RESIN OUTLOOK 2006: High prices, shortages to continue

Plastics processors are not going to experience much relief from high resin prices in 2006. That was the message, heard loud and clear, at Canadian Plastics’ annual Resin Outlook conference in October.

Hurricanes Katrina and Rita curtailed natural gas supply and severely affected not only natural gas refineries, but also facilities producing monomers and chemicals used to manufacture such monomers as ethylene, styrene and benzene.

Additionally, skyrocketing demand for materials from China ate up worldwide capacity, leading major chemical companies to build new facilities in China and neighbouring countries, rather than to build those facilities in North America. China is even purchasing plastic waste from other countries and using the regrind to offset high materials costs.

However, part of the drastic jump in the cost of natural gas and crude after Hurricane Rita was due to what Peter Drake, deputy chief economist with TD Financial in Toronto called a “fear factor.”

Despite the damage caused by the storms to refineries and oil and gas platforms, economists said the price of crude and natural gas should not have been as expensive as they were, he noted.

“You can make a reasonable assumption that the fear factor will disappear, especially when we’re looking at a certain slowing of economic growth,” Drake said.

That’s because high natural gas and rising interest rates will restrain economic growth, he said.

In Canada, however, high oil prices continue to be good for such provinces as Alberta that has seen a booming economy come out of the rush to develop the province’s extensive oil reserves. But, high oil prices have been bad for Ontario that relies, instead, on manufacturing to drive its economy and must purchase large quantities of oil and gas from western Canada to drive its economic engine.

However, the high prices seen in September and October might be a blessing in disguise.

“History has shown that high prices will do two things: it will make users more energy efficient, and it will free up supply,” Drake said. “But it won’t happen overnight.”

Monomers, Monomers, Monomers

The basic six (ethylene, propylene, butadiene, benzene, toluene, xylene) and their primary derivatives (PE, PP, PS, elastomers) enjoyed competitive advantage in the 1990s as a result of low cost of natural gas in North America, said Peter Killen, senior advisor with Muse & Stancil, Co. in Houston, Tx.

Natural gas prices have gone up because suppliers of natural gas had to focus on crude where they could make more money. Also, more consumers and companies turned to natural gas because its early low cost, increasing demand and thereby driving up costs.

Monomers depend on natural gas and crude, so when prices for those materials go up, so the prices for monomers and the resulting polymers.

PET/Polyester

Hurricanes Katrina and Rita had a huge effect on the supply chain for polyethylene terephthalate, especially paraxylene (PX) and ethylene glycol (MG), according to Alex Lidback, global practices leader, aromatics at Chemical Marketing Associates Inc. in Houston, Tx.

The storms upset about 63 per cent of North America’s supply of PX and 60 per cent of the supply of glycol, one of the building blocks of MG. In October 2005, production of PET was below 80 per cent, Killen said. Merchant MEG sellers were at 50 to 60 per cent allocations for October and allocations for PX were around 75 per cent or less. At the time of the conference only 21 per cent of North America’s PX facilities were running.

Shortages will continue until all the plants are back up and running and issues, such as transportation — many roads were destroyed in the hurricanes — and workers, whose homes were also destroyed, can return to work.

In 2005, worldwide PET capacity reached 14.7 million metric tons, and demand topped out at 11.6 million metric tons.

Worldwide there is a 27 per cent excess capacity for PET, and there will be an influx in about a million tons of PET capacity before 2009, with 270 tons going back into the U.S. market.

When tariffs were lifted in April, PET imports started to increase again, but the current high prices will likely drive more consumers to buy PET from China. By 2007, Chemical Marketing Associates predicts North America will import more PET than it exports.

In spring 2006, Chemical Marketing Associates is projecting material costs to calm down, but prices will still exceed those from August 2005. Although there won’t be excess inventory of PET, there should still be enough to fill demand, he said.

By fall and winter 2006, raw materials costs will decline even more and PET supply will be ample or excessive so costs will lower significantly.

Styrenics

Styrene prices, large due to benzene, ethylene and natural gas prices are pushing up the cost of derivatives like polystyrene (PS), according to Alex Lidback, global practices leader, aromatics at Chemical Marketing Associates Inc.

And with no relief in sight for the cost of PS’ parent chemicals, and with prices still too high to drive increased demand, 2006 will not be a great year for PS, Lidback said.

China had been leading worldwide growth in the PS market, as demand in North America and Western Europe was waning, but now China is turning to other methods to offset the cost of materials.

“In China, polystyrene scrap and regrind, in terms of imports, has grown dramatically this year,” Lidback said. “They’re blending major regrind into their consumption. Their growth rate is actually over five per cent, but most of that growth is a result of regrind.”

Additionally, the PS price in China is really low, he said, within US$40 to US$50 of the styrene monomer. The concern is that PS resin and eventually goods from PS will start making their way from China to North America.

When polystyrene prices rise, customers turn to other materials such as polypropylene (PP), polyethylene terephthalate (PET) and paper, he noted.

In 2005, North American demand for PS slightly exceeded the production of the polymer, but there was still extra capacity available for production to increase. In 2005, the operating rate was only 78 per cent the capacity. Lidback projects this to increase to 80 per cent in 2006, reaching just over 84 per cent in 2010.

Ethylene, one of the monomers used to produce polystyrene, had 85 per cent of its capacity affected by Hurricanes Katrina and Rita. About 19 per cent of styrene capacity was still offline at the time of the conference.

That’s what led PS producers to declare force majeure — there simply were not enough monomers available to produce PS.

Polypropylene

Polypropylene supply tightened in 2005 because of increased demand from China’s booming economy and its lack of PP capacity said Robert J. Bauman, vice-president, polymers, with Nexant ChemSystems in San Francisco, Calif.

Very little new capacity will come online in 2006, keeping supply tight, especially in light of the tight supply of propylene which will limit the ability to start up new PP plants, he added.

Only five per cent of the North American PP capacity was affected by hurricanes Katrina and Rita. Although no PP plants were affected, eight refineries in the area were but Bauman said they should be back online by the end of 2005.

This downturn will continue into 2009 and early 2010 when PP capacity will expand, mostly in feedstock-advantaged countries.

In 2006 and 2007, plastics process can expect high prices for polypropylene (PP), with a fly up period, peaking in 2006 with some subsequent decline due to bottlenecking and inventory depletion, he noted.

Between 2008 and 2010, Bauman said some price relief can be expected as new capacity comes on stream – but not to expect very low prices because there may not be enough capacity due to constraints on propylene.

Polycarbonate

High benzen
e prices have caused polycarbonate prices to reach historic highs, said Ben Smith, director of phenol studies, Chemical Marketing Associates Inc. However, phenol prices were also high, further adding to cost increases.

As with pretty much every other polymer, China’s economy is driving worldwide demand for PC. Margins hit lows in 2004 but the higher costs of propylene, crude oil, and the destruction wrought by hurricanes Katrina and Rita impacting the supply and cost of PC.

However, Bayer added more capacity in 2005 which helped increase supply.

Canada makes up only 10 per cent of North America’s demand for PC, with the U.S. comprising the bulk at 75 per cent and Mexico with 15 per cent. North America’s total domestic demand reaches 508,000 metric tons.

Worldwide, North America makes up only 19 per cent of PC demand while China makes up a whopping 25 per cent. Total worldwide demand tops out at 2.6 million metric tons, with just slightly less than half of that coming from Asia.

If worldwide demand continues to grow, capacity will need to be added to stave off a shortage, Smith noted.

PVC

Moving into 2008, North America and Western Europe are going to lose out on marketshare of polyvinyl chloride (PVC) to China, according to Jim Seidewand at Resin Technology, LLC. in South Easton, Mass.

“It’s pretty dramatic, what’s going on,” he said. “China is doubling its PVC capacity between 2004 and 2008. Almost 90 per cent (of the world’s) new PVC capacity is there.”

In the early part of the decade, accessing one of the building blocks of PVC, VCM curtailed production of PVC. Now, the barrier involves the high cost of natural gas and oil.

In 2006, PVC supply could tighten in North America as Dow shuts down old, inefficient, plants in Alberta and Texas, and shortages in other feedstocks, like ethylene.

China however, is increasing production of VCM using the outdated, environmentally unsafe “Carbide Process,” and eventually, PVC produced by this method will dominate, he said.

But the crux of the matter is — PVC prices will remain high.