HOUSTON — The answers to the questions most frequently asked of polyethylene executives at a pair of recent petrochemical conferences really were quite simple. They went something like this:
Yes, we are in a trough period and operating rates are expected to drop.
Yes, demand is still very good.
And, yes, we expect to work our way through this scenario as we have in past business cycles.
These outlooks were presented by Equistar Chemicals' J. Vaughn Deasy at DeWitt & Co. Inc.'s Petrochemical Review, and by Exxon Corp.'s Irwin Levowitz at the World Petrochemical Conference, organized by Chemical Market Associates Inc. of Houston. Both events were held April 1-2 in Houston.
Levowitz predicts that the next few years will be ``especially challenging,'' while Deasy said his company expects North American PE operating rates to be below 90 percent from 1999-2002.
Both Equistar and Exxon have a lot at stake in the matter. Equistar of Houston is North America's largest PE producer, with more than 6 billion pounds of capacity. Exxon, also of Houston, ranks second with almost 5 billion pounds of capacity.
Much of this challenge will be caused by oversupply and overcapacity in both PE and ethylene, its primary feedstock. For example, North America's 1997 PE capacity of 35.5 billion pounds will balloon to 41.7 billion pounds by 2000 because of major additions from Exxon, Nova Chemicals Inc., Dow Chemical Co., Union Carbide Corp. and Equistar.
Ethylene capacity, in turn, is expected to hit 112 billion pounds by 2005 from 71 billion pounds in 1995.
Overall, PE use will climb an average of 5 percent annually between 1995 and 2005, according to Levowitz.
The imbalance is evident in a series of comparisons presented by Pat Duke, Houston-based DeWitt's vice president, who pointed out that global PE capacity will grow 7.5 percent annually between 1997 and 2002, while demand is slated to grow only 5 percent.
Although demand has been strong — for example, demand for linear low density PE jumped 5.7 percent last year — oversupply has driven PE prices down an average of 6-7 cents per pound since late summer.
PE makers had announced price increase attempts for April 1, however, some industry buyers and analysts have expressed doubts those increases will be achieved.
Levowitz, Exxon's PE vice president, also predicted a change in North American market share among the three grades of PE.
Low density PE will lose 6 percentage points of its 25 percent market share by 2005, he said. LLDPE will gain 4 percentage points to reach a 33 percent share and high density PE will gain 2 percentage points to consume 48 percent of the market.
But the industry shouldn't shed any tears for LDPE, according to Levowitz.
``People have been burying LDPE for years, but in North America today, more LDPE is consumed than at any time in history,'' Levowitz said.
Producers will have to focus on low-cost positions, higher operating rates, lower fixed costs and a better product mix to succeed, according to Deasy, HDPE vice president at Equistar.
``We've had a good three years in business, but now the down cycle has begun,'' Deasy said. ``The question is, how long and how deep is it going to be?''
PE markets for automotive, sheet, drum and pipe have seen the most growth in recent years, Levowitz said. Auto/sheet/drum, which includes gas tanks, truck bed liners and 55-gallon drums, has grown at an 8-10 percent rate. Pipe, where PE competes with PVC, metal, concrete, cement and clay, has been increasing at a 9 percent clip.
The economic picture is confused further by just-in-time inventory practices that make demand appear erratic when it actually is steady, according to Deasy.
``Companies don't want to put resin in silos or in tracks behind the plant just to feel comfortable,'' Deasy said. ``This leads us to conclude we have `good years' and `bad years,' and that's really not true.''
Levowitz and Deasy expect increased competition in the PE field, with Levowitz adding that both resin producers and their customers will look to consolidate.
Technology also will play a major role as metallocene catalysts gain broader acceptance. Deasy pointed out that metallocene technology's potential goes beyond ``cannibalizing'' current PE uses.
The value of intellectual property also is being given more attention in light of recent technological advancements, Levowitz added.