By: Frank Esposito
February 28, 2013
AKRON, OHIO — March Madness may be right around the corner, but January and February weren't exactly calm for North American buyers of polypropylene resin.
Regional PP prices jumped another 6 cents per pound in February, right on the heels of a 15-cent hike in January. The increase means that prices in the region are up about 22 percent since Jan. 1, according to the Plastics News resin pricing chart. That percentage is based on general-purpose grades of homopolymer PP used in injection molding.
Availability of propylene feedstock again was the culprit behind the price hike, industry sources said.
"It's the same thing as in January," said Scott Newell, a PP market analyst with Resin Technology Inc. in Fort Worth, Texas. "There's tightness in propylene. These are some of the seasonal outages we see this time of year. With heavy outages at crackers, [PP] inventories don't affect pricing as much."
Most of these outages are from planned maintenance turnarounds, but a few unplanned outages have made the propylene market even tighter than normal.
At the same time, propylene is suffering from some structural issues caused by increased North American use of natural gas-based ethane as a petrochemical feedstock, market veteran Robert Bauman said. Ethane produces less propylene when cracked than crude oil-based naphtha does — and major development of natural gas fields in the region has favored ethane, thus diminishing propylene supply.
Propylene makers that can use either ethane or naphtha as a feedstock now are using almost 90 percent ethane, said Bauman, president of Polymer Consulting International Inc. in Spring, Texas. Just a few years ago, those same producers were using only 70 percent ethane, he added.
Ethane is advantaged vs. naphtha when the ratio of oil prices to natural gas prices is more than 6-to-1. As of Feb. 28 — with oil at $92.50 per barrel and natural gas at $3.50 per trillion cubic feet — that ratio was more than 26-to-1.
"The propylene market is structurally short because of the way shale gas ethane has impacted the business," Bauman said.
Dow Chemical and other firms — most recently Ascend Performance Materials — have announced plans for on-purpose propylene production, but the soonest any major propylene capacity increase could impact the North American market is 2015, sources said.
And while North American PP makers might be catching flak for the high rate of price increases, former PP executive Craig Blizzard said that producers' profit margins aren't increasing along with prices.
"Producers are exerting their position of market power in light of cracker shutdowns late in the first quarter," said Blizzard, who's now president of Blizzard Consulting Group in Chevy Chase, Md. "But the margins on polypropylene over propylene are not crazily high."
Even as prices have soared 21 cents in the first two months of the year, buyers contacted by Plastics News said that prices could drop as much as 5-10 cents per pound in March, and another decrease might be seen in April. Spot prices for propylene already were dropping in late February.
Newell, Bauman and Blizzard all agreed that the price volatility and overall high prices seen in North American PP in recent years is having an adverse effect on the market. The January move was the eighth double-digit price swing to hit the North American PP market since Jan. 2011. And the 2012 PP total of 16.5 billion pounds sold in the U.S. and Canada is more than 14 percent below the pre-recession total of 19.3 billion pounds. Last year, sales were up less than 1 percent vs. 2011.
"We see demand in polypropylene as stagnant to declining," Newell said. "It never really had a rebound from the recession. There was a little bit of improvement, but sales were down in 2011 and flat in 2012."
As for the recent increases, Newell said that 21 cents in two months "definitely creates a demand response." PP buyers "will cut back now or cancel orders or push back shipping dates. That's not good for the industry."
Blizzard added that the PP industry "as a whole realizes that polypropylene isn't returning to the 2x GDP growth level it enjoyed for many years." He also cited several factors that have reduced North American PP use, including processors finding ways to use less PP in their products, a reduction in the consumption of low cost PP products, an increase in imported PP products and a reduction in sales of North American PP into export markets.
And while some market watchers contend that most processors who might be thinking of switching from PP to another material already have done so, Bauman said there might be more losses ahead for PP. He estimates that between 2011 and 2013, North American PP will lose 12 percent of its demand to high density polyethylene and polystyrene.
"Processors may be able to change machinery" in order to use lower-priced and less-volatile HDPE and PS, he explained.