MIDLAND, MICH. — For Dow Chemical Co., getting through the downturn in the polyethylene market cycle is a matter of what and where.
The what is the company's differentiated product line, including its Elite metallocene-based linear low density PE. The where is at Dow locations around the world, which include areas that have picked up the slack for shrinking demand from Asian markets.
Company officials outlined their game plan in recent interviews at the firm's Midland headquarters.
``Right now we're sold out and operating at full capacity and we expect to be sold out in the near future,'' said Len Azzaro, North American PE commercial director.
This sold-out situation has Dow executives confident they'll find a home for the 550 million pounds of new PE capacity the Fort Saskatchewan, Alberta, plant will produce in December. The new PE line there will produce standard Dowlex LLDPE and metallocene-enhanced Elite LLDPE made with Insite technology.
The mood at Dow is running against conventional wisdom, which sees decreased demand from Asia, slumping resin prices and at least 4 billion pounds of new capacity planned in North America alone by the end of 2000, and predicts tough times ahead for global PE markets.
These ominous numbers have led several resin makers and industry analysts to predict PE operating rates will drop below 90 percent in 1999 and 2000. Yet Dow, the global leader with a 9 percent market share, insists it's ready to ride out the storm.
``We've seen previous troughs like this when supply comes up and then pricing sags for a year until demand catches up with capacity,'' Azzaro said. ``The question this time is if the impact on demand from the Asian situation changes the length of the trough.''
``We're not smiling about [the Asian crisis], but we've got good products and we're a global company with lots of places to move product,'' he added.
But inventories remain low in North America, with Azzaro estimating most PE buyers' inventories are ``well under 30 days.''
``All markets operate on fear and greed,'' Azzaro said. ``If buyers think there's a shortage, they'll start buying and if they think there's an oversupply, they'll shed inventory.''
Azzaro also expressed doubt that any major PE producer would idle capacity to tighten supply, saying there is ``no guarantee'' other producers would follow that lead. The perception that resin-price declines create good times for buyers also is overstated, according to Azzaro.
``When our customers' prices go down, their customers see the polyethylene price drop and they want a lower film price,'' he said.
Azzaro declined to comment on the possibility of another PE price increase attempt later this year, but he agreed that confusion among buyers played a role in the failure of an earlier effort that would have raised prices between 3-5 cents per pound. So far in 1998, North American PE prices have dropped an average of 4 cents per pound.
``It shows weakness when producers play with dates and amounts and change things around [on a price increase],'' he said.
Asia's economic turmoil hasn't caused Dow to alter its other global expansion plans. A 460 million-pound-per-year line came on line in Schkopau, Germany, in April and a planned January startup of a 660 million-pound-per-year PE plant in Thailand is on track. Plans to bring on 595 million pounds in Argentina in 2000 also are on schedule.
All of Dow's new PE capacity will be outfitted with Insite metallocene technology.
``Linear low is obviously where the high growth is in polyethylene polymerization and it's our primary investment focus,'' said Roger Schwartz, Dow's global PE business manager.
LLDPE growth is expected to be almost 8 percent annually for a seven-year period ending in 2001, Schwartz said. Total PE growth is projected at 5.1 percent annually from 2000-2005.
LLDPE has benefited from solid growth in the film market, which absorbs more than 60 percent of North American LLDPE production. U.S. LLDPE film markets this year have jumped almost 6 percent through April, according to the Society of the Plastics Industry Inc. in Washington.
Stretch film demand has soared almost 10 percent to date in 1998, but that growth has been tempered by poor profitability among stretch film makers resulting from overcapacity in the industry, according to Dow senior marketing executive Gus Garrett. Dow's metallocene-based LLDPE has created downgauging opportunities for film producers, Garrett added.
Stretch and consumer liner film each make up about a billion pounds of annual consumption in North America. The consumer liner market, mostly trash bags and can liners, is evolving into a thin-gauge market dominated by fewer than a dozen major suppliers.
``It's basically Hefty [Tenneco Packaging] and Glad [First Brands Corp.] and a whole bunch of little guys,'' Garrett said of the consumer liner field.
Dow officials also are counting on the company's Elite metallocene LLDPE to grow as a result of customers' desire to streamline their purchasing patterns.
``Converters want to simplify the number of resins they buy,'' senior marketing executive Carlo Guarino said. ``Elite can replace two or three compounds with one resin.''
Guarino predicted U.S. demand for metallocene PE, which was less than 500 million pounds last year, will top the 1 billion-pound mark by 2000 and reach 3.5 billion pounds by 2005.