Resin Outlook 2005: No Relief From High Prices

Resin manufacturers who have to justify price increases tend to get defensive. In past years all fingers have pointed at China, Wal-Mart, natural gas prices. This year, all fingers point farther up the supply chain to benzene, according to industry analysts speaking at the Canadian Plastics Resin Outlook Conference in October. Benzene is an important precursor to styrenics, nylon and polycarbonate. Benzene is also a precursor to many other petrochemical-based products, which plays a role in its elevated pricing. Gregory Masica of BASF Corp. explains that petrochemical companies have a choice whether to direct toulene toward the gasoline stream for blending, or to direct it toward other products, where it can be converted to benzene and xylene for plastics, urethanes and pesticides.

In 2001, negative demand growth and poor economics resulted in benzene units being shut down, and poor economics delayed future expansions, says Howard Rappaport, Chemical Market Associates Inc. During 2003, continued demand growth absorbed even more benzene capacity, with only minor capacity additions globally. In 2004, excessive benzene scheduled outages coupled with a series of operating problems tightened the supply/demand balance even further.

The result is that demand and pricing for benzene are much higher than usual. The cost of benzene in the summer of 2004 was almost quadruple its traditional cost. In addition, demand may outstrip supply during 2005, according to Ben Smith of Chemical Market Associates Inc.

STRONG ECONOMY FORECAST FOR ’05

The good news is that the global recovery is still going strong, according to Peter Drake, deputy chief economist with TD Canada Trust Financial Group. He notes that the global economy is poised to experience its best back-to-back performance in 2004-2005 since the late 1970s. While non-Japan Asia will be the global growth leader, Latin America is also recovering, Japan is in a cyclical rebound and the U.S. economic slowdown is temporary, he explains.

Drake expects the U.S. economy will gain momentum, with real Gross Domestic Product (GDP) forecast at 4.3% for 2004, 3.5% for 2005 and 3.2% for 2006.

He also predicts that the U.S. Federal Reserve will raise interest rates at a measured pace. “There’s no need to panic and anguish over a possible rise in interest rates. I think rates will achieve a neutral level by the end of 2006,” he explains. The U.S. Federal Reserve Funds Rate reached a 47-year low during the last half of 2003 and the first half of 2004. Drake expects it will climb steadily to between 4 and 5% by 2007.

Taking a closer look at Canada, Drake points out that service industries’ growth had been keeping pace with that of manufacturing industries for several years, but services will take the lead in 2005 with 3.7% growth.

He characterizes the Canadian economy as solid, but not booming. Real GDP growth of 2.8% in 2004, 3.5% in 2005 and 3.2% in 2006 is forecast.

Drake has praise for Canadian manufacturers, who weathered the quick rise in currency values and achieved a near-record capacity utilization rate of about 86% by mid-2004. “It’s remarkable in light of what’s happened with the Canadian dollar. I have to give them credit–there’s been a lot of scrambling to deal with the currency situation.”

Mercifully, Drake predicts more stability for the Canadian dollar through 2005 and 2006. The U.S. dollar, he believes, had become overvalued, and will likely fall another 5 to 8%.

POLYOLEFINS

Global consumption of polyolefins hit the 100 million tonne mark for the first time in 2004. Linear-low density polyethylene has taken over from polypropylene as the growth leader in this group, with an expected growth rate of 7% for the the 2003 to 2008 period, reports David Durand, director, global research, consulting with Townsend’s Polymer Services & Information. Polypropylene has dropped to a growth rate of 6.5%, from the 8% rate it posted in the previous five-year span.

Given the near-term supply tightness for both polyethylene and polypropylene, Durand expects announced price increases to stick, and prices to remain high through 2005. “We have two factors–feedstock costs and producer margins–both moving up. It could easily be 2006 before you see any relief on pricing.”

Resin producer margins have been squeezed by high feedstock costs. Durand points out that U.S. olefin monomer prices in 2004 were the highest seen in years. Ethylene particularly is characterized by strong demand and tight supply.

The global consumption pattern for polyolefins is shifting toward higher growth rates in the developing regions. Durand’s forecast for 2003 to 2008 puts polyethylene growth in North America, Europe and Japan at about 3%, while in Latin America, Asia-Pacific, Mideast/Africa, and Eastern Europe it is about 7%. The volume growth will be about 17 million tonnes over the five-year span. The situation is similar for polypropylene.

Looking at capacity utilization, Durand notes that polypropylene is “running very tight right now. We need 1.3 million tonnes of additional capacity by 2008 to keep capacity utilization from rising above 95%.” Similarly in the HDPE/LLDPE segment, 1.8 million additional tonnes are needed to keep utilization rates below 90%. At the time of the conference in October, announced capacity additions did not meet those targets. “We’re currently in an upswing in the business cycle, and normally producers would add capacity, but they are being extremely cautious this time,” explains Durand.

STYRENICS

Benzene, a precursor to styrene, is at a contract price twice its historical norm, says Howard Rappaport of Chemcial Market Associates Inc. Only limited capacity additions are on the books for 2005, suggesting that the market will remain tight, barring a major reduction in demand.

Globally, there is excess capacity in polystyrene, but a tight supply situation upstream, at the benzene and styrene stages, creates constraints. Styrene prices, largely due to benzene, are pushing polystyrene prices much, much higher, says Rappaport. However, the abundant polystyrene capacity continues to hurt producer margins.

On the demand side, China’s growth in demand far outstrips that of any other region. Interestingly, almost half of northeast Asia’s polystyrene is used for electronics/appliances. Only 20% is used for single-use packaging. In the U.S. and Canada the reverse is true. Only 9% is destined for electrical/electronics applications, while 58% was consumed as single-use packaging.

NYLON

Among the precursors to nylon are crude oil, natural gas, benzene, cyclohexane and propylene. Commenting on the price of each material in turn, Gergory M. Masica, product manager, nylon products, BASF Corp., states these streams are all at “historically high levels.”

Masica estimates that current raw materials costs have increased the production cost of nylon by US $0.30/lb.

The natural consequence is that nylon prices have been rising, and may continue to rise in 2005. “It’s all dependent on benzene,” says Masica. “If that (price) does not decline, further price increases could be anticipated.”

There are other factors influencing the nylon market as well. Heightened demand for carpet and textile fibre lessens the available supply for plastics. The weaker U.S. dollar has made imports from Eastern Europe less attractive, and Asian growth means there is higher domestic demand and fewer imports to the U.S. As well, post-industrial scrap resin availability is decreasing as some producers consume scrap and off-grade materials “in-house”.

POLYCARBONATE

In addition to the high costs of benzene and crude oil, polycarbonate has the burden of constrained phenol supply. Ben Smith of Chemical Market Associates notes that a lack of phenol in some cases has limited polycarbonate production. He also predicts feedstock availability problems for benzene during 2005, and for propyl
ene, particularly in Asia.

Producer margins have been at an all-time low for the last few months, but this may improve once pricing for benzene and crude oil retreats.

Operating rates are tightening, and the number of players in this market is increasing. Looking at planned capacity increases, none are planned for North America from 2004 forward. The vast majority of new capacity will come onstream in Asia.

Smith explains that 1999-2003 was a period of overcapacity, but now “operating rates are going to tighten, which should provide producers an opportunity to improve margins.”

China will usurp North America as the major consumer of polycarbonate in 2004, accounting for 25% of global consumption. By 2009, Smith says, Asia will consume more polycarbonate than North America and Western Europe combined.

Polycarbonate has a variety of uses, with optical media being the single largest end market, at 21%. Sheet/film and alloys are the next largest markets, followed by housewares, sports and medical markets.

The growth of global optical media production has slowed somewhat from its tremendous flurry in the late ’90s. Smith says optical media production had an average annual growth rate of 23% from 1997 to 2001. That slows to 9% for the 2001 to 2006 period.

PVC

The price of natural gas, which is used to make ethylene dichloride, the precursor of vinyl chloride monomer (VCM), has risen 300% since 1999. This factor, combined with a PVC supplier capacity utilization rate of above 95%, means PVC pricing will remain high, by historic standards, for 2005 and beyond, according to Terrence Hurley, president, Shawnee Chemical Co. and Shawnee Chemical Canada Ltd.

“The end of cheap gas meant the end of cheap domestic PVC and cheap exports to other countries,” says Hurley.

Also pushing PVC pricing up is high demand for the resin in China and at home. Hurley reported that in North America, 50% of PVC is used in construction, and PVC use has grown 50% faster than annual GDP growth since 2003. Hurley believes that pricing power will remain with PVC producers for the foreseeable future.

“VCM (capacity) is the real problem, as it doesn’t lend itself to incremental addition,” says Hurley. “It requires a billion-dollar investment and takes four years to install.”

If new VCM capacity is not added, Hurley says the industry could be headed for a worst-case scenario with demand outstripping supply within several years.

***

THE EXPERTS PREDICT:

Polypropylene and polyethylene: Relief from price increases by end of 2005 or into 2006. Two factors – feedstock prices and margins – both moving up. Foresee margin growth into early 2005, maybe up to 20 cents, plus feedstock supply issues. Limited capacity expansions announced to date.

– David Durand, Townsend’s Polymer Services & Information

Polystyrene: Prices will remain high for the next few months. Styrene prices, largely due to benzene, are pushing polystyrene prices much, much higher, plus margins are in terrible shape and producers are trying to push price increases through in leaps to regain margins.

– Howard Rappaport, Chemical Market Associates Inc.

PVC: Increased feedstock costs and high operating rates mean PVC will remain high for 2005 and beyond.

– Terrence Hurley, Shawnee Chemical Canada Ltd.

Nylon: No relief in sight. Independent sources project high sustained prices for nylon raw materials through 2005. Global demand is projected to remain high for raw material and nylon products such as engineering resins, textiles and fabrics.

– Gregory M. Masica, BASF Corp.

Polycarbonate: No relief in sight. Expect when operating rates improve next year that producers will be able to hold onto the prices they are charging today. Watch for prices not to decrease as quickly as raw material prices fall.

– Ben C. Smith, Chemical Market Associates Inc.