Resin Outlook 2007: No Pricing Relief in Sight

Volatile energy prices, mergers and acquisitions of chemical companies, the rising Canadian dollar, and overseas pressures, all against a constant backdrop of rising oil prices, will conspire to keep resin prices high in 2007.

At Canadian Plastics ‘ Resin Outlook Conference on October 4, Derek Holt, assistant chief economist with The Royal Bank of Canada in Toronto, identified China as a key factor in determining the shape of the resin industry for the near future.

“The Chinese economy grows by 10 per cent every year, a rate that has allowed it to displace Japan as the world’s fastest growing economy”, he said.

Thus, China’s increasing need to manufacture more resin domestically, combined with its resin importing and exporting patterns, will play a fundamental role in determining global resin prices, Holt explained.

The second key factor shaping the resin industry, Holt noted, is the global price of crude oil, which will continue to rise in 2007. This piece of news isn’t all bad, Holt said, since high oil prices benefit Canada’s Western provinces, particularly Alberta, which is flourishing as a result of the rush to develop its extensive oil fields. On the other hand, he continued, Alberta’s economic rise comes mainly at the expense of Central Canada — especially Ontario, which has an economy that grew by only 1.5 per cent in the first half of 2006.

Holt also predicted slight fallings off in real gross domestic product (GDP) growth for both Canada and the U.S. in 2007.

POLYETHYLENE: STABLE DEMAND PROJECTED THROUGH 2007

“The potential for a high demand for polyethylene (PE) in 2007 is very strong on a global basis,” Chris Gick, director, industry dynamics at Moon Township, Pa.-based Nova Chemicals Corp., said. “Asia in general is expected to be the region of highest demand growth between now and 2015.”

Actual U.S. and Canadian domestic PE demand going forward will likely continue to grow throughout 2007 as well, Gick said. PE supply in North America had been limited in the second half of 2005 by hurricanes Katrina and Rita, Gick added, but in the year since, PE resin imports into North America have returned to a level close to the historical long-term average. “North American operating rates should remain within a range above 90 per cent, and the market will remain balanced and tight through 2007,” he noted.

Ethylene prices should increase through 2007, Gick said, because the average costs for ethylene feedstock materials such as ethane and naphtha in the last twelve months are up 150 per cent and 240 per cent respectively when compared to 1990 prices.

“In 2007, there should also be a slight increase in demand for ethylene, but this will not exceed supply,” Gick said. “Only a significant recession could change this supply and demand forecast.”

Gick identified Asia as the region of highest demand growth for PE.

POLYPROPYLENE: HIGH GLOBAL DEMAND, LOW INVENTORIES TO BOOST PP PRICES

According to Robert Bauman, vice president of White Plains, N.Y.-based Nextant ChemSystems Inc., the operating rates for olefins and polyolefins (PO) are currently high, with low inventories in most countries.

Bauman said that a “fly up”, projected to begin by the end of 2006 and peak in 2007, will result in high prices, operating rates and margins.

Additionally, a lack of new capacity in 2007 and 2008, caused by expected construction delays in the Middle East and China, will keep operating rates and materials prices high. Then in 2009, Bauman continued, a downturn is projected to begin, based on the large increment of new capacity expected to start up. More profit will be taken in from olefins than from polyolefins from the fourth quarter 2006 through to 2008, he said.

The global demand for polypropylene (PP) reached an estimated 65 million tons in 2005, Bauman said, a demand that will show no sign of abating in 2006 and 2007, with operating rates projected to be at 90 per cent. The global demand for PP will grow by about six per cent in the next year, he continued, with China remaining the largest importer. China’s projected demand for PP will grow to reach 50 per cent of all Asian demand by 2010, Bauman said, and it will remain the largest and most competitive export market.

“The Middle East is projected to become the major supplier of PP in the next few years,” he explained. “There are no new PP plants under construction or even announced in the United States, due to high feedstock costs.”

North America’s relative stagnancy regarding PP production will actually transform it into a net importer between 2006 and 2010, with the Middle East as the most likely supplier, Bauman suggested.

POLYVINL CHLORIDE: HIGH ENERGY COSTS TO KEEP PVC PRICES UP

Escalating energy costs are to blame for the high prices that processors are paying for polyvinyl chloride (PVC), Steve Brien, global practice leader, Chemical Marketing Associates Inc., in Houston, Tex., said.

Moving into 2007, energy costs are expected to climb, he noted, meaning the cost of PVC is projected to increase to about US$0.60 per pound (lb.).

But demand for PVC in North America is expected to decrease, Brien noted, reducing focus on export markets for PVC resins. “As PVC growth slows down, due to overseas pressures such as the importing of finished consumer goods — which is here to stay — the construction market will set PVC demand in North America,” Brien explained.

Trends in world PVC capacity are also changing, Brien noted. In 1980, for example, Asia accounted for 21 per cent of the total global capacity of 36 million metric tons for PVC; by 2005, that figure had shot up to 49 per cent, a trend that Brien expects to hold until at least 2010.

“Also, margins for PVC should remain higher in the downturn, 2008 and 2009,” he said.

STYRENICS: PS PRICES TO REMAIN HIGH, VOLATILE

Prices for polystyrene (PS) are predicted to remain high and volatile throughout 2007, according to Peter Feng, director of styrenics at Chemical Marketing Associates Inc.

The markets for PS are growing slowly in North America and Western Europe, while the Chinese market is growing quickly, Feng noted. However, PS has been squeezed out of the marketing in some areas, as some of its applications have become obsolete. “Technology changes have hurt parts of the PS industry,” he explained. “Very few companies are making VHS tapes, for example, or cassettes, both of which used PS. Also, a lot of the new technical equipment is small, and uses less PS.”

The cost of PS, however, is heavily influenced by the monomers used to produce it. “The price of styrene should move up and down with that of raw materials. Styrene prices, due largely to benzene, ethylene, crude oil and natural gas, are pushing derivative prices,” Feng explained. Currently, there is an overcapacity of styrene, and demand is slow, he noted, but the price of benzene reached a record high of US$4 per gallon in October 2006, and at present, benzene supply is limited in North America, but imports are likely to increase, easing price pressures in fourth quarter 2006.

NYLON: PRICING FEELS LINGERING EFFECTS FROM KATRINA, RITA

New and exciting applications, particularly in automotive field, are boosting nylon’s use globally, Joseph Barnes, product manager, nylon 6, at BASF in Wynadotte, Mich., said. Moving into 2007, the resin’s price will come under direct pressure from a variety of sources, he continued, primarily the rising prices of oil and natural gas. “The price of natural gas broke US$12/Mmbtu [British thermal units] in October 2005, and the price of oil broke US$75 per barrel in July 2006,” Barnes noted.

Nylon pricing, however, still hasn’t fully recovered from the aftermath of 2005’s hurricanes Katrina and Rita. The material was placed on allocation following the devastation, and supply still hasn’t recovered; nor have inventory levels returned to pre-hurricane volumes.

“In
the near term, increased feedstock and additive costs, combined with supply disruptions and increasing global demand, will put pressure on nylon margins and pricing, driving up the price,” Barnes said. In the medium term, he continued, projected lower feedstock and energy costs, combined with increasing capacity, will allow nylon pricing to stabilize back to the current range of approximately US$0.70 per lb. “And in the long term, nylon will align with feedstock and energy costs as global supply and demand remains in balance,” Barnes added.

HOW TO NEGOTIATE THE BEST DEAL FOR YOUR RESINS

With resin prices remaining high and projected to increase in both the near- and long-term, plastics processors need to brush up on their price negotiation skills. John Denzer, managing partner at Resin Technology Inc., in Hickory, N.C., offers tips on how to negotiate the lowest price possible.

1 Communicate: Let suppliers know where your business is going and what price changes you want to make.

2 Set clear pricing goals: Apply sourcing goals and sourcing strategies in order to know, and realize, your ‘best price’.

3 Set clear sourcing goals: Ensure competitive pricing and volume flow by creating multiple sources options with the right suppliers for your business.

4 Have more than one resin source: Vary your supplier base and make the most of contract, spot, secondary and/or import price opportunities. Develop short-term tactical plans and a long-term strategy to achieve your sourcing goals.

5 Optimize timing of buys: Know when to buy to make the most of your purchasing dollar.

6 Know your inventory: The volume that you buy, store and utilize is a significant factor in production costs.

7 Insist on firm contracts/agreements: Develop the contract structure with each supplier so as to position your business to take advantage of what the market dictates to you.

8 Be flexible between spot and contract buying: Develop an operational plan that makes the most of long-term strategic resin plans. Spot buying allows you to take advantage of sudden price changes.

9 Have 30, 60, 90-Day purchasing strategies: Develop tactical plans for each period of time in order to maximize savings in the current market environment.