Resin Outlook 2008: Calmer Waters

Resin prices have been unnaturally distorted over the past few years by the one-two punches of China and Hurricane Katrina. In 2005, Katrina’s swath of destruction curtailed natural gas supply and severely affected natural gas refineries; skyrocketing demand from China, meanwhile, has eaten up world-wide capacity in recent years and led major chemical companies to build new facilities in that country rather than in North America.

But as the floodwaters of Katrina continue to recede, they leave some good news for plastics processors in their wake: prices will fall for some — although not all — of the commodity and engineering major resins during 2008 and beyond, according to industry analysts speaking at the Canadian Plastics Resin Outlook Conference in October.

STRONG ECONOMY FORECAST FOR 2008

According to Derek Holt, assistant chief economist with the Royal Bank of Canada in Toronto, a forecasted real Gross Domestic Product (GDP) growth of 5.5 per cent globally is a good backdrop for the plastics manufacturing sector in North America.

Turning to the U.S., Holt forecasts real GDP to be 2.5 per cent for 2008. Holt expects the U.S. to avoid a recession in 2008, but predicts a one to two per cent slowdown in the overall pace of U.S. economic growth over the course of the next year. He also noted that the U.S. housing market has dropped almost 20 per cent in the past two years, and should continue its decline throughout 2008.

Taking a closer look at Canada, Holt said that the Canadian economy, which has been overshooting its fundamental drivers in the past few months, appears poised to return to a tightening path during the next year. The Canadian dollar, above parity with U.S. currency for the first time in decades, is expected to fall almost 10 per cent in 2008, to US$0.95, he said. Real GDP growth of 2.8 per cent is forecast for Canada in 2008.

“Home construction in Canada is up slightly from 2006 and will continue to grow in 2008, which is a real departure from the situation south of the border,” Holt said.

On the downside, Holt noted a “crushing corporate tax burden” hampering economic growth in several Canadian provinces, Ontario and Quebec chief among them.

According to Holt, automobile production in Canada will fall slightly in 2008 before picking up in 2009 and 2010.

POLYOLEFINS

Polypropylene (PP) is becoming one of the most popular of the resins, according to Craig Blizzard, strategy director with Basell Polyolefins North America in Wilmington, Del. “Presently, PP is being used in appliances, automotive components, diapers, food packaging, housewares, medical applications and more,” he said. Blizzard predicted a strong global demand for PP in the coming year, and identified key factors affecting North American demand as the importation of components and finished products made from PP, reduction in exports of components and finished products, and ongoing success of efforts in North America to produce light-weight products made of PP.

Shannon Schneider, a polymer consultant with Houston, Tex.-based Nextant Chemsystems, predicted a period of strong producer profitability followed by a severe downturn in both PP and polyethylene (PE). PE prices have not been as strong as export prices but the trend is upwards, she said. Also, PP prices have also not been as strong but have the same upward trend. U.S. domestic PP price has risen to roughly US$0.67/lb. by the beginning of 2007. At present, U.S. domestic PE prices are at approximately US$0.55 to $0.65 per/lb.

Schneider also forecast a downturn to begin in 2009, as too much new capacity will be starting up, with bottom years projected for 2011 and 2012. “The lack of new polyolefin capacity in 2008 will keep operating rates and prices high, and the peak prices are projected for mid-2008,” she said. “We expect that polyolefins will change to a buyer’s market by 2009,” she concluded. “Polyolefins will lead the flyup projected to begin at the end of this year, with global operating rates reaching about 91 per cent by early 2008.”

Schneider noted that the PE trade remains highly regionalized, with virtually no importation of PE into North America from either the Middle East or Europe at present. North America could become a net importer of PP by 2009, she continued, creating a possible opening for Latin American exporters, who will have an increasing PE surplus during the period 2008 to 2013. Large HDPE and LLDPE deficits are projected in North America in the coming years unless substantial new capacity is achieved, she concluded.

STYRENICS

The net price for polystyrene (PS) reached a high of almost US$0.80 per/lb. in 2007, and should fall to approximately US$0.65 by mid-2008, according to Peter Feng, director of styrenics with Chemical Market Associates Inc., in Houston, Tex. Feng noted a decrease in demand for PS in 2007, due to high and volatile prices, substitution by PP and polyethylene terephthalate (PET), changes in technology and fashion that have rendered PS somewhat out of date, and an increase in recycling. “Demand should continue to suffer into 2008, with the possibility of more capacity reductions to come,” he said.

Turning to styrene, Feng noted that demand also slowed in 2007, due to high and volatile prices. Supply will continue to grow in 2008, primarily in the Middle East and Asia, he said, while exports have shifted from North America to the Middle East.

For benzene and ethylene, Feng predicted that prices would remain high in 2008 due to limited domestic supply; in the longer term, supply will increase, he said.

The key determinant for much of resin pricing lies in benzene, an important precursor to styrenics, nylon and polycarbonate (PC). Feng and other industry analysts agreed that benzene prices would remain high in 2008, in part because domestic supply is limited. In the long term, regulatory changes will increase the North American supply of benzene, Feng concluded.

PET

As with PP, PET is fast becoming another hotly desired manufacturing resin, according to Jose Rangel, business development manager for PET with DeWitt & Company Inc., in Houston, Tex. “There is strong growth for PET both in North America and globally in 2008, led primarily by the popularity of PET bottles,” he said.

According to Rangel, the price of PET will climb to approximately US$0.66 per/lb. in 2008 and 2009, before dropping to US$0.61 by 2012 – fluctuations caused by volatile raw material and energy costs. An element of pricing stability could be added by the maturing of PET markets in the next few years, he suggested.

Rangel also predicted significant capacity build-up in North America, in the range of approximately four million tons by 2012. “The supply and demand for PET in North America is expected to grow at 12 per cent annually in the next five years,” he said. “Operating should remain at the 80 per cent range during this same period.”

NYLON

Among the precursors to nylon are crude oil, natural gas, benzene, cyclohexane and PP. The price of benzene, in particular, has always been a determining factor in nylon pricing. According to George Martin, deputy bureau chief with Houston, Tex.-based ICIS, benzene settled at US$3.49 per gallon in October 2007, which is lower than the US$3.80 per gallon that had been sought by producers.

Martin predicted that pricing trends for nylon will remain unchanged into 2008 for a variety of reasons: migration of fibre demand to Asia; lower demand for nylon in the U.S. due to declines in the housing and automotive markets; lower consumer disposable income; and reduction in feedstock demand in China.

The housing woes in particular are weighing on nylon consumption, Martin said. “Domestic demand is not very good at this time,” he said. “Going into 2008, domestic producers will be more dependent on exports in order to get material.”

POLYCARBONATE

The price of PC in
North America is expected to fall during the next four years, according to Paul Blanchard, a senior consultant at Chemical Market Associates Inc. At present, PC costs approximately US$3,300 per ton, Blanchard said. The price should decline to as low as US$2,600 per ton by 2011, before beginning to nudge upwards again. “PC capacity will outpace growth until the end of the decade,” he said. “Operating rates will be low, which will allow for greater competition for pricing.”

Globally, PC manufacturing is increasing, Blanchard said, despite occasional slowdowns. “PC producers are looking for the next large volume application and it’s out there somewhere,” he said. “For purchasers, meanwhile, the next few years may be a good time to buy PC.”

Demand for PC still outpaces supply in China, and that country is expected to remain a net PC importer until at least the end of the decade, Blanchard concluded.

THE EXPERTS PREDICT:

Polyolefins:

Strong producer profitability through 2008. Lack of new capacity in 2008 will keep operating rates and prices high, with peak prices projected for the middle of the year. Downturn projected to begin in 2009, at which time polyolefins will change to a buyer’s market.

Shannon Schneider, Nextant Chemsystems

Styrenics:

Demand for polystyrene continues to suffer. For styrene, demand will also slow due to high prices. For benzene and ethylene, prices will remain high in short term, but decrease in the long term as supply increases.

Peter Feng, Chemical Market Associates Inc.

PET:

Raw material and energy volatility will continue to keep price high in the short term. Maturing of PET markets, however, could provide eventual price reduction and stability.

Jose Rangel, DeWitt & Company Inc.

Nylon:

Pricing trend will be mostly flat into 2008, due to such factors as migration of fibre demand to Asia, U.S. housing market declining, feedstock demand in China off.

George Martin, ICIS

Polycarbonate:

Capacity will outpace demand until the end of the decade, causing North American prices to fall over the next few years before climbing again.

Paul Blanchard, Chemical Market Associates Inc.

How to negotiate the best deal for your resins

Resin Technology Inc., of Hickory, N.C., offers tips on getting the lowest possible price.

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 source 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.

Source: Resin Technology Inc.