The polyethylene market's wild ride could get wilder before 1999 is over, as ethylene and PE outages and Y2K fears threaten to throw the industry's cyclical pattern out of whack for at least a year.
With prices already up an average of 6-8 cents per pound in 1999, the addition of a third round of increases for an additional 5 cents effective May 1 is gathering steam. Outages at various Gulf Coast ethylene and PE units have tightened supply, helping the market recover rapidly from the 12 cent decrease it suffered in 1998.
The latest outage hit Equistar Chemicals' ethylene cracker in Channelview, Texas, which went back down May 18. The cracker, with an annual ethylene capacity of 1.9 billion pounds, had been down since early April for compressor repairs. Equistar officials now say one of the plant's two units will be operating again by May 26, while the second line should restart in early June.
The outage tightens an ethylene market affected by planned and unplanned ethylene outages at Dow Chemical Co., Union Carbide Corp. and Shell Chemical Co. In addition, Mobil Chemical Co. has been unable to meet customers' demand for high and linear low density PE because of operating problems in Beaumont, Texas.
The pricing picture was complicated further by Exxon Chemical Co.'s recent decision to break from the PE pack and announce a 5 cent-per-pound increase for July 1. Most major PE makers had announced increases for June 1.
Industry sources speculated Exxon delayed the move to give customers relief after the sharp price rises of the first half of the year. Officials at Dow, Union Carbide and Nova Chemicals Ltd. of Calgary, Alberta, said they plan to stick with their June 1 increases.
As turbulent as the PE market has been, things just could be getting started, according to Robert Bauman, an industry consultant with IBM Chem Systems in Tarrytown, N.Y.
``The market is critically tight,'' Bauman said. ``The ethylene shortage has been an unforeseen blip in a time of anticipated oversupply.''
The market's ups and downs could continue in a scenario that calls for demand and price increases in the early summer months, decreases in late summer as seasonal patterns kick in, and then increases in October as processors load up on material to guard against any shipping problems that could result from Y2K computer adjustments.
That scenario was spelled out by Bauman and several other PE buyers and industry contacts. Bauman said major corporations including General Motors Corp. and Coca-Cola Co. are requiring suppliers to have as much as 5 percent additional inventory on hand to handle Y2K difficulties. An official at a major resin distributor said his firm is planning to increase inventories by 10 percent this fall as well.
An executive at a major PE producer said his firm has planned for such a demand pattern, but he hopes it won't come to pass.
``We hope people don't go wild,'' he said. ``It's not good for our industry to have that kind of dislocation from demand patterns. It puts a huge strain on logistical resources and cash flow. ... But all it takes for that to happen is for every [customer] to order another hopper car.''
An October demand surge could drive up PE demand and prices again in the fall, causing those numbers to surpass normal seasonal demand.
``A company like Kraft can't do anything without packaging, so they better have at least a month's worth of material on hand,'' Bauman said.
The Y2K ripple effect then could continue into 2000. If no problems materialize, processors will have more material on hand to start the year than they normally would, driving prices down in the first half of 2000 when they would be on the upswing.
``We're telling people that  might be a 14-month year as far as sales and demand are concerned,'' Bauman said.
The PE executive said one of his company's projections calls for the market to be soft in the first quarter of 2000 because of Y2K-fueled inventory building.
But Bauman cautions that early-year sales booms — particularly the 12 percent jump in LLDPE production since February — largely are the result of pre-buying in advance of further price increases, and will not be sustainable throughout the year.
The only thing for certain at this point is that the ongoing PE upheaval is keeping processors in a state of flux.
``It's a nightmare to keep track of when the different increases apply,'' a New York-based PE buyer said. ``We're in a constant quoting mode. We've told our customers to not even bother looking at our price list.''