Resin Outlook 2002: Demand will rise, so will prices

A common theme among analysts at Canadian Plastics’ Resin Outlook conference was that power had shifted to the buyer in the commodity resin markets. The purchasing power of large buyers has become a factor in driving prices down and in forestalling price increases.

“Large buyers are driving profit out of the industry,” says Robert Bauman of Nexant Chem Systems. “Overall, the buying power of consolidated companies has increased dramatically. There are now 20 or 30 companies buying more than one billion lb./yr. Their effect throughout the industry is pervasive, and will continue.”

Resin producers are being squeezed from both sides, explains Alex Lidback, director of benzene and styrenics for Chemical Marketing Associates Inc.

“There’s been a shift among consumers from product loyalty to retailer loyalty,” he says. “It’s amazing how strong and powerful these retailers have become.” Examples are The Home Depot, Wal-Mart, Lowe’s and Walgreens. Caught between the powerful retail influences, which are “almost inflexible” and rising energy costs, producers of both resin and plastic products are feeling the squeeze.

Lidback’s data show that the gross margin of these mass discounters has been decreasing steadily since 1984. It has dropped to about 21 percent from a high of 27 percent in 1984. “Retailers are working on smaller and smaller margins, so we can see the pressure that is put on converters,” he states. “This is not likely to change.”

Resin prices, however, are poised to change.

POLYOLEFINS: RECOVERY BEGINS IN Q1

Robert Bauman, vice-president of Nexant Chem Systems Inc., noted that the Sept. 11 terrorist actions will have a negative impact on the polyolefins business in the short term. The general feeling in the industry, he says, was that November orders would be down, as customers work off any excess ordered in September and October. December he described as a “real unknown.” He expects a significant recovery in sales volumes may not occur until the end of the first quarter of 2002.

The good news is that once the economy recovers, Bauman believes that the polyolefins recovery will be strong. He points out that:

There is strong pent-up demand because it is the first time that North American demand growth has been negative for two years.

Sales upon recovery will be a combination of demand plus inventory rebuilding.

Following a period of market contraction, a sharp rebound in sales has historically occurred.

Nexant Chem Systems’ forecast is that polyolefins recovery will begin at the end of the first quarter of 2002, led by polyethylene. There will likely be a surge in sales in the second quarter as customers rebuild inventory and meet demand. “If the industry exerts some discipline,” Bauman says (with heavy emphasis on the “if”), “this could result in one or two price increases during the first few months of the surge.”

Strong pressure from large customers will probably erode some of the price increases in the last half of the year.

Polypropylene margins will not improve as much, since there is more severe overcapacity in this market. Prices and margins in this market are among the worst in history, reports Bauman.

Looking ahead, Bauman predicts demand growth for polyolefins will be 8 to 10 percent in 2003, reflecting a continuation of the economic recovery. The next global fly-up is forecast for 2004.

Even with recovery, some important issues remain for the North American polyolefins industry. “Displacement of U.S. resin exports by Asian and Middle Eastern producers will intensify as new plants start up,” notes Bauman. As well, “fabricated products imports (such as retail bags and film) will increase and displace domestic production.”

SINGLE SITE CATALYSTS PROMISE HIGH GROWTH

Also on the subject of polyolefins, Chris Gick, director, industry dynamics for NOVA Chemicals Corp., spoke of technical developments in polyethylene. He noted that single-site catalyst (SSC) developments will drive LLDPE growth to higher levels than would ever have been achieved with conventional resins alone.

According to Gick, North American demand for SSC polyethylene was about 1 billion lb. in 2000. He cited several sources that set their forecasts for somewhere between 2 and 3 million lb. by 2005.

He also noted that SSC LLDPE is taking a larger share of the total LLDPE market. The annual growth rate of SSC LLDPE is 20 percent through to 2005, while the growth rate for LLDPE (without SSC grades included) is only 7.7 percent. With the advent of so-called second-generation SSC grades which are easier to process, the market share of SSC LLDPE could grow at an even faster rate, says Gick.

NOVA will be introducing an easier-processing SSC resin, called Advanced Sclairtech, in the first quarter of next year.

OVERCAPACITY STILL PLAGUES POLYSTRYENE

The economics of polystyrene production are bleak, says Alex Lidback of Chemical Marketing Associates Inc. Net price, production costs and net margin are all expected to bottom out in 2002. Operating rate for polystyrene producers is less than 80 percent currently, and is likely to remain there through 2002 and into 2003. On a total cost basis, margins are non-existent, says Lidback.

Once economic recovery is underway, polystyrene is not expected to experience the “pent-up” demand forecast for other resins.

“The electronics side of the market has been hammered by the shift to offshore production coupled with the economic downturn,” he explains. Electronics/appliance applications had an average annual “growth” rate of -6.1 percent between 1996 and 2001. The declining AAGR was expected to slow to -3.1 percent from 2001 to 2006. Packaging applications (single-use) had an AAGR of 0.8 percent from 1996 to 2001, but will experience stronger growth of 3.4 percent from 2001 to 2006, according to CMAI. Other applications will hold steady at about 2.3 percent growth.

Thus, any movement of polystyrene prices next year will have more to do with monomer cost and monomer supply than with PS supply and demand.

For ABS, Lidback predicts 4.7 percent AAGR between 2001 and 2006 on a global basis, with capacity growing at less than that rate, so operating rates will increase. North American demand for ABS slightly outstrips capacity, but operating rates will continue to be less than 80 percent through to 2005.

PVC SET FOR EARLIEST RECOVERY

The dot-com free-fall, economic downturn and other unforeseen events in 2001 left many of the return speakers to this annual conference beginning their presentation with an explanation of why last year’s forecasts didn’t pan out.

That was the situation for David Harris of Innua Petrochem Ltd. In October 2000 he told the Resin Outlook conference PVC demand in 2001 would exceed production and that demand for vinyl chloride monomer would exceed production.

“Well”, says Harris, “that didn’t happen. The bubble burst in 2001. Stock markets collapsed. Consumer confidence was down. Buyers stopped buying at all levels. Housing and automotive markets slowed. Major technology projects, such as fibre optic cabling, disappeared.”

The technology market in particular came to a dramatic halt, going from boom to bust overnight, says Harris. This had a direct affect on demand for PVC.

Because PVC is an “infrastructure” product, Harris feels it has bottomed out and that producers will see improved demand early in 2002. There is a cushion in the global supply/demand balance that should moderate price variations.

In North America over the past two years demand has dropped while production has continued to grow, which has forced a reduction in PVC operating rates. In 2001, prices dropped much more rapidly than demand, says Harris.

“This is a direct reflection of the fact that the export market is weak and sales opportunities are at prices so low that North American PVC producers do not want to sell at these levels. Thus the best option has been to cut domestic prices.

“We are near the bottom on pricing; producers really have no further to go in reducing prices. If they cannot sustain domestic prices a
bove US$0.20 per pound … then we will certainly see some plant shutdowns during the winter months.”

Harris predicts that 2002 will be a constrained year with overall demand about the same as 2001. “Net net benchmark domestic price will peak at US$0.30/lb in June 2002 and hold that price through the third quarter, before settling back towards the US$0.25/lb level by year end.”