HOUSTON — Polypropylene makers aren't out of the woods yet where profitability is concerned.
Prices and profitability have been hampered by what BP Amoco Polymers' James Fawley called "a triple whammy" of massive supply increases, an economic slowdown and a propylene feedstock cost squeeze.
North American PP operating rates are expected to begin an uptick later this year, climbing from the low 80s in percentage to the mid-80s and staying there through 2002, according to Chemical Market Associates Inc. analyst Graham Harris in Houston.
That swing should be helped somewhat by global market leader Basell NV's temporary closing of about 400 million pounds of capacity in Bayport, Texas. But margin improvement and supply/demand balance will not be apparent until 2003.
In North America alone, capacity has increased 30 percent since 1999, including almost 2 billion pounds this year from expansions by Dow Chemical Co., Formosa Plastics Corp. USA and others. Demand has not kept pace, in part because major slowdowns in the automotive and fiber markets.
"Polypropylene producers focused on plant loading vs. profitability because of the new capacity," said Fawley, PP business manager with BP Amoco Polymers in Naperville, Ill. "As a result, it's questionable if even a top-quartile polypropylene plant can generate cash returns."
Harris spoke at his firm's World Petrochemical Conference, while Fawley spoke at DeWitt & Co. Inc.'s World Petrochemical Review. Both events were held March 28-29 in Houston.
The flat demand the industry suffered in 2000 will be replaced by 7.4 percent growth in 2001-02, Harris said, adding that PP demand in injection molding will climb almost 9 percent in that period.
Further consolidation among PP makers remains a real possibility, said Fawley, while Harris commented that PP makers need to rethink their approach to pricing, since producers too often lower their prices to gain or retain market share.
"Management needs to communicate to the sales force that decisions that support the pricing strategy will be rewarded, even if it results in a loss of business," Harris said.
North American PP prices have fallen steadily since mid-2000, and producers have seen little success with 3 cent-per-pound increase attempts that were slated for Feb. 1.
Another key to PP's long-term recovery, according to Fawley, will be its ability to compete with other plastics, ranging from ABS to PET to high density polyethylene, and its low cost per cubic inch when compared with those materials.
PP's cubic-inch cost is 1.25 cents. Similar costs for other commodity plastics range from about 1.4 cents to more than 3 cents, Fawley said.