AKRON, OHIO — Resin producers find themselves at the edge of a pricing trough going into 1998. But to hear them talk about the situation, they've been living on that edge for so long they should be paying taxes on it.
``Our industry is notorious for being unable to forecast the turn and what the turn is,'' Dow Plastics' Anthony Carbone said at his Midland, Mich.-based firm's year-end press briefing in New York. ``Two years ago, conventional wisdom would have said we'd be at or close to the bottom now.''
That didn't happen. Sales and production continued to climb in most major resins in 1997, a year that many plastics executives characterized as being stronger than they had anticipated.
Overall resin sales were expected to finish up 4.7 percent higher in 1997, with production jumping 5.2 percent, according to the Society of the Plastics Industry Inc. in Washington.
But that growth did not necessarily translate into higher prices. Processors battled price increase initiatives tooth and nail throughout the year. Suppliers made some slight gains, then prices for some resins began to drop later in the year. Analysts such as New York-based Salomon Smith Barney predict further profit margin deterioration in 1998 through the year 2000. Resin makers are bracing themselves for this possibility.
Carbone, Dow Plastics' executive vice president of plastics, hydrocarbons and energy, said his company believes the trough will be ``more dish-shaped than spikelike.''
``It would be less than honest of me to say polyethylene prices will be higher or that polystyrene will bounce back. That's not credible,'' Carbone said. ``What is credible is to get more performance out of the business in the two or three years of the trough.''
The 1998 outlooks — and the stories behind those outlooks — for major commodity and engineering resins are as follows:
Things could be tightening up in PE in 1998 after a couple of robust seasons. Several producers and analysts said operating rates and growth rates could drop this year, with price erosion becoming a definite possibility.
``Our projections are always right but our timing's always wrong,'' said John Hotz, vice president of low density PE, linear LDPE and performance products for Houston's Equistar Chemicals. ``We thought '97 would be a tough marketplace but it turned out to be a good year.''
Some of that anticipated softness may be seen in the second half of 1998 because of downward pressure on ethylene prices, Hotz said. Both Exxon Chemical Co. and Westlake Polymers brought on new ethylene crackers in late 1997, and a damaged cracker at Shell Chemical Co.'s Deer Park, Texas, facility is scheduled to be at full strength by mid-1998 as well.
Officials and analysts don't see eye to eye on how this supply cycle will affect operating rates. Hotz and Equistar high density PE Vice President Vaughn Deasy, each speaking in recent telephone interviews from Houston, said they see operating rate percentages remaining in the low 90s for HDPE and LDPE and in the high 80s for LLDPE. But Nova Chemicals' Dave Clarke, along with industry analysts Rob Harvan and Bob Dennett, said rates should be down 2-4 percent.
``You can't divide PE from ethylene prices and we see ethylene dropping,'' said Clarke, vice president of polymer sales and marketing for Calgary, Alberta-based Nova. ``The first half of '98 should be reasonably positive, but in the latter part we could see a major crunch.''
The ethylene market could have more of an effect on PE pricing than new capacity will in 1998. Exxon Chemical of Houston is scheduled to bring on a 490 million-pound-per-year PE line in Mont Belvieu, Texas, while a 500 million-pound PE line in Fort Saskatchewan, Alberta, for Dow in late 1998 might not be opened until early 1999. Beyond that, most expansions are slated for 2000.
Both expansions will have swing capacity to produce HDPE and LLDPE, making actual capacity predictions difficult. Dow's new plant will also be equipped to use the company's Insite-brand metallocene technology.
Clarke, in a recent phone interview from Calgary, predicted overall 4 percent PE growth in 1998. Deasy's prediction is a little bit higher, at 5.5 percent. Dow's Romeo Kreinberg, who serves as global vice president for the company's PE/PET purified terephthalic acid business, checks in with a prediction of PE growth 2 percent higher than gross domestic product, which most economists believe will be around 2.5 percent.
``1997 was a good year for polyethylene, but we expect next year to be more challenging and that might be so,'' Kreinberg said Dec. 12 in New York. ``I'd take another 1997.''
Harvan, a consultant with Houston's Bonner & Moore firm, said the PE market should ``get more in line with the 20-year growth average'' in 1998.
``When we saw 5-10 percent growth in 1995-96, we all knew it was a little bit unusual but we hoped it would keep going on,'' Harvan said. ``Now there's more resin available in North America and we should be getting back to gross domestic product growth.''
Dennett, a consultant with Houston's CMAI Inc., puts PE growth in the 4-5 percent range for 1998, with increases in capacity exceeding total demand growth.
Two other trends that executives and analysts expect to see continue in 1998 are strong growth in film markets and continued replacement of LDPE by LLDPE.
Nova's Clarke places film growth at 7 percent, boosted by growing presences in stretch film, consumer trash bags and institutional chemical liners. Equistar's Deasy said HDPE film growth could be as high as 7.5 percent.
``High density film is our best growth area and our area of highest value,'' Deasy said. ``It's a franchise for us.''
The ongoing LDPE/LLDPE war is seen in SPI numbers, which showed North American LLDPE sales and production climbing by 5.5 percent and 7.9 percent, respectively, while a 0.1 percent increase in LDPE sales was accompanied by a 1.5 percent drop in production last year.
``LDPE has its own home in the marketplace, but LLDPE is still capturing growth between those two polymers,'' Equistar's Hotz said. ``You have to expect a lot of fabricators moving between low density and linear low density.''
Nova's Clarke acknowledged LLDPE is gaining ground, but added it hasn't massacred LDPE in the manner some had predicted.
``The properties [LLDPE] needed to replace LDPE weren't achieved with hexene and butene,'' Clarke said. ``They're not matching performance so we're still getting [LDPE/LLDPE] blends.''
The plentiful supply situation could make it tough sledding for 3 cent increases announced for Jan. 1, as well as other potential increase attempts throughout the year.
``The market is turning to being a buyer's market,'' Harvan said. ``It won't be impossible to raise polyethylene prices, but it will be a lot harder than it's been in the last year or so.''
PP executives can't be blamed if they are not expecting big things in 1998, since 1999 is looming on the horizon like Mothra descending on Tokyo.
No less than 3.5 billion pounds of new U.S. PP capacity is scheduled to come on line by the end of 1999. North American PP sales were expected to finish up 7.1 percent in 1997 after climbing 13.2 percent in 1996, according to SPI.
``We'll see some stability in polypropylene in the first three quarters of 1998,'' Epsilon Products President Philip Jardine said in a recent interview at Plastics News' Akron office. ``But 1999 will be a challenging year for the industry.''
This pending deluge will make for an interesting market in 1998, particularly since two price increases attempted in 1997 were largely unsuccessful. The first increase attempt of 1998 is already under way, as major PP makers are seeking a 3 cent boost Feb. 1.
``The anticipation of large amounts of capacity in 1999 and 2000 is influencing PP pricing today,'' said Tom Sennett, PP business director for Amoco Polymers of Alpharetta, Ga. ``It's psychology. We don't like the fact that it's going on, but if you look at the short-term here and now, the foundation is in place for growth to be very good in 1998.''
Gerald Ferris, North American business planning manager for market leader Montell Polyolefins of Wilmington, Del., said PP growth should be in the 6.5-7 percent range again in 1998 with production rates in the low 90s. Ferris described the failure of the increase attempts and subsequent price softening as ``a little bit of an aberration.''
``When the Exxon plant came onstream it created the impression that the market was soft, but if you look at supply and demand our utilization rates were actually high,'' Ferris said.
Ferris added that Montell is also concerned about capacity expansions announced for 1999. Those expansions include projects by Epsilon (800 million pounds), Amoco (550 million), Aristech Chemical Corp. (550 million), Arco Chemical Co. (400 million) and Fina Oil & Chemical Co. (550 million by late 1998).
``We'll have to see what happens, but there might be some price erosion,'' Ferris said. ``You're not going to absorb 2 billion pounds in a year.''
Jardine, whose company is based in Marcus Hook, Pa., anticipates that PP will make inroads against HDPE in thin-walled containers and against ABS in automotive applications in 1998. Sennett added that PP molding, consumer goods and packaging markets will do well, continuing a trend that saw consumer product demand surge by 20 percent in 1997.
Bonner & Moore's Harvan also predicts a healthy 1998 for PP, with domestic growth in the 5-7 percent range. PP pricing could also remain fairly healthy.
``One of the things about polypropylene that continues to insulate it from some price volatility is the breadth of its usage,'' Harvan said. ``It's an amazingly versatile polymer that's being used in everything from fine specialty fabrics to auto batteries.''
PVC industry leaders definitely know what they don't want to see in 1998: a repeat of the early drop in resin prices in 1997. That had producers flailing about with a series of price increases that were ultimately unsuccessful.
``1997 was an unusual year in that the natural rhythm of the business was out of sync,'' Geon Co. Chairman, President and Chief Executive Officer William Patient said.
A downturn in housing starts, fueled somewhat by wetter-than-usual weather, was linked to the midsummer slump, which hit at a time when the industry usually expects prosperity.
``We tried to force a lot of big increases through earlier in the year and they fell apart,'' added Tom Stevning, PVC business director for Formosa Plastics Corp. USA of Livingston, N.J. ``Now we know that doesn't work.''
Formosa has opted for 2 cent increases in January and March. Some competitors already have matched the January attempt.
Industry executives and analysts alike predict PVC growth in the 4-6 percent range in North America in 1998. That number would build on sales growth of 10.5 percent and 6.4 percent, which SPI recorded for 1996 and 1997, respectively.
Even if 1998's growth estimate is met, PVC manufacturers will have a hard time replacing profit margins they've lost since late 1996, according to Pat Duke, vice president of polymers for Houston's DeWitt & Co. consulting company.
``The overall trend will be for downward pressure on PVC pricing because there's plenty available on a global basis,'' Duke said in a recent phone interview. ``Resin is backing up in America, but fortunately it looks like the market can absorb it.''
Duke added that the construction market, which dominates the PVC pipe and siding markets, isn't expected to be as strong in 1998, a prediction supported by the National Association of Homebuilders' projection of a drop of almost 5 percent in new housing starts in 1998.
But Cleveland-based consultant Dick Roman pointed out that existing home sales could still set a new record in 1998 even if housing starts lag. Sales of vinyl siding, pipe and windows used to remodel those homes could help fill the gap caused by a drop in housing starts.
The dip in housing starts will also be offset by an increase in the amount of PVC used in the homes that are built, according to Dick Mason, controller for Houston-based capacity leader Shintech Inc. PVC products added to building codes in several counties in Washington and Oregon are further proof of the material's acceptance, he said.
Roman added that some PVC makers, such as Geon and Occidental, may continue to focus on their compounding operations in 1998 in order to take advantage of a less-cyclical market.
Shintech, which does rigid PVC compounding through its K-Bin unit, will continue to develop that operation in 1998, Mason said.
``The cycles are different for resins and compounds,'' Mason said. ``You can suffer with compounds if you can't pass your raw material cost on, but if the markets aren't really tight, which they haven't been in recent years, compounds can hold on to the margin longer.''
Patient and Stevning, whose firms rank second and third, respectively, in North American PVC production behind Shintech, remained optimistic, particularly because of anticipated growth in such areas as window profiles and vinyl fencing.
``The window market is absolutely exploding, especially in the western part of the country,'' said Patient, whose firm is in Avon Lake, Ohio.
Stevning agreed, saying window profiles ``have sort of taken over the growth pipe and siding has lost in the last few years.''
Vinyl window sales, which were as low as 8.3 million units in 1990, are expected to reach 19.5 million units next year, according to a report released by the American Architectural Manufacturers Association.
Patient claims fencing also will boost PVC sales in 1998.
``A couple of years ago, you were almost laughed at when you talked about vinyl fencing,'' Patient said. ``Now it's really starting to grow in decking and garage doors and other areas.''
The only sizable new capacity coming onstream next year will be Occidental Chemical Co.'s 450 million-pound expansion in Pasadena, Texas. A 1.1 billion-pound plant planned in Convent, La., by Shintech has been delayed because of challenges filed by the Environmental Protection Agency and local environmentalists; it is now slated for a 2000 opening, according to Shintech officials.
Polystyrene makers must feel like they're surrounded by water but have nothing to drink.
``There will still be more product coming on than demand can absorb in 1998,'' said David Huntsman, vice president of PS and expanded PS for Huntsman Corp. of Salt Lake City. ``That's still an issue we have to deal with.''
Huntsman and BASF Corp. of Mount Olive, N.J., cut into this overcapacity by closing a combined 300 million pounds of capacity in recent months, but those closings only served to offset BASF's 315 million-pound Altamira, Mexico, plant, which opened last year.
``Demand is growing, but [PS makers] aren't making any money,'' said Andrew Stevens, a consultant with Houston's Phillip Townsend Associates Inc. ``They're still absorbing capacity from previous expansions.''
This no-profit litany was heard from PS makers throughout the year, peaking in the fall when fingers were pointed after attempts to raise prices fell apart.
``If competitors choose not to adjust their prices, it becomes more than just a supply and demand issue,'' said Bob Koaches, PS business director for North American capacity leader Dow Plastics of Midland.
With resin prices dropping an average of 4 cents in late 1997, PS makers are hoping for success on 3 cent hikes announced for Jan. 1. Overall, industry growth of 3-5 percent can be expected in 1998, according to producers and analysts.
Ironically, lower prices caused by oversupply could fuel increased demand in 1998, adding
to the 7.8 percent sales boost SPI reported for PS in 1997.
``With prices as low as they are, polystyrene will remain an attractive material,'' Huntsman said. ``When you see sales increase, you'd like that to translate into increased margins, but the amount of material in the marketplace has held us back.''
Early signs of success for the January increase could create significant prebuying in anticipation of a second increase, said Steven Cummings, market intelligence leader for Nova Chemicals in Calgary. Cummings said that same scenario played out in 1994, the last time the industry hit this point in its historic pricing cycle.
Nova is confident PS demand will remain strong because of the closeness between leading economic indicators and domestic PS demand. Since 1972, PS demand has followed leading indicators with a gap of only 6-12 months, Cummings said. Those indicators are on the rise again headed into 1998.
Lifestyle changes are adding to this growth, as PS' food packaging base has benefited from busy consumer lifestyles, with more families eating out or eating on the run, he said.
Margin shrinkage caused by drops in PS pricing that weren't reflected in the styrene market could be alleviated in 1998 when both Nova and Arco Chemicals add styrene capacity, Stevens said. Closing smaller, outdated plants, such as BASF and Huntsman did, also will give the market a boost, he said.
Crystal PS will see more growth than high-impact PS because of such applications as onetime use disposable packaging. Crystal PS growth could be as high as 10 percent, with HIPS growth in the 3 percent range.
The only significant capacity expansion in 1998 will be BASF's addition of 240 million pounds in Joliet, Ill., late in the year.
1998 could be another step in the PET industry's return to health from the pricing pitfalls it experienced in 1996.
``We expect to see pretty aggressive growth again in North America of between 10-15 percent,'' Eastman Chemical PET container plastics business manager Phil Myers said. ``Pricing still isn't acceptable to our viewpoint, but it's not as bad as it was at the end of last year.''
PET bottle resin prices actually regained 11 cents before dropping a few pennies late in the year. A 3 cent increase slated for December has met mixed results.
Shell Chemical bottle resins marketing manager Tom Petersen expects to see a moderate PET price increase of 1-4 cents in 1998.
``Prices will be stabilizing slightly higher,'' Petersen said. ``We did see some price increases this year. If not for that, we would have shut our doors.''
``The industry looks very good on the growth side, but we need to price responsibly to allow our margins to recover,'' he added.
Eastman of Kingsport, Tenn., leads the field with 39 percent of the U.S. market; Houston-based Shell is third with 13 percent.
Edgar Acosta, a consultant with Houston's DeWitt & Co., was even more optimistic about PET growth, predicting a growth rate of 15-18 percent in 1998. But Acosta pointed out the moderate price upswing of 1997 has to be placed in the proper context.
``The price increases [PET makers] gained are renewing optimism, but they need another 10-20 cents to pay off their plants,'' he said.
He added that recent inavailability of off-spec material is a sign PET makers are showing some discipline in their production practices.
``When prices were dropping ... [PET makers] were raiding each other's accounts,'' he said. ``Now they've changed their tune.''
Potential growth markets in 1998 include single-serve bottles for products such as milk and an anticipated push into beer bottles.
As for capacity expansions, things are expected to be quiet until Wellman Inc. of Shrewsbury, N.J., brings up a 470 million-pound plant in Bay St. Louis, Miss. That plant's first line should be operating by late 1998.
ABS could see declining production and sales for a fourth consecutive year in 1998, as the market continues to shrink after setting records in 1994.
``We expect to get off to a good start, but end the year down,'' said Bruce Kleinert, ABS product manager for Bayer Corp. of Pittsburgh, the second-largest North American ABS producer behind GE Plastics of Pittsfield, Mass. ``In the first half, we expect to run full out. Producers can wait for things to happen or we can try to make positive things happen.''
Producers' positive efforts will have to contend with continuing replacement by such materials as PP and abundant supplies that have kept prices down.
Fred Stephan, ABS commercial director for GE Plastics, said he doesn't expect the ABS market to worsen in 1998.
``There were some anomalies
we went through in 1997 in a variety of different areas that we hope not to go through in 1998,'' Stephan said.
Final 1997 projections anticipated that North American sales and captive use would drop 3.7 percent, with production down 6 percent, according to SPI. That picture has worsened somewhat from 1996, when production was up 1.3 percent but sales and captive use dropped 2.1 percent.
``This isn't the type of market where you can easily see volume absorbed very well,'' Kleinert said, adding PP has hurt ABS in the auto market, while PS has provided competition in such areas as floppy disks, toys and business machinery.
ABS makers will continue to minimize erosion in anticipation of BASF adding capacity at Altamira in 1999, according to John Uhlein, a consultant with Peppin & Associates of Chesterfield, Mo., but prices still will be affected by oversupply and competition from other materials.
Stephan added ABS still will have some advantages over PP in 1998, particularly in the auto market, where PP can't meet some safety standards for interiors.
Solid growth in automotive applications should lead to another strong year for nylon in 1998.
DuPont Co., the Wilmington, Del.-based North American market leader, is anticipating growth of 6-8 percent, while BASF of Mount Olive, N.J., which is among the top five producers, expects 7 percent.
North American production growth for 1997 was estimated at 7.2 percent by SPI, while sales and captive use rocketed up 11 percent.
Auto manifolds should play a big role in this growth, since many programs will be commercialized in 1998, said Michael Crickenberger, Americas regional business manager for Dupont's Zytel and Minlon nylons.
``By 2000, we'll see more nylon manifolds than metal manifolds on the road,'' Crickenberger said.
Nylon has been able to flourish in spite of such drawbacks as moisture absorption, Peppin & Associates' Uhlein said.
``Automotive continues to gobble up more and more nylon,'' he said.
Nylon pricing should be flat in 1998, in spite of short-term upward pressure from shortages in raw materials such as adepic acid, said Raj Mehta, BASF's engineering resins business director.
``The adepic shortage could be a theme from now until the year 2000,'' Crickenberger said. ``We'll have a very high sales-to-capacity issue. If something happens at a plant in another part of the world, the market will see the impact pretty quick.''
These shortages, in addition to a tight glass supply affecting growth in glass-reinforced nylon, could drive prices up an average of 5 cents in 1998, he said.
The capacity expansion scene should be quiet in 1998 in the wake of BASF's recent 70 million-pound project in Freeport, Texas.
While the results of a fall pricing blitz still are up in the air, PC should be stronger than a candle in the wind in 1998.
Of course, ``Candle in the Wind 1997'' is the title of the Elton John song that eulogized Princess Diana and sparked worldwide sales of 13 million CD singles through Christmas. As Bill Driscoll, Lexan PC general manager for market leader GE Plastics, will tell you, there's a lot of PC going into those CDs.
``The Diana effect is still there,'' Driscoll said. ``Usually we see a Christmas production slowdown, but this year we had to increase operating rates by 10 percent around Labor Day. It took off and it hasn't stopped.''
This push will help PC reach a growth rate of 7-8 percent in 1998, although supply will be tight, Driscoll said. That is slightly lower than the industry's 15-year growth average of 9 percent.
Trough? What trough? Thermoplastic elastomers may be the only category in which executives can predict growth rates of 15-20 percent without casting serious doubts on their credibility.
The 7-8 percent growth TPEs enjoyed in 1997 was in line with analysts' predictions of 5-9 percent annual growth through 2000. That growth has boosted TPE production from 194 million pounds in 1992 to about 274 million pounds in 1997.
BFGoodrich Specialty Plastics in Brecksville, Ohio, expects to see double-digit growth in its Estane thermoplastic polyurethane line again in 1998, said Dale Kramer, TPU global general manager. BFG has seen 15-20 percent growth in TPU in each of the past four years.
In thermoplastic vulcanizates, officials at Advanced Elastomer Systems of Akron, Ohio, expect to see its Santoprene TPV line grow 13-15 percent in 1998.
The auto market was not as strong for TPVs in 1997, AES Chief Operating Officer William Ginter said, but the consumer market continued to discover TPVs in such applications as power tool grips. Ginter, who expects TPE prices to rise ``slowly but surely'' in 1998, is optimistic TPVs can gain ground in such areas as automotive clean air ducts and trunk and hood seals.
Replacing thermoset rubber will continue to drive TPEs, according to Uhlein.
``There's a lot of rubber out there,'' he said. ``And I expect [TPE makers] to continue picking off applications as time goes on.''