Although polyethylene prices dropped another penny per pound in December, producers are gathering steam on price jumps proposed for January, as rising oil and natural-gas costs have put PE makers' backs to the wall.
Several processors contacted recently said their skepticism about price hikes is giving way to a realization that PE makers are unlikely to crack when enforcing the increase. Several PE makers already have revoked 30- or 60-day price protection guarantees extended to some buyers, industry sources said.
In addition, many PE firms have taken lines down for maintenance or cut back on their production rates to make up for poor profitability. Robert Bauman, an industry analyst with IBM Chem Systems in Tarrytown, N.Y., estimates that as much as 15 percent of North American PE capacity is not being used.
The PE drawback also is tied to ethylene shutdowns announced by Union Carbide Corp., Equistar Chemicals LP|and Westlake Group.
"A lot of ethylene had gone cash-negative on the cost side, and polyethylene was also negative on cash," said John Hotz, vice president of PE|for Nova Chemicals Corp. of Pittsburgh.
Bauman is bullish on the 5 cent-per-pound increases proposed for January and 6 cent-per-pound hikes nominated for February. High feedstock costs could allow upward pricing momentum in March as well, Bauman said by phone Jan. 25.
"We could see 20 cents in price increases in the first quarter," he said. "We're looking at a three- or four-month spike. But this isn't demand-based. Demand is actually weak."
Recent resin sales data backs up Bauman's claim. Sales of linear low density PE into the film market were up less than 1 percent through November 2000, while film-grade LDPE sales were down more than 9 percent and film-grade HDPE sales were down more than 6 percent, according to the American Plastics Council in Arlington, Va.
Film is the largest single end market for LLDPE and LDPE and the third-largest for HDPE, according to APC.
Lower processor inventories also could give increase attempts some teeth. Many processors reported they were working off inventories in the second half of 2000, which led to demand being off from the first half of the year.
"If [a processor] calls today and says he needs three extra cars, he either can't get them, or he can only get them by paying 10-12 cents more per pound," Nova's Hotz said.
Chem Systems restated that belief in a Jan. 18 report, saying that processors did not pre-buy in December because of doubts they had concerning January increases.
PE makers clearly are feeling the heat. In Pittsburgh, Nova Chemicals Corp.'s olefins/polyolefins unit saw its fourth-quarter profit cut in half — down to $27 million — from the same period in 1999. Equistar Chemicals LP of Houston earlier reported its polymers business had lost $100 million in the third quarter, and followed up that news with the Jan. 22 announcement of the closing of its PE plant in Port Arthur, Texas.
Even PE kingpin Dow Chemical Co. of Midland, Mich. — which has shown a knack for maneuvering through industry cycles in recent years — saw fourth-quarter pretax profit for its plastics unit drop slightly in the fourth quarter when compared with 1999.
In a Jan. 25 news release, Nova President and Chief Executive Officer Jeff Lipton said: "It was impossible to raise resin prices to protect our margins and, as a consequence, earnings tailed off each month during the [fourth] quarter."
"Most PE makers are already operating at a loss," Chem Systems' Bauman added. "This clearly isn't a sustainable operating position."
Since mid-2000, film-grade PE prices have dropped an average of 7 cents per pound, while prices for nonfilm PE have dipped down an average of 4 cents per pound.