Polypropylene's reigning champ and an aggressive challenger each are working to situate themselves for survival as prices and profitability continue to drop in 1998.
The champ is Montell Polyolefins, the Wilmington, Del.-based division of global PP leader Montell NV of Hoofddorp, the Netherlands. Montell produces about 3 billion pounds of PP in North America each year.
The challenger is Epsilon Products, a Marcus Hook, Pa.-based firm that will double its capacity in the next year by opening a major PP plant in Garyville, La. After that expansion, Epsilon will move into the top five North American PP makers, with about 1.6 billion pounds of capacity.
The two firms are separated by less than an hour's drive in the metropolitan Philadelphia area. They're also joined by the market forces, including overcapacity and decreased Asian exports, that have driven PP prices down by an average of 5 cents per pound through July.
``Profitability is less than attractive,'' Bob Ockun, Montell senior vice president, said during a recent interview in Wilmington. ``By our estimation, 10 percent of the lines in the industry will lose money at the gross-profit level in 1998.''
This comes despite a surge in demand. North American sales and captive use have climbed almost 6 percent through June, according to the Society of the Plastics Industry Inc. in Washington.
``The markets are good and that's the paradox,'' Michael Pembroke, Epsilon's sales and marketing director, said during a recent interview in Marcus Hook. ``How have we had so much pressure on pricing when supply and demand are in the 90 percent range? We're in uncharted territory.''
Epsilon will be playing a substantial role in the supply picture next year when it opens a pair of lines in Garyville. A 400 million-pound-per-year impact copolymer line will begin operating in May, while a similarly sized random homopolymer line will begin production in July.
The project will proceed in spite of widespread industry speculation that one or both of the lines would be delayed because of negative market conditions, according to Epsilon President Phil Jardine.
Bringing the lines up on time ``has been an issue with our competitors since day one,'' Jardine said.
``It's OK if [our competitors] don't believe us as long as our customers do,'' he added. ``It wasn't our idea just to have this big plant. It makes strategic capital sense to move forward in this way.''
Montell will add 150 million pounds of capacity in the fourth quarter by converting a homopolymer line to copolymer in Bayport, Texas. The firm will add another 100 million pounds through debottlenecking by 2000.
Montell also recently added almost 40 million pounds of capacity at its compounding plants in Gahanna, Ohio, and Jackson, Tenn. The company's total North American PP compounding capacity now stands at about 175 million pounds.
In total, the North American PP industry plans to add about 3 billion pounds of new capacity by the end of next year.
Double-digit sales growth in June and July has prompted Montell, Epsilon and most other major PP makers to attempt a 3 cent price hike in early September.
Sales growth through May was fueled by housewares (up 22.3 percent), caps and closures (up 14.7 percent), major appliances (up 12.3 percent) and transportation (up 11.2 percent), according to SPI.
Officials at both Montell and Epsilon credited the proliferation of large PP storage containers with the boom in housewares.
``People used to put a lot of stuff in boxes, but now they're giving their kids these storage containers to put their toys in,'' said Montell PP business planning director Tom Boal. ``These products are getting great shelf space in Wal-Mart and Kmart.''
``People don't have wooden toy boxes anymore,'' Epsilon's Pembroke said.
Double-digit growth in transportation was reached in spite of some business losses stemming from the General Motors strike.
``Automotive took a hit, but it's not like our doors were shut for seven weeks,'' Ockun said.
Ockun said he's confident continued industry growth of 6-6.5 percent per year will help absorb the new capacity, but he added that lowered operating rates — which Montell anticipates will bottom out at about 85 percent in mid-2000 — might lead less-established rivals to idle capacity.
``Eighty-five percent is a low operating rate for this industry,'' he said. ``It might not know how to cope with that on a long-term basis. [Other PP makers] might shut down.''
Epsilon's Jardine is a shade more upbeat, as you would expect of a man steering a major capacity addition.
``There are a lot of new designs and new applications that will be brought forward in mid-1999,'' Jardine said. ``Polypropylene's low price should spur demand at that time.''
Among these new applications, according to Jardine, are improved PP fibers aimed at competing with nylon in the carpet market and PP films that could tussle with polyethylene in films for the housewares and consumer products markets.
Newer members of the Epsilon family — such as Executive Vice President Woody Miller — also are convinced of the company's potential to become a larger player in the PP market.
Miller joined Epsilon in July after a five-year stint as president and chief executive officer of Blessings Corp., a film producer in Newport News, Va. Blessings' Edison Plastics Division ranked 47th in Plastics News' 1998 ranking of North America's top film and sheet producers.
``It's hard being among the elephants, but mice can run faster — they're a little smarter and they can run into cubbyholes,'' Miller said. ``[Epsilon] can react to customers in ways that larger suppliers might not be able to.''