Robert C. Fry Jr. has a boring economic outlook for 1997, but the economist in DuPont Co.'s corporate planning office points out that a boring economy is not bad, especially for the plastics industry.
``There is an old Chinese curse that says: `May you live in interesting times,' '' Fry said Dec. 9 in an interview at his office in Wilmington, Del.
``My outlook for 1997 is the opposite of that. We are looking at moderate growth and low inflation for the year,'' he said. ``We are now at somewhat of an equilibrium in the economy, and we can forecast a trend in growth at 2-2.5 percent. 1997 won't be a bad year, but it will not be a boom year either,'' Fry said.
As a result, Fry said the industry can expect to return to its overall trend of growing 4-4.6 percent, after growing 6-8 percent in 1996.
``Inventories appear to be in line with sales right now, and inflation is staying at about 3 percent. That indicates there is no imbalance in the economy at this moment,'' he said.
Further, Fry invoked Isaac Newton's law of motion, saying he believes it applies directly to economics.
``Newton's second law roughly says that something in motion will tend to remain in motion until something comes along to change it. I see nothing coming along to cause imbalances in the economy or to indicate anything like a recession or a significant downturn,'' he said.
Industry analysts Rob Harvan, director of chemical planning for Bonner & Moore Associates Inc., a Houston consulting company, and Paul Raman, chemical industry analyst for PaineWebber Inc. of New York, agreed with Fry, saying they believe the industry will have a good year.
Harvan said 1997 may get off to a slow start, as processors use inventories of resins they built up in 1996. After that, however, growth may continue.
``I think demand in 1997 will finish ahead of demand in 1996,'' Harvan said in a Dec. 23 telephone interview.
While they view some segments of the industry as having difficulties, especially PVC and polystyrene, both Harvan and Raman said economic indicators generally are good.
Raman said his outlook may be as boring as Fry's.
``I'm looking at 4-5 percent growth for the industry in 1997. I do not see any great acceleration, but I don't see any slowdown either,'' Raman said.
Here is a materials outlook — on a resin-by-resin basis — for the coming year:
Polyethylene producers are experiencing deja vu, however they do not agree which past experience they may be encountering.
Some producers compare prospects for 1997 to 1995:
At that time processors had large inventories on hand from 1994, and those inventories and slower demand made markets for PE stagnate early in the year. Sales for 1995 remained lower than average as processors corrected their inventories.
Other producers compare prospects for 1997 with a year ago:
At that time, processors had some year-end inventories on hand from 1995, but demand picked up early in 1996 and remained strong through three quarters of the year.
With the inventory correction over, sales for 1996 leapt 12 percent.
Producers of PE are further at odds this January with a variety of price increases that are pending for the middle and end of the month.
Dow Chemical Co. of Midland, Mich., endorses the second of the two deja vu scenarios, and has announced aggressive price increases — 3 cents for Jan. 15 and 5 cents for Feb. 1 — in expectation of demand taking off.
Meanwhile, a number of other producers, including Chevron Chemical Co., Lyondell Petrochemical Co., Union Carbide Corp., Quantum Chemical Co., Phillips 66 Co., Formosa Plastics Corp., Exxon Chemical Co. and Paxon Polymer Co., have announced separate price increases for PE, ranging from 5 cents per pound effective Jan. 1, to 3 or 5 cents effective Jan. 15 or Feb. 1.
As of Jan. 8 no other producer had been as aggressive as Dow, with announced increases that total 8 cents.
Strong demand for PE resins in 1996 spurred three rounds of price increases, allowing the industry to recoup margins it lost in 1995.
``We'll be somewhat flat in 1997,'' Jeff Taylor, manager for PE sales for Chevron, said from his office in Houston Dec. 27.
Taylor's comments were echoed by executives from several
other PE companies, but were disputed by others.
``We had two years' worth of growth in one year.
``Sales of linear low density PE were up 25 percent from October 1995 to October 1996, and that is just not realistic. Overall, PE sales were up 12 percent in 1996 over 1995.
``The long-term growth rate for PE is easy to predict: It's two to three times gross domestic product. From that formula, you can predict growth of 5-6 percent per year, and 12 percent in one year is two years' worth,'' Taylor said.
Len Azzaro, commercial director for PE products for Dow, and Don Schober, business director for Union Carbide's Unipol Polymers, were among those who do not agree with Taylor's assessment of the market and its potential for growth. Both Azzaro and Schober are more optimistic.
Schober said he believes 1997 will be another good — if not booming — year for PE sales.
``We are looking for growth up to 10 percent for the year,'' Schober said in an interview at Union Carbide's headquarters Dec. 13.
While he acknowledged that 1997 may be slightly slower than 1996, Schober cited continued strength in markets for film, molded products and extrusion products as reasons why he expects another good year for PE.
Schober also said he expects increased costs for raw materials — especially for ethylene monomer — to support price increases even in the face of slightly softer demand for PE.
Azzaro also believes 1997 will be another good year for PE, with demand remaining strong enough to keep inventories balanced or tight through the first half of the year.
Polypropylene makers had a dilemma in the fourth quarter of 1996: Prices softened, yet production capacity utilization rates remained at high levels.
Producers saw this as a result of anticipation of new production capacity coming on stream at Epsilon Products Co. of Marcus Hook, Pa., at Solvay Polymers Inc. of Houston and at Phillips Sumika Polypropylene Co. of Houston, and further new capacity coming into production at Exxon Chemical Co. of Houston.
``Sales were very strong in the last six months, and inventory levels are low,'' Gerald Ferris, director of business planning for Montell North America Inc., said in a Dec. 10 interview at his office in Wilmington, Del.
``There was some softening in some niches, but capacity utilization rates remained very good,'' in the low 90 percent range, Ferris said.
However, he acknowledged there was softening in prices.
``People are trying to put themselves into a good position for 1997,'' he explained, adding that the positioning appears to be a move to ensure business in light of the new capacity coming into production.
``Our capacity utilization rates are great, but we're getting hammered,'' Mike Pembroke, director of sales and marketing for Epsilon, said in an interview at his office Dec. 9.
Both Pembroke and Ferris said they expect PP prices to become stable in the first quarter of 1997 for two reasons:
First, they expect prices for propylene monomer to increase as inventories remain at critically low levels.
The production of propylene monomer competes in the petrochemical industry with the production of propylene that is used to make propane for home heating oil. Production swings seasonally toward home heating oil in winter, and this year supplies of home heating oil are very low while prices for natural gas and oil are high.
The combination of high prices, low inventories and increasing demand for raw materials is squeezing margins for PP producers, and adding strength to their pricing.
Secondly, Pembroke, Ferris and other industry executives are hoping the jockeying for position will quiet down as the new production capacities enter their markets and are absorbed.
However, both Pembroke and Ferris noted that other new additions to production — by Dow Chemical, Lyondell Petrochemicals or Grand Polymers Ltd., a joint venture based in Tokyo between Mitsui Petrochemical Co. Ltd. and Ube Industries Ltd. — could put PP into an oversupply situation in North America.
Industry sources said Grand Polymers is considering building PP production capacity in North America to supply polymer to transplanted automotive assembly plants.
``If the market continues to grow well, at 6-10 percent each year, we will need 500 [million] to 600 million pounds a year of new capacity to keep up with demand,'' Pembroke noted.
``But then the question becomes: Where do we get monomer from?'' he added.
However, if demand does not grow at that 6-10 percent rate, PP may quickly become oversupplied, causing a drop in prices, he added.
Ferris expects current planned production increases to push capacity utilization rates down to the high 80 percent range through 1997.
Polystyrene producers are in a tough competitive position — with supply outpacing demand — from which they may not recover until the end of the decade, executives said in recent interviews.
``I am concerned about prices,'' David Huntsman said in a Dec. 9 interview at his office in Chesapeake, Va.
Huntsman is vice president for polymers and styrene resins for Huntsman Corp., based in Salt Lake City.
``There are two factors that drive prices in polystyrene: raw material costs and the supply/demand balance. We expect to feel pressures from both of these through the next couple of years.
``Styrene monomer will be in long supply, with the prices moving down in early 1997.
``As for demand, we will have a lot of supply coming on in the next two or three years, and we do not expect demand to catch up to supply until the end of this decade,'' Huntsman said.
Polystyrene is important to Huntsman Corp.: It was the first polymer the $4.3 billion company produced, and was the heart that pumped lifeblood to the company's expansions over the past 10 years, David Huntsman said.
With the acquisition of Amoco Chemical Co.'s styrenic polymers business that closed on Dec. 6, Huntsman said his company intended to send a signal to the industry.
``Huntsman Corp. has not been aggressive enough in polystyrene. We viewed PS as a ma-ture polymer, with less growth opportunities than other polymers.
``We did not move as fast as other producers, but we decided we are not going to stand flat-footed. We will expand aggressively,'' he said.
Huntsman's aggressive stance has other industry executives worried, and analysts said PS may be in for a difficult time as a result.
``We are really going to see 1997 as not a good year for PS,'' said Rob Harvan, director of chemical planning for Bonner & Moore Associates Inc., a Houston consulting company.
Harvan spoke in an interview by telephone Dec. 23.
``They are going to suffer. There is new capacity coming on, demand is not strong and feedstock prices are up. This is not a good outlook,'' he said.
With that poor outlook, PaineWebber's Raman said he expects prices for PS to drop to levels equal with prices for PE and PP.
Stephen Cummings, market intelligence leader for Nova Chemicals Inc. of Leominster, Mass., said the advantage PS will have will be stable prices for a long time.
``PS looks like it has dropped to the bottom of the business cycle,'' Cummings said in a telephone interview Jan. 2.
Even with expected declines in prices for styrene monomer, he added that it is not likely prices for PS will decline further.
However, Cummings said: ``The price for PS can be expected to remain favorable for the duration of this period vis-a-vis competitive materials.
``Processors who are seeking the performance characteristics of PS, with the ease of processing PS also will have the benefits of pricing stability over a relatively long period of time,'' he added.
ABS resin producers are facing several threats, all adding up to prospects of low growth domestically and internationally:
PVC, polystyrene and polypropylene suppliers say they are continuing to take market share from ABS in packaging, automotive, appliance and business machine applications and raw material costs are firm.
Foreign producers built significant capacity for ABS in the Far East, and North American manufacturers began to see foreign competition for the first time in 1996.
As a result, prices for ABS resins fell 4-8 cents per pound in the last half of 1996, and are not expected to strengthen soon.
``ABS is a dismal story,'' said Austin Peppin, owner of Peppin & Associates, a consulting firm based in Chesterfield, Mo.
Peppin was interviewed Dec. 23 by telephone.
``They've had a flat market in 1996, it's going to decrease next year, and there is no light at the end of the tunnel.
``The ABS producers are seeing a lot of competition from polypropylene and polystyrene and there are no new markets opening up. The prognosis for growth in North America and in Europe is very, very poor,'' he said.
``The markets in Southeast Asia are growing well, at 8-10 percent per year, but Chi Mei Corp. and Formosa Plastics Group [both of Taiwan] are producing ABS, and they have different price relationships to PS and PP in those markets,'' Peppin added.
However, Charles Crew, vice president for commercial operations for GE Plastics of Pittsfield, Mass., was more optimistic.
``We have invested heavily in ABS, and we are positive about the business,'' Crew said Jan. 2 in a telephone interview.
While he acknowledged that many materials are competing for business now dominated by ABS, he said ABS resins have performance characteristics that PVC, PS and PP cannot match.
``If processors find that PVC, or PP, or PS works in an application, they will go ahead and use it.
``But we can out-design [those materials], we can cut out wall thickness, and we can combine components to accomplish different functions, that's where our advantages are,'' Crew added.
He said GE Plastics is targeting ABS at value-added products where the material's overall performance will help to promote its uses and growth.
Much of the increased production that nylon producers built between January 1995 and December 1996 already has been absorbed, according to industry analysts and executives.
``Nylon has proven to be a very versatile material for the automotive and packaging industries, and sales in 1996 were up considerably from 1995,'' Peppin said.
``The polymerization capacity increases generally have been absorbed, and producers may need to expand capacities again,'' he said.
Reinhard Katz, group vice president for BASF Corp. of Mount Olive, N.J., said his company is expanding nylon production capacity at its facilities in Antwerp, Belgium, and Freeport, Texas.
In Antwerp, BASF is adding 70 million pounds of nylon 6 polymerization capacity. That capacity is to be in production by the end of January. At Freeport, another 70 million pounds of nylon 6 polymerization capacity is to be in production by mid-1997.
``There is a lot of new capacity being put into production, but demand is increasing in Europe and North America,'' Katz said.
Demand for nylon is increasing in the automotive industry because air intake manifolds are being converted from metals, and from a number of new programs, such as exterior and other under-the-hood products, Katz said.
A move to increase nylon resin prices failed in the fourth quarter of 1996, yet two industry executives said that attempt to raise prices prevented them from moving further downward.
Producers of engineering thermoplastics in North America found business in 1996 better than in the previous year, and hope 1997 will be better still. But capacity expansions that are under way or planned threaten to dash those hopes in the latter part of this year.
Sales of ETPs — acetal resins, polyphenylene sulfide resins, polyphenylene oxide and polyphenylene ether resins and thermoplastic polyesters — grew about 5 percent in 1996 compared with 1995, industry executives said.
``We saw some inventory correction, especially in the first half of the year, but the second half was good and sales were on plan,'' said GE Plastics' Crew.
``We had a great 1996,'' noted Ben Catanzaro, vice president and general manager for Hoechst Technical Polymers of Summit, N.J.
Catanzaro is responsible for Hoechst's performance polymers businesses.
``It was better than 1995 by some measures, and we don't expect 1997 to be much different,'' he said Dec. 12 in an interview at his office.
But too much production capacity may mean an oversupply for most of those resins by end of 1997 or early 1998, said Catanzaro — a view seconded both by Katz and Carl Amond, also a vice president and general manager for Hoechst Technical Polymers.
Amond is responsible for the firm's acetal and nylon polymers businesses.
With polyphenylene sulfide, ``four years ago there was overcapacity, and a year ago there was a shortage,'' Catanzaro said. ``Now, every producer has announced capacity increases, and there may be overcapacity again soon,'' he said.
In thermoplastic polyesters, Hoechst, DuPont and BASF — which is in a European partnership with GE Plastics — all are adding production capacity.
In acetal resins, Hoechst and DuPont, the dominant suppliers in North America, are adding capacity, as is Ultraform, a joint venture formed between BASF and DeGussa Corp. of Theodore, Ala.
While producers expect 6-8 percent growth in these ETPs during the year, they said the expansions are likely to outstrip demand.
Even with the joint ventures, which make partners out of several of the leading companies, Amond noted that conditions that justify a capacity expansion always are evident to executives at all the producing companies at the same time.
``The difficulty is that resin production capacity is not available in finite increments and, if we all decide to put in capacity at the same time to continue our growth, we quickly get to the point of having too much resin,'' Amond said.
As a result, engineering thermoplastic makers are hoping to have a strong first half in 1997, because they expect a weakening in the second half.
Polycarbonate producers expect demand to grow by 8 percent in 1997, as applications in automobiles, compact discs and digital versatile discs expand.
``We're looking at reasonable growth in 1997,'' said Lee Noble, executive vice president of Bayer Corp. in Pittsburgh and president of that company's Polymers Division.
Noble was interviewed Nov. 25 in Newark, Ohio, where Bayer was marking the startup of a 56 percent increase in production capacity at its compounding facility there.
GE's Crew agreed with Noble's assessment of good PC resin growth.
``The second half of 1996 was very good,'' Crew said. ``We're expecting 1997 to be a continuation of that. Sales are relatively strong, and we are looking for continued growth through the year.''
Expansions in PC resin production capacity at GE Plastics, Bayer and at Dow helped ease the extreme tightness the industry felt through the first quarter of 1996.
Lead times reached 26 months in late 1995, but fell to four to six weeks by mid-1996, and now are at three to four weeks, industry executives said.
The reduced lead times were matched by a softening in prices in 1996.
``With the new production capacity we are in a more balanced position with demand. We are back at service levels that are more sane,'' Crew said.
He noted that there was a slight inventory correction during 1996, but he said that correction now has lapsed, and growth is resuming.
However, neither Crew nor Noble said PC resins will be in tight supply in the near future.
Crew noted that markets for DVD technology, which many expect to replace CDs, have not developed as hoped.
``We have gone from CDs for audio applications to CDs for read-only-memory applications, and DVD is the next step,'' Crew said.
DVD technology squeezes more information onto discs the size of CDs, but the technology requires different — and more expensive — devices to read the information.
``The acceptance of DVD will depend on the acceptance of the players [to read the technology],'' Crew said, noting that DVD technology sellers missed the 1996 Christmas season for the introduction of their products.
``We'll know what's going to happen with this in six months,'' he added.
Noble said his company is hoping to gain new business opportunities from new applications for PC in automotive and architectural glazing.