Resin Outlook 2010: After The Recession. A Buyer’s Market (Maybe)

You definitely don’t need us telling you that 2009 was a rough year. Heading into 2010, though, there might be a silver lining for resin buyers: suppliers with overcapacity of some of the major commodity and engineering resins forced to unload at low prices. With other resins, however, high energy costs and a weakening U.S. dollar will mean — what else? — rising prices. Which is which? Read on.

The 2009 Canadian Plastics Resin Outlook Conference was the first ever held during an economic recession — making it, by definition, a most unusual gathering.

The word “unusual” could describe the pricing forecast information presented by the conference speakers, too. We all know that the past year has played havoc with the manufacturing industry. Some of the speakers made it clear, though, that — depending on the resin being purchasing — buyers can take advantage of falling prices caused by substantial oversupply of commodity and engineering resins. For other materials, unfortunately, it’s business as usual, with rising energy costs and a falling U.S. dollar expected to keep prices high.

ECONOMIC BACKGROUND

If the world economy were a Western movie, the U.S. would definitely be wearing the black hat. The virtual collapse of the investment banking sector in America, centred in mortgage lending practices for the housing market that went spectacularly wrong, triggered a global credit crunch and deep global recession in 2009 — not to mention a 45 per cent plunge in the overall commodity index.

The good news for 2010, according to Patricia Mohr, an economic and commodity market specialist with The Scotiabank Group in Toronto, is that a recovery among the G7 nations will take place — and is, in fact, already under way. “The GDP in Germany and France started to rise again in the 2nd quarter of 2009, and we expect to see a ‘pop’ in U.S. economic activity in the 3rd quarter and three per cent economic growth in the U.S. in 2010,” she said. “Also, an economic turnaround is beginning in Canada, with 2.8 per cent economic growth expected in 2010.”

Great, but what does this mean for the price of commodities, including resins? There may be an upward pricing shift for some materials, Mohr said, spurred in large part by a weakening U.S. dollar. “Most commodities are traded in U.S. dollars, making it easier for commodity producers to raise prices in international markets as the U.S. dollar slides down.”

Mohr’s advice to the Canadian plastics industry? “Canadian processors need to plan on being cost competitive internationally with a currency at par with the U.S.,” she said.

With consumer spending on a slow rise, Mohr highlighted recoveries currently under way in the all-important plastics markets of auto manufacturing and home building. “There will be an upward shift in U.S. motor vehicle assemblies in 2010,” she said. “Inventories are currently very low, partly as a result of the ‘Cash for Clunkers’ program, and this will allow the assemblers to move their schedules forward.” Also, housing starts in the U.S., which plummeted to an abysmal 500,000 units in April 2009, should improve to 700,000 by mid-2010, she said. “Both of these developments are good news for the Canadian plastics industry.”

POLYOLEFINS

One of the most popular of today’s resins, polypropylene (PP) is used in appliances, automotive parts, diapers, food packaging, housewares and medical components. But according to Joe Congdon, director of global PP consulting with Townsend Solutions in Houston, Tex., global PP consumption is currently down 3.1 per cent, including down 8.4 per cent in the U.S. and a whopping 21 per cent in Canada between 2007 and 2008.

What happened? In a nutshell, oil speculation upset the market, Congdon said. “High oil prices worsened an already developing recession; speculative and derivative financial markets collapsed, and there were record oil price declines in the latter half of 2008,” he explained. “As a result, PP prices declined by 70 per cent during 2009, plant operating rates dropped below 70 per cent, and everyone reduced inventory.”

As North America comes out of the recession, Congdon predicted a period of rebalancing for propylene lasting between three to six months. “The propylene industry needs to shed some two billion lbs. of demand,” he said. “At the moment, there is ample polyethylene (PE) and PP supply in North America and slow growth due to PP product imports and ongoing converter flight.”

The good news: this excess supply had led to competitive pricing — at least for ethylene, which should remain below all regions except the Middle East. The price of propylene in North America is expected to remain above the global price throughout 2010, Congdon said, with large volume PP homopolymer trading at between US$0.55 to US$0.65 cents per lb. through to 2011.

For long term consumption of both PP and PE, Congdon forecast major changes for net trade balances between regions, with North America and Europe on target to become net importers by 2012.

STYRENICS

The key determinant for much of resin pricing lies in benzene, an important precursor to styrenics, nylon and polycarbonate (PC).

According to Esteban Sagel, director of polyolefins, North America, with Houston-based Chemical Market Associates Inc., the price of benzene shot up in 2009, reaching US$3.75 per barrel in August. Why? “The driver of the price upswing is supply constraint, brought about by higher energy prices, light feedstock cracking, refinery issues and trade pressures,” Sagel said. “As prices get out of hand, the level of imports rise.”

Sagel noted that there is currently an oversupply of styrene, with capacity growing beyond demand. “Globally, this oversup-ply is forecast to last throughout the value chain until at least 2014,” he said. “In North America, production is also forecast to run well below capacity until 2014.”

The reasons? Sagel described polystyrene (PS) as a product currently under siege. “The U.S. National Toxicology Program is considering adding PS to its list of carcinogens and several measures against the product in food packaging are being considered around the world.” Partly for this reason, there is a growing tendency for PS to be replaced by other materials.

Overall, Sagel noted, this trend is expected to depress margins, counteracting any price lift from increasing oil prices. Energy prices, however, are expected to keep styrenics prices elevated through 2010. Sagel forecast the price of benzene at just under US$1,000 per metric ton and styrene at approxi- mately US$1,200 per metric ton.

But the news for PS isn’t all bad. “I expect PP prices in North America to remain higher than in the past, resulting in the relative price of PS moving closer to parity with PP than ever before,” Sagel said. “This results in a better cost position for PS relative to other materials.” The price of PS should hover at approximately US$2,000 per metric tone throughout 2010, he concluded.

PET

The use of PET in the U.S. is under increasing constraints due to falling demand and lower pricing in Asia, according to Landon Feller, markets reporter with Houston-based ICIS. “PET purchasing was very slow in 2009, with isolated purchasing spikes only,” he said.

In common with several other resin types, there is currently an oversupply of PET in North America, caused in part by mild weather in the Gulf Coast that kept operations running high.

The good news for purchasers is that the seasonality of PET applications — used mostly in water or juice-based packaging — exerts a downward pressure on producers. So too does the fall of PET prices in Asia. “These pressures force North American vendors to sell at lower prices than they would like, so don’t be surprised if they prove willing to make significant concessions to shore up waffling customers in 2010,” Feller said. “We’re heading into a buyer’s market in North America. Chinese and North Korean dealers have large quantities
of resin that they would love to sell here for as low as US$0.48 per lb.” North American PET prices should remain lower at least into February 2010, he concluded. “Looking further ahead, and considering Asian volumes, US$0.52 per lb. import volumes can be expected until at least October 2010.”

The immediate future of PET applications in North America seems to read like a good news/ bad news story. “There is tremendous room for PET markets to grow, with new applications in food packaging, wine, teas and fruit juice,” Feller said. “As a result of the 2009 recession, however, the market growth remains near zero at present.”

In the longer term, though, the future of PET does indeed look bright, as the material’s cost advantages and technical advantages shield it from loss of market share, Feller said. “Business should improve faster for PET molders than for those dealing in other commodity plastics,” he explained. “Most of the lightweighting that can be done has been done by this point. New developments have been hampered by issues with barrier strength, limiting the extent to which PET content can be reduced.”

PVC

Production and sales of PVC resins hit a low point in December of 2008, according to Kevin Allen, associate editor at Houston-based Platts, and North American producers reduced output to the point that sales actually surpassed production. “Export sales ticked upward slightly in 2009, but were not significant enough to offset declines in domestic sales,” Allen said.

The primary factor affecting the PVC market throughout 2009 was the depressed construction and housing markets; and while U.S. housing starts are showing signs of recovery, Allen doesn’t expect PVC demand in North America to return to previous levels until unemployment and the threat of inflation subside.

What has this meant for PVC pricing? “Given the state of overall PVC demand in 2008 and 2009, U.S. producers have been relatively successful in passing through price increases,” Allen said. “Sellers were able to push through approximately US$0.12 worth of price hikes in the face of weak demand.”

Heading into 2010, Allen forecasted a return to more traditional patterns of PVC consumption. “Demand traditionally falls off in October and will likely remain soft throughout the remainder of 2009, with domestic PVC prices softening accordingly,” he explained. “Given the projected demand throughout the year, buyers will be looking for producers to give something back. Prices could drop between US$0.02 to US$0.04 per lb. by the end of this year.”

NYLON

The by-now familiar refrain of softening North American demand in 2009 applies to nylon as well, according to Greg Smith, vice president, engineering resins, at Resin Technology Inc. in Forth Worth, Tex. “Fibre demand is off by more than 20 per cent this year, and the automotive demand has obviously been down quite significantly,” he said. “On the brighter side, film demand has remained relatively strong.” Also, demand for nylon in Asia has continued to rise, leading to export opportunities for North American nylon 66 producers.

The cost to produce nylon 66 increased significantly in 2009, peaking in October, Smith said. “Nylon 66 is approximately US$0.10 per lb. lower than one year ago for the propylene route, and about US$0.22 per lb. lower than one year ago for the butadiene route.”

Smith predicted wide ranges in nylon 66 pricing during 2010, but with the possibility of relatively lower prices when compared with other materials. “A price increase of US$0.10 per lb. was implemented in August due to feedstock cost pressures, but this increase is not gaining support as raw material costs dropped in September,” he said. An additional downward pressure comes from a benzene drop in September that led to a cyclohexane decrease of US$0.71 per gallon in September and a corresponding caprolactam decrease of about US$0.13 per lb. in the same month. “This has lowered nylon 6s6 production costs in the past few months, and smart buyers should insist on having

these savings passed down to them,” Smith explained.

POLYCARBONATE

Turning his focus to PC, Smith noted that global demand growth softened during 2009, caused largely by a slowdown in Chinese consumption that reduced export opportunities for North American producers.

“Global PC capacity additions averaged approximately six per cent per year between 2005 and 2009,” he said. “More capacity additions in Asia and in the Middle East are planned between 2010 and 2012.”

Currently, he continued, the global PC plant capacity utilization rate is roughly 70 per cent, as a result of which some PC producers have shut down plants or idled production lines.

“During July and August 2009, buyers of PC heard rumours of an increase of up to US$0.10 per lb., but at many accounts there was no actual increase due to competition,” he said. “The threat of a price increase, along with higher feedstock costs, have actually served to flatten the market after PC prices steadily dropped by as much as US$0.40 per lb. since the last financial quarter of 2008.”

Producers of PC lost margin in 2009 as feedstock costs increased and PC prices went down, Smith noted. “Margins are improving now due to the drop in benzene, and spot refinery-grade propylene (RGP) prices are now dropping. This will further improve PC margins during 2010,” he said. “In the end, buyers should remember that soft demand and oversupply of PC will persist during the next year, which means that there will be price decreases in competitive environments.” CPL

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At A Glance

Polyolefins

Stability will return to the market, but North American propylene price will remain above global price. North American ethylene price will remain below all regions except the Middle East. Large volume PP homopolymer will trade in the US$0.55 to US$.065 per lb. range through 2011.

Joe Congdon, Townsend Solutions

Styrenics

Energy prices will keep styrenics prices elevated through 2010: benzene will cost just under US$1,000 per metric ton, styrene at about US$1,200 per metric ton, and PS at about US$2,000 per metric ton.

Esteban Sagel, Chemical Market Associates Inc.

PET

With oversupply and a persistent downward pressure on pricing, sellers will make concessions to shore up waffling customers in 2010. This is a buyer’s market in North America.

Landon Feller, ICIS

PVC

Given low PVC demand throughout the year, buyers will be looking for producers to give something back. Prices could drop between US$0.02 to US$0.04 per lb. by the end of the year.

Kevin Allen, Platts

Nylon

A price increase of US$0.10 per lb. was implemented in August due to feedstock cost pressures. The price increase nominations of an additional US$0.10 per lb. are not gaining support as raw material costs dropped in September.

Greg Smith, Resin Technology Inc.

Polycarbonate

PC producers have lost margin in 2009 as feedstock costs increased and PC prices went down. Margins are improving now due to the drop in benzene, and spot RGP prices are now dropping. This will further improve PC margins.

Greg Smith