The good, the bad, the uncertain

The condensed version of a full day of expert predictions and explanations of global resin economics is this:

Canada’s economy will sustain its growth, consumer spending will rise, the price for polyolefins and styrenics will continue to fall, while PVC prices continue to rise.

It adds up to good news for most processors of commodity resins.

Peter Drake, vice president and deputy chief economist of TD Bank Financial Group reported at Canadian Plastics’ Resin Outlook Conference that consumer spending is on the rise as a result of the rising standard of living and employment growth. In addition, economic growth will slow to a more sustainable pace and inflation–especially core inflation–will remain low.

“We’re going to see consumers continue to spend because they have the tools at their disposal,” he says

Canada’s standard of living is forecasted to exceed the high level it reached in 1989, meaning the average Canadian will have more money to spend than he/she did during the 90s. In 2002, it is expected that the average Canadian will have nearly $19, 000 disposable income per year — about $2, 000 more than he/she had in 1997.

Drake notes that the increased spending could have a positive effect on products such as packaging, sporting goods and toys.

It’s no surprise to hear that the high-tech industries are growing at a much faster rate than the rest of the economy. Looking at industrial performance by sector, Drake predicts the communications industry will be the fastest growing industry in terms of real GDP. Communications (which includes Internet activity) is forecast to grow by nine percent, six per cent more than the growth rate of the total economy. Business services, which includes a great deal of information technology activity, will be the second fastest growing segment, with over five percent growth. Construction is expected to experience four percent growth and manufacturing 2.5 percent growth.

While growth in construction bodes well for the economy, it is a contributing factor in the rising PVC prices, due to PVC’s strong presence in pipe, profile and window markets.

Polyethylene and polypropylene: down

The pricing outlook for polypropylene and polyethylene suggests downward pressure for the next three quarters, running through to mid-2001, says Robert Bauman, vice president of Chem Systems Inc. “The next two or three quarters are likely to be stable but at low prices,” he says. “It would not surprise me to see a drop of $0.10/lb. in the next few months. Price recovery (upward movement) could come in the first to second quarter of 2002 with prices rising until the market gets tight in 2003. Somewhere between January and December 2003 there should be a fly-up,” says Bauman. “You can quote me on that.”

Bauman says the degree of the price decline through 2001 is a function of polyolefin producers’ control, leadership and discipline. If producers do not build too many inventories during the next few months and reduce production to match sales, the degree of the decline will be lessened.

Although the polyolefins business remains dynamic, global events continue to have a strong impact on prices. The forecast startup in the first quarter of 2001 of Nova’s Joffre polyethylene plant will exert downward price pressure, as will other North American capacity increases. New global polyolefins capacity — particularly in the Middle East and Asia — will displace some exports from the United States.

For polypropylene, “the biggest problem of all is capacity,” Bauman says. “Global demand for polypropylene is strong. There is just too much capacity in place today, with additional capacity starting up in the next 18 months.”

For LDPE, a lack of new capacity means this resin continues to be a shining star for polyolefins producers. However, as more second generation LLDPE products (both metallocene-catalyzed resins and higher alpha olefin grades) replace LDPE, its positive demand growth will diminish. This will not occur on a global scale until the post-2005 period.

“In addition to replacing both LDPE and conventional LLDPE in existing applications, second generation LLDPE products will experience an increased demand by replacing other polymers and by enhancing performance in selected markets (e.g. fresh salad bags, banana shipping bags),” Bauman says.

Based on operating rates, LDPE has the best prospects of maintaining supplier margins, while polypropylene has weakening economics. Most companies can produce 100 percent of published nameplate capacity in polypropylene, so in North America, operating rates need to be almost 94 or 95 percent before the industry is considered tight and a price increase is effective, explains Bauman. The effective operating rate of most LDPE plants is in the low 90s, while LLDPE plants can generally operate above nameplate capacity. “As such, polyethylene will get tighter faster that polypropylene, and PE suppliers will generally be able to increase prices sooner.”

PVC: long-term pain

Immediate, short term relief is expected for PVC users, but the long term growth of construction products and an accelerating demand for fencing and decking products is expected to cause upward pressure on prices, reports David Durand, director of Global Research for the Plastics Consulting Business Centre at Phillip Townsend Associates in Houston, Texas.

Durand expects a slowing short-term demand due to inventory adjustments and reduced construction products, causing a downward effect on prices.

The highest growth markets for PVC, growing at more than five percent annually, are siding, window frames and rigid profiles. Both siding and window frames are expected to have further penetration into new construction markets. Rigid profiles includes fencing and decking which he says will experience rising demand.

In the moderate growth rate category, with growth ranging from three to five percent annually, are pipe/conduit, wire and cable, film and sheet, industrial and consumer products, medical products, rigid molded items, and automotive applications. All of these are mature markets.

Pipe/conduit is expected to have competition from polyethylene; similarly, wire and cable is expected to have competition from alternative materials.

Medical markets have good potential, reports Durand, but face both environmental pressure and competition from alternative materials. Automotive applications are also under pressure because of potential substitutions to facilitate recycling.

The lowest growth markets (at three percent or less annually) are bottles, packaging film, toys/infant care, footwear and plastisols.

Bottles are expected to have competition from PET, while packaging film will be challenged by alternative resins. Growth rates remain low with toys/infant products as a result of activist-driven safety concerns.

Polystyrene: Falling slowly

Alex Lidback, director of Benzene and Styrenics for Chemical Marketing Associates, forecasts PS prices will fall slowly during 2001 and 2002, then drop sharply and level out during 2003 to 2005. (See figure)

However, new capacity is required. Limited capacity additions over the next year should tighten the market, which could cause the prices to go up because of a decreased supply.

The world demand growth for polystyrene during the 1999-2005 will total 3.3 million tons — 1.2 million tons more than in the 1995-1999 period. Northeast Asia has a huge appetite for polystyrene, with China leading the way. China will account for almost 25 percent of global PS demand by 2005. It is a huge net importer of PS, with most of its supply coming from Korea, Taiwan and Japan.

South America’s dependence on imports will lessen due to new capacity announced for next year. South America is not a low-cost producer, so it cannot compete in world markets but the increased domestic capacity will have an effect on North American markets. Mexico currently exports a significant amount of PS to South America. The shift in domestic capacity will free up some of Mexico’s production, with U.S. markets the likely recipients, ex
plains Lidback.