AKRON, OHIO - Too many pounds of material are chasing too few accounts in the North American polyethylene and polypropylene markets. In recent months, this tail-chasing has led prices for PE and PP to drop an average of 3 cents per pound.
PE makers had pushed through 8 cents in increases to most buyers in the first quarter. Now, 3 cents of that is gone, and many processors expect another 2 cents in price reduction by the end of June.
``The [first] increase was driven by energy and feedstock costs, but it hasn't been enough to stop the bleeding,'' a Midwest PE buyer said. ``This isn't an inventory correction anymore. It's just slower sales.''
American Plastics Council resin sales data appear to bear out that claim. Through March, U.S./Canadian sales of linear low density PE were down 4.2 percent from the same period in 2000, while sales of high density PE were off 7.8 percent, and low density PE sales had plunged 9.5 percent, according to Arlington, Va.-based APC.
Pricing pressure from natural gas, which is used to make ethylene, also has eroded. Natural-gas prices per million BTUs were just under $4 on June 5 after being at least double that amount earlier in the year.
``There was a lot of emotion and a lot of anticipation because of natural-gas prices,'' a Virginia-based PE buyer said. ``It looked like PE prices were going to go up and stay up, but now we're seeing there's obviously more supply in North America than the marketplace needs.''
Union Carbide Corp. (now Dow Chemical Co.), Formosa Plastics Corp. USA and Nova Chemicals Corp. all have added to North American supply in the past nine months by firing up capacity that will total almost 3 billion pounds when fully on line.
But first-quarter sales in some core PE markets have not helped that new capacity find a home. Some industry observers estimate that as much as 20 percent of North American capacity has been idled because of slack demand.
LLDPE sales into trash and can liners were down 12 percent in the first quarter when compared with 2000, while LDPE sales into nonfood packaging film were down 10 percent, and HDPE sales into injection molding markets dropped 14.1 percent, according to APC.
Some market watchers argue that processors using more wide-spec and off-spec material in place of prime resin may inflate those decreases. But others said the change in consumer buying habits might be deeper and longer-lasting than resin makers had anticipated.
``All the markets we sell into - poultry, meat, fabric, homebuilding - are down,'' a Southeast PE buyer said. ``So the resin sales guys are matching [lower] prices because they know if they lose one-thirtieth of 1 percent of market share, they're out of a job.''
Market analyst Fred Peterson, president of Probe Economics Inc. in Millwood, N.Y., said demand for PE and PP should pick up in the second half of the year, but pricing is likely to remain soft. He added that even natural-gas prices in the range of $4-$5 - as compared with its $2 historical average - could eliminate the feedstock advantage U.S. resin makers enjoy over foreign competitors.
``The economy will come back slowly in the second half, but that's not much comfort to the manufacturing sector,'' Peterson said.
In PP, the downcast story that began in mid-2000 continued to unfold as prices slipped another 3 cents per pound since early April. North American PP prices now are down an average of 4 cents per pound this year.
PP sales dropped almost 2 percent in the first quarter, according to APC. With prices dropping, PP buyers are waiting until the last possible minute to make their purchases, a Chicago-based PP buyer said.
``You typically want to keep your inventory as low as possible, but that's especially true in a market like this,'' the buyer said.
Roughly 2 billion pounds of new PP capacity has been added in North America in the past two years. Formosa is adding a new plant in Point Comfort, Texas, while a new plant owned jointly by Dow and Phillips Petroleum Co. is set to launch in New Jersey in early 2002.
As a result, PP makers are not optimistic about seeing a recovery until sometime in 2003.
``Producers are really concerned about keeping market share right now,'' said James Fawley, PP business manager for BP Amoco Corp., North America's second-largest PP maker. ``Industry operating rates right now are around 81 or 82 percent, and the magic number for decent profitability is 90 percent.''
The Chicago-area buyer had his own spin on the situation.
``Put it this way: Our suppliers are very cognizant of deals from their competitors,'' he said.
Fawley said BP Amoco is continuing to work on new product development in the face of the current downslide.
``Our customer base is always looking for ways to run faster and cheaper,'' he said.
Current growth opportunities for PP are in replacing PE in rigid packaging and film applications and PVC in automotive and other markets, Fawley added.
Market analyst Bob Unterreiner, president of Sterling Consultants in Palatine, Ill., agreed that opportunities exist for PP in displacing PVC in bottles for cosmetics and drugs. Other new uses could open up if PP makers continue to improve the material's stiffness and strength.
But Unterreiner added that PP makers were drawn in by the double-digit growth rates the market posted consistently in the 1990s.
``The industry planned capacity to continue that double-digit growth,'' he said. ``They didn't see this slowdown coming at all.''
Probe's Peterson pointed out that lower barriers to entry in PP make it more appealing than PE to manufacturers who are looking to have a presence in the plastics market.
``With polypropylene, you don't need to build an ethylene cracker, and you can buy propylene more easily on the open market,'' Peterson said. ``As a result, this oversupply situation could be chronic.''