HOUSTON — High feedstock costs and slowing demand have highlighted the risks of the polyethylene market, leading some industry consultants to expect a decline in prices and profitability through the first half of 2002.
"The polyethylene market isn't for the faint of heart," Len Azzaro, Dow Chemical Co. PE business vice president, said at DeWitt & Co.'s World Petrochemical Review in Houston. "Polyethylene prices haven't increased with the price of oil and natural gas, so the only way to remain profitable is to reduce your cost structure."
With prices for natural gas — which provides the ethane to produce 70 percent of North American PE — at double their historic levels, producers are in a bind, even though they've raised prices successfully an average of 8 cents per pound to date in 2001.
"In the short-term, we can hedge some of [the increases in natural gas], but beyond that we're limited in what we can do," Norman Phillips, Equistar Chemicals LP vice president-PE, said in Houston. "It looks like [high natural-gas prices] are going to be with us for a while, and that could have some impact on capital projects."
For the time being, the industry seems to have its share of such projects. Nova Chemicals Corp. of Pittsburgh currently is bringing on almost 1 billion pounds of capacity split between high and linear low density PE in Joffre, Alberta. Formosa Plastics Corp. USA of Livingston, N.J., is adding more than 500 million pounds of HDPE in Point Comfort, Texas.
Factoring in slower-than-normal PE demand, courtesy of a slowing U.S. economy, darkens the picture even further for PE makers. Those conditions have led Howard Rappaport, an industry analyst with Chemical Market Associates Inc. in Houston, to project lower prices for PE until mid-2002. U.S. operating rates are expected to follow the same pattern. Rappaport sees U.S. HDPE prices dropping into the mid- to high 30s in cents a pound by mid-2002, with LLDPE prices hitting the low 30s and LDPE prices dipping into the high 30s.
U.S. operating rates for HDPE will remain in the 80-83 percent range, with LLDPE in the high 70s and LDPE in the mid-90s and above, said Rappaport.
U.S. HDPE demand growth in 2001-02 is expected to be 4.2 percent, with LLDPE climbing 6.6 percent and LDPE up 0.5 percent in that same period, Rappaport said.
Phillips sees some hope in the HDPE pipe market, while Azzaro said the only film market that could be hit by an economic slowdown would be stretch film because of its industrial uses. Other packaging-based film markets should remain steady.
"You're not buying less food because of the economy," Azzaro said. "And if you have a baby, you're not using fewer diapers."