Resin Outlook 2000
By Jim Anderton
Derek Holt, senior economist, Royal Bank of Canada, has good news for the Canadian economy: with inflation on the ropes, improved external balances, and fiscal surpluses, the outlook is decidedly posi...
Derek Holt, senior economist, Royal Bank of Canada, has good news for the Canadian economy: with inflation on the ropes, improved external balances, and fiscal surpluses, the outlook is decidedly positive. With the NAFTA implemented, painful public and private sector restructuring is largely complete, and with a moderately stronger dollar, (look for a US $0.70 by the end of 2000) the plastics sector should be in a position to benefit.
“We are one of the most commodity dependent major world economies,” says Holt, who notes that export growth has not significantly lessened our dependence on commodity pricing. As a result, strengthening prices in ’99 and forward benefit the economy as a whole, particularly compared to our G7 trading partners.
Where are interest rates headed? Interest rate spreads between Canada and the U.S. should be stable, says Holt, as the Bank of Canada follows closely the U.S. Federal Reserve in the near term: “We’re not going to be forced to pay much of a premium relative to the U.S., over the next year or two. That’s not going to work to the advantage of the Canadian dollar.”
POLYETHYLENE AND POLYPROPYLENE: DOWN
Robert Bauman, vice president, Chem Systems Inc., isn’t short of variables in the search for a polyolefin pricing equation. “There are many things which we see affecting the profitability of the business today: Global events, cyclicality, technology, and structural change consolidation.” Bauman describes polyolefin pricing as “event driven”, meaning that events in China can and do affect pricing in North America. How important is China? China buys 40 percent of all globally traded PE and PP, a proportion which is increasing. Bauman identifies “fly up” as the consequence of global operating rates reaching ninety percent. The real cause of fly up, he says, is not demand, but inventory buying based on expectations of higher prices and supply difficulties.
Accidental supply outages are still significant. The ’94 surge, for example, coincided with shutdowns in 15 ethylene crackers and thirty polyolefin plants worldwide. The Asian crisis was largely responsible for the pricing slide in ’98. According to Bauman, Asia is also worth watching because the region leads North America in price movement by eight to twelve weeks. Chinese polyolefin demand will be driven by strong demand for agricultural applications and the continued drive for exports in manufactured goods.
Y2K will drive inventory growth, mainly by end users hedging against supply disruptions. Bauman believes a 3 to 5 cent price increase for PE may result.
Polypropylene pricing will be dictated by large capacity increases which will overshadow strong demand growth. The expectation of new production, in fact, differentiates PP from PE surge conditions, as Bauman explains: “A ninety percent operating rate in polypropylene is no longer good enough to raise prices.”
LDPE is still surprisingly strong, and will remain so for a couple of years, says Bauman, until new technologies, such as metallocenes, become more widespread. LLDPE growth will be strong, based on volume and new applications, with demand controlled by the packaging market. Bauman predicts that metallocenes will begin to emerge in 2000 in this market and in five to six years will capture as much as thirty per cent of the market. HDPE will also grow strongly.
In the long term, pricing peaks will be lower, and valleys deeper and longer. Good news for processors; Bauman summarizes: “the trend is down for 2000, staying down for 2001, 2002, with a fly up in 2003.”
PVC has been on a roller coaster this year. Innua Petrochem’s senior trade consultant, David Harris, links the North American housing boom to the dramatic shift from the surplus position of the first quarter: “We have gone in a six month period from excess to allocation.” Perceived environmental issues notwithstanding, Harris believes that the currently accepted four percent growth rate figure will have to be revised to upwards of seven percent, the rate predicted before the Asian collapse. Will there be enough capacity so support seven percent rates? Harris doesn’t believe there is: “We may just scrape by if growth is at the four percent level, but at seven percent we are in trouble.”
Where will the capacity emerge? Largely in Asia, he explains, mainly due to regulatory difficulties in North America and Europe. The major player, China, will add to capacity using ethylene dichloride/vinyl chloride monomer technology, for which there is no indigenous feedstock supply. The required imports of feedstock promise to dramatically alter global chlor-alkali economics, as traditional producers face aging technologies and the elimination of traditional markets in the pulp and paper and solvent industries. As a result, PVC prices will rise, but by how much? Harris predicts that “we will see a sustained move up in price to the $US 0.35 and possibly $US 0.40 per pound. Spot trading is already at the lower end of the predicted range, and capacity will not catch up for a number of years.”
Polystyrene processors take note: prices are going up, according to NOVA Chemicals Ltd. marketing director Bill Glass: “In the last year, oil prices have doubled, industry continues to consolidate…(and) Europe and Asia are recovering a lot faster than we thought.” The result in ’99 has been PS pricing in the neighborhood of 26 cents per lb., compared to last year’s prediction of 23 cents per pound. 1999 saw four price increases in polystyrene. Glass traces the likely movement in PS to feedstock pricing and capacity. As 70 percent of the styrene molecule, benzene is especially important, and has moved sharply upward in step with crude oil, as has the other major raw material, ethylene. Polystyrene and styrene monomer capacity utilization is predicted to grow at 2.75 percent and 2.0 percent rates respectively through 2003. When combined with an industry determination to generate profits throughout the pricing cycle, processors should regard higher pricing as a certainty.
“The area we need to look at to understand PET is primarily Asia”, advises Edgar Acosta, manager of PET for DeWitt & Co. Conventional supply outages (such as the loss of 140 kilotonnes of production in the four weeks after the Taiwanese earthquake) are combining with non-market forces within the region, such as China’s freeze of imports, to create depressed pricing in a high-demand global market. China is a huge player in PET, and the combination of a crackdown in smuggling and the revocation of special import licenses has kept a lid on pricing in Asia. In Europe, however, the euro devaluation has limited imports from Asia, stabilizing European pricing. Imports into North America are not a factor, although Acosta believes that they will have pricing consequences in the near future. Future devaluation of the Chinese currency, the Renminbi, solid recovery from Japan, and Asian chemical sector consolidations will all play a part in pricing in 2000, but Chinese consumption will remain a key driver.
Feedstock pricing is stable to falling, and overall, capacity additions will continue to suppress PET pricing through 2000, although North American processors generally see higher prices than their Asian counterparts.