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April 10, 2000 02:00 AM

Analysts predict price slump from PE glut

Frank Esposito
Senior Staff Reporter
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    HOUSTON — Changes in the major dynamics of the polyethylene market will be easy to spot in the next two years, as prices bounce to the beat of a new drum. Demand looks to remain strong in North America, but it won't be enough to stave off the effects of overcapacity. The anticipation of 2 billion pounds of new PE coming from Nova Chemicals and Dow/Union Carbide in late 2000 will begin to drive prices down in mid-2000.

    But continued demand — and a dramatic shortening of traditional industry cycles — will lead prices to bounce back in early 2001, according to Chemical Market Associates Inc. consultant Howard Rappaport.

    Pat Duke, a consultant with DeWitt & Co., sees the cycle bottoming out a little later — in late 2001 or early 2002 — before building to a new peak sometime between 2005 and 2007.

    Duke and Rappaport spoke at the CMAI World Petrochemical Conference and DeWitt & Co. World Petrochemical Review, both held March 28-30 in Houston.

    Some of this increased cycle speed will come from developments in electronic-commerce, which could make pricing more transparent as Web-based resin sales increase.

    North American PE makers headed into 2000 still needing to improve their profit margins in spite of the market price jump of 16-18 cents in 1999. Rising ethylene costs limited the amount of margin PE producers could build in 1999, and a price dip in late 1999/early 2000 wiped out much of that meager margin, Rappaport said.

    "The [PE] margin increase wasn't enough to reinvest in the first place — then it was gone, and ethylene prices were still going up," Rappaport said.

    The not-so-good news for producers is that although prices will rebound quickly in 2001, margins shouldn't see significant improvement until 2003 at the earliest, according to Rappaport.

    Producers are off to a good start in 2000, with low and linear low density PE prices climbing an average of 4 cents per pound, and high density PE up 3 cents per pound in March.

    DeWitt's Duke attributes some of the early momentum to minimal effect from Y2K-related inventory building, although many producers and processors thought that phenomenon would play a role in the early going. In fact, producers' inventories of LLDPE, polypropylene, polystyrene and PVC actually declined in 1999.

    "There was a lot of talk about 2000 being a short [demand] year because of Y2K," Duke said. "That theory held up for about two weeks until people realized there wasn't any inventory downstream."

    CMAI expects LLDPE demand to grow 5 percent this year, with HDPE climbing 4 percent and LDPE growing less than 1 percent.

    PE use in film for the food market will contribute to that solid growth.

    "You have to keep food packaged and fresh," Rappaport said. "That's not affected by the economy. People still have to eat."

    Food-packaging film accounted for 13 percent of 1999 LDPE sales and 5 percent of LLDPE sales, according to the American Plastics Council in Arlington, Va.

    Rappaport expects consolidation among both PE producers and processors to continue. Concerns that the creation of monoliths such as Dow Chemical Co./Union Carbide Corp. and ExxonMobil Chemical Co. will constrain resin buying are unfounded, according to Rappaport.

    "There's still plenty of competition in polyethylene," he said. "A buyer still has a lot of choices."

    But the consolidations could have another effect, in that they're distancing Dow/Union Carbide and ExxonMobil from the rest of the PE pack. By 2001, top-ranked Dow will be more than 7 percent larger than the No. 3 firm in global PE capacity, while second-ranked ExxonMobil will be more than 5 percent larger than the third player, according to Duke.

    On the PE processing side, large packaging firms created by consolidation will be better equipped to negotiate resin prices, Rappaport said.

    Duke added that the mega-processors will have more power to affect market pricing. The U.S. blow molding market could be especially influenced by a handful of large processors, he said.

    Amid all of this, PE makers also need to keep an eye out for competing materials, particularly when price becomes a factor. Rappaport estimates there's at least some overlap — where more than one material can be used for the same application — in 10-15 percent of the global commodity plastics market.

    HDPE in particular has to look out for competition from PP in injection molding and PVC in pipe, Rappaport said, warning that injection molders who make tooling changes to go from HDPE to PP may not go back to HDPE when prices come down. PP also is being tested in some pipe applications, he said.

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