLYETHYLENE STILL GROWING
Polyethylene growth continues globally, according to Dow regional sales manager, polyethylene, Paul Nietvelt. Current global capacity exceeds 109 billion pounds, with the top 12 of over 150 producers accounting for 48 per cent of world capacity. Compounded global demand growth rates for PE have averaged at better than six per cent from 1992 to the present. Nietvelt predicts that growth in North America will exceed overall growth in the economy by a healthy margin: “In North America, we’re looking at 5.8 per cent, and that equates to approximately two plus billion pounds per year of additional demand, which equates to anywhere from three to four world-scale polyethylene plants that need to be built every year to keep up with the demand”. In general, PE trends suggest stability in North American markets, with continued interest in consolidation, joint ventures, and alliances among both converters and producers. On the pricing side, PE continues to show sensitivity to production interruptions, feedstock pricing, natural disasters and fluctuating inventories. The result is pricing which would seem to defy prediction, with forecasts for three quarters forward deviating by as much as 10 cents per pound on the high side, and 20 cents on the downside. Caveat emptor.
SUBSTITUTION DRIVES POLYPROPYLENE
Polypropylene continues its expansion, historically at two to two and a half times GDP in North America. Can this growth continue? Tom Boal, North American business planning manager for Montell thinks so: “Domestic sales and use are up 7.2 per cent over the year before, and still showing strong growth”. North American sales and use figures for 1998 are up 6.9 per cent, with rigid packaging and transportation products exploiting new technologies to reach double digit growth. Substitution is the driving force in the packaging sector, with HDPE and PS the primary victims. Automotive benefits from new high performance grades with enhanced appearance for fascia and interior applications.
On the supply side, capacity has increased five per cent while the Asian troubles triggered a 9.3 per cent decline in exports. Current planning calls for major increases in global capacity through 2000, although some “stretch-out” seems likely given current economics. Demand-driven pricing pressures in the future will depend on whether PP technology and continued substitution can maintain the eight per cent annual growth needed to keep up with capacity. Boal’s models predict that six per cent, however, will leave consumption at about 85 per cent of capacity, allowing room for some supply rationalization.
STABILITY FOR POLYSTYRENE
“We’re at historically low prices for polystyrene,” states Ron Hornack, vice-president, solid polystyrene sales & marketing for the Styrenics division of NOVA Chemicals Inc. Hornack notes that contrary to many traditional industrial inputs, PS pricing follows overall trends closely. PS demand will stay the course in 1999, with three per cent growth in packaging offsetting market share lost to substitution. The primary force in PS packaging is electronics and food service products. Overall demand growth for 1999 is estimated at two per cent.
On the supply side, North American supply reached 7.5 billion pounds in 1998 with little change for ’99. NOVA, which has aquired Huntsman’s PS assets, will account for fully 2.2 billion pounds of the total. Supply and demand are in synch for 1999, operating at utilization rates in the low eighty per cent range, while Asian producers will reduce output in line with both economic conditions and the rationalization of the segment by mergers and joint ventures. Expect 30 day inventories for PS in 1999.
High inventories, low feedstock prices, and slowing Asian demand will keep PS pricing down for ’99. Suppliers will fight back with new products and stronger liaison with processors and end users.
PVC ON A ROLL
PVC demand growth will continue to be strong at an annual rate of five per cent through ’99 and into 2000. PVC pundits traditionally link pricing and supply estimates on housing start data, but as vinyl diversifies, this approach is becoming less reliable. Barry Hendrix, director of sales and marketing PVC resins for Geon, says: “Vinyl is growing much faster than the housing market overall.” Housing is still vinyl’s anchor, however, and the increasing trend toward renovation combined with an aging North American housing stock will keep PVC growth in front of the economy as a whole.
The major news in joint ventures is the formation of Oxy Vinyl from Geon and OxyChem to form the largest North American producer. The new business has a capacity exceeding 4.5 billion pounds annually. Vinyl producers are enduring the tightest margin squeeze since the early ’90’s, a situation expected to continue through 1999 until utilization rates increase in 2000. Hendrix sees mergers and partnerships leading to global pricing, with most new capacity additions stretching out until prices climb out of the cellar. When it comes on-line, capacity will be added primarily in North America.
The imbalance between demand and capacity for most commodity resins, combined with the Asian crisis and low feedstock pricing has produced some of the most favourable market conditions the processing community has ever seen. With margins at historic or near-historic lows in the resin sector, however, 1999 will see increasing interest in market consolidation by mergers and joint ventures as well as traditional cost-cutting strategies. Jeff Spetalnick, executive director of the Chemical Research Division of CIBC Oppenheimer, summarizes conditions for 1999 as follows:
PET pricing has taken a beating due to major oversupply, and for PE in general, the ramp-up of resin supply will amplify the effect of general economic weakness this year. Pricing will be flat, but so will producer margins, a condition will change only if demand increases in ’99. Operating rates will remain in the high 80’s while the segment consolidates. More joint ventures are on the horizon.
Expect more of PP’s strong growth, largely at the expense of other resins. The wild card is Asia, with one third of global capacity and weakening d
emand. With major North American capacity expansion scheduled to come on-line in ’99 (almost 20 per cent), recessionary forces could bring a notable oversupply situation if Asia dumps resin. Countering this risk in North America is the reduction in the number of major producers to 11.
Worldwide over-capacity, weakness in Asian export markets and a utilization rate which has not exceeded 88 per cent since 1994 will keep prices weak throughout ’99.
Major industry consolidations such as Geon/Oxy, Solvay/BASF and Norsk Hydro/EVC put PVC ahead of the pack in supply rationalization. Increasing demand in the construction industry, where use per house is increasing, suggests that PVC pricing has already bottomed out, and may rebound slightly in ’99. CPL