Uncertainty Across the Board
As the Great Recession recedes, global resin consumption is on the rise and capacity is being introduced to handle the increase. But don't expect life to get easier if you're a resin buyer, as prices remain volatile (at best).
November 1, 2012 by Mark Stephen, editor
It’s a strange time for plastics processors. Two years ago, you had the materials and not the orders; now, you have the orders but can’t always get the materials to fill them. And what the heck is going on with the U.S. and European economies?
By now, this uncertainty is almost the new normal. In 2010 and 2011, attendees at the annual Canadian Plastics Resin Outlook conferences knew they were in the middle of, or barely out of, an almost unprecedented financial meltdown. This time around, no one knows what to expect — and probably nothing could have really shocked the attendees anymore.
It’s a hard climate in which to forecast, but our speakers gave it their best shots. The consensus? Demand in general is ticking upwards and capacity is being introduced to handle it. But from polycarbonate to polypropylene to PVC, factors specific to each material, and the various markets they’re used in, will make for unique and specific pricing trajectories.
David Tulk, senior macro strategist with TD Financial Group, outlined the full measure of uncertainty of today’s global economy. “We still see the world as very vulnerable for economic growth,” he said. “There’s some altitude between us and the ground but not much; given the shocks of the last few years, every little disruption, whether it’s political or a natural disaster, has a very pronounced impact.” The bottom line? The recovery is on, but it’s slow-moving. “In Europe, some very important structural challenges remain unresolved, which leaves North America vulnerable,” he said.
Closer to home, Tulk continued, there’s a slightly kinder economic backdrop now in the U.S. than in previous years. “There have been improvements in the housing market and in the flow of credit, and these are building a firmer platform,” he said. “For the north/south relationship, it’s a time of cautious optimism.” Not that the financial situation in the “south” part of that equation is anything to email home about. “We’re still forecasting anemic growth, low inflation, and a lurking vulnerability for the U.S. economy,” Tulk said.
Within the Canadian economy, manufacturers are being hurt by the persistent strength of the Canadian dollar, he continued. And we’d better get used to it: “I don’t think the strong dollar is going away anytime soon,” Tulk said. Also, there’s some fatigue beginning to show in consumer spending and in the cooling domestic housing market.
Blame both on outside forces. “Canada has benefitted from the early stages of the recovery, but we’re having a harder time getting any further along without global support,” Tulk said. “We’re actually less confident about the Canadian economy now than last year, given the fatigue we’re seeing.”
Recognizing the ongoing weaknesses of the U.S. and Europe, the federal government is encouraging Canadian businesses to consider east/west, as opposed to north/south, economic relationships. In a word, Asia. “In the longer term, stronger business ties with China and other Asian nations will put Canadian businesses in better positions to adapt to the changing marketplace,” Tulk said. “But it takes time to build these relationships, and it doesn’t necessarily help with the short-term outlook.”
One of the most popular of today’s resins, polyolefins are used in everything from appliances to automobiles to medical components to diapers. Taken as a whole, polyethylene (PE) and polypropylene (PP) resins represent over 60 per cent of the estimated 211 million metric ton global thermoplastic market in 2012, according to Robin Waters, director of polyolefins for IHS Chemicals.
“Globally, both PE and PP are projected to see improved growth for the next five years compared to the past five years,” Waters said. “Both resin groups, however, show remarkable disparity between emerging market economies and more mature, developed regions; this is reflected in the wide range of demand growth rates across countries and regions, with global growth being driven by the emerging economies.”
For PE, shale development is enabling the North American ethylene producer to become one of the lowest cost producers in the world. “Combined with the Middle East, over 40 per cent of the global ethylene capacity is cost-advantaged,” Waters said. PE investments are increasingly concentrated in these two feedstock cost-advantaged regions, he added, as well as in high demand growth areas — led by China, which represents nearly one-quarter of current global demand and 39 per cent of global demand growth over the next five years. “These trends are driving industry consolidation and operations optimization in higher cost regions, particularly in Europe,” he said. “In North America, low cost feedstock from shale gas is revitalizing the PE business, making exports highly competitive globally. In response, several producers have announced new capital projects that are currently scheduled to come onstream in the second half of the decade.”
But the energy drivers benefiting North America PE producers are having the opposite effect on PP producers. “The ongoing preference for light cracker feedstocks and reduced propylene from refineries continues to put North America in an unfavorable cost position, complicated by extreme price volatility,” Waters continued. “Some relief is in sight with planned-on-purpose PP production, but not until the latter part of the five-year planning period.” The result? “While North America will maintain a net export position, albeit decreasing, the Americas region as a whole will increase its net import position due to improving growth rates and lack of capacity projects in South America,” he said. “Oversupply in China will continue to suppress global prices and resulting margins for producers to the region.” In addition, expect China to become more self-sufficient, Waters added, with projected capacity additions over the next five years, putting additional pressure on other regions that currently export PE to China.
Here’s an obscure but important fact: the North American market for polystyrene (PS) has consolidated into just three main suppliers: Total Petrochemicals, Americas Styrenics, and Styrolution — or four if you count Mexico’s Resirene, which is also an active participant. It’s important because, with so few producers, any supply disruption can affect the market. And it does. Take the weather: the PS market is extremely vulnerable to weather-related disruptions, and this summer a hurricane and drought kept PS supply tight and prices high. According to Michelle Klump, markets editor for ICIS, there’s a small measure of good news — at least in the short term — around the corner. “Supply constraints are expected to ease in October, and demand for PS should pick up slightly in preparation for the holiday season — although there’s probably not enough time to regain lost demand,” she said. “Some market participants predict an overall drop of two per cent for the rest of 2012.”
In the larger picture, PS is forecast to enjoy a modest global growth rate of 2.9 per cent through to 2016, due mainly to growing demand for packaging, which will remain the biggest source of PS demand going forward.
And price? The cost of PS in North America is getting marginally higher — up to about US$0.97 per pound in August 2012 — due to tighter benzene supply, Klump said. That’s a good price compared to Europe, where PS hit about US$1.15 per pound in August; but not so good compared to Asia, where it remains at less than US$0.75 per pound. Whatever the price of PS, the costs of alternative materials have traditionally risen at even faster rates, providing PS with a built-in silver lining. But this might not be the case anymore. “Lately, PS has been losing its price advantage to PP, as the price of benzene — which is the biggest factor in PS pricing — rose by 41 per cent between December 2011 and March 2012, dragging PS prices up too,” she said. “The price of PP plummeted from US$1.10 per pound in June 2011 to about US$0.63 per pound in August 2012, while PS rose from US$0.90 to US$0.97 per pound during the same period.” In the end, take any predictions about PS prices in the future with a few boxes of salt. “The price volatility of benzene makes predicting PS prices in the longer term extremely difficult,” Klump said.
And as always with PS, there’s an environmental backdrop to the story…and it isn’t pretty. “The U.S. National Toxicology Program included styrene in its June 2011 Report on Carcinogens, a fact which continues to hurt demand and, related to this, communities throughout Canada and the U.S. continue to consider measures banning PS food and other packaging,” Klump said.
When it comes to polyvinyl chloride (PVC), it’s all about new construction; PVC remains the plastic of choice for the housing and commercial space industries, and demand correlates with the health of the construction industry. The effects of this fact on PVC pricing can’t be overstated. According to Jim Seidewand, the president of Resin Technology LLC, North American housing starts are projected to slow in 2013, hindering domestic PVC demand. But higher growth in developing regions such as South America, the Indian subcontinent, and Africa — and global operating rates of up to 90 per cent — will lead to higher PVC prices overall: expect to pay between US$0.07 to US$0.08 more per pound in the first months of 2013, he said. In the longer term, supply of PVC precursor ethane will increase faster than demand, keeping ethane prices reasonable, which should help bring PVC back down slightly. Look for some unintentional help here from Asia. “China will be uncompetitive in the PVC export market, which should provide a global price ceiling,” Seidewand said. China currently has the vast majority of new PVC capacity — a whopping 50 per cent, triple its capacity of a mere seven years ago — while Asia is responsible for two-thirds of the current world capacity, Seidewand continued. Demand in China will continue to grow at approximately six per cent per year over the next 12 months, he said. In the longer term, expect PVC imports to China to diminish and exports to the Indian subcontinent to grow dramatically.
And Europe? European PVC resin, with its high oil and operating costs, will not be a major factor in international trade, Seidewand said, except in the Middle East. Russia in particular will be hungry for PVC for windows and siding in new construction projects. Continuing consolidation of PVC production in Europe is expected — but until then, it’s a good time to be an exporter. “The U.S. ethylene cost position, coupled with its chloro-alkali cost advantage, will allow the U.S. to export almost five billion pounds of PVC,” Seidewand said. It’s an export demand that Canadians can jump all over too, he added.
Thirty-seven per cent of all global nylon 6 demand is for the automotive industry, and as that industry roars back to life — with North American operating rates for nylon 6 averaging approximately 90 per cent into 2013 — producers and buyers should expect the material’s popularity to improve, according to Paul Blanchard, a senior consultant with Chemical Market Associates Inc.
There was a nylon 6 pricing problem in 2010 and 2011, and here’s why: all nylon 6 is made with caprolactam, and the new nylon 6 demands — particularly in China — tightened caprolactam supply and pressured polymer prices upward globally. But that was then. Heading into 2013, buyers have an ace in the hole: new caprolactam capacity announced in China has been built ahead of demand, which might just create the oversupply that leads to a buyer’s market.
For nylon 6/6, Blanchard noted that intermediaries face a constrained global supply of key precursor adiponitrile that supports high prices levels — which won’t be helped by the likely delay of Invista’s Shanghai investment in intermediates. But prices still may not be high enough to suit nylon 6/6 makers. “This year, the costs have escalated much faster than the prices have, resulting in an erosion of margin,” he said. “In some cases, nylon 6 and 6/6 prices are reaching parity, which is very unusual: usually nylon 6/6 has a US$0.15 to US$0.20 price advantage.”
Blanchard forecast nylon 6/6 operating rates in North America to climb to 80 per cent and higher by 2014. “It’s not a situation that lends itself to low prices anytime soon,” he said. Pricing should remain tight — but if it comes down at all, thank China. “Suppliers in China are without a basic source of adiponitrile, making it the most expensive country from which to buy nylon 6/6,” he said. “This means you’re getting a comparative bargain if you’re buying from either North America or Europe.”
In some ways, these are tough times for polycarbonate (PC). “The hope that Blu-ray recordables would save the market has proven unfounded, and other electronics are taking over that don’t require PC,” Blanchard said. “The new great hope for PC is vehicle windows, which could increase the global demand by about 40 per cent, although vehicle windows currently make up only two per cent of global PC demand.” For the foreseeable future, though, whatever PC growth there is will be led by the electronics segment, which currently makes up approximately 21 per cent of global demand for PC.
That’s not to say that PC is passé: the industry continues to invest in product application development for long-term growth of the business, and a lot of new capacity is coming onstream in Asia and the Middle East, including projects by Mitsubishi, Sinopec, Bayer, and Kayan. “Globally, recent demand has been very good, especially in the third and fourth quarters of 2011, resulting in a tight supply that allowed PC prices to rise,” Blanchard said. “But the markets are easing now, and the prices should ease also, helped by a combination of lower benzene costs and the new Kayan start-up in Saudi Arabia. We expect the price to hold steady at between US$1.60 and US$1.80 per pound until the beginning of 2013; after that, when the effects of the Kayan plant have been digested, we expect to see upwards pressure.” The long-term outlook is dependent on the strength of demand growth from China and India, Blanchard concluded, and on the rate of increase in new production capacity.