Top executives at resin-making firms saw no need to pull punches as the first quarter of 2001 whimpered to a close.
``We are not yet seeing a rebound in end-use demand for our products,'' Jeff Lipton, Nova Chemicals Corp. president and chief executive officer, said in an April 25 conference call. ``Consequently, it is hard to get enthusiastic about the second quarter, even though we believe it will be better than the first quarter.''
J. Pedro Reinhard, executive vice president and chief financial officer of Dow Chemical Co., followed that up in an April 27 conference call by describing the first quarter as ``one of the most difficult quarters that the North American chemical industry has ever experienced and Dow is no exception.''
With Nova and Dow ranking Nos. 1 and 2 in North American polystyrene production - and in the top five in polyethylene - it's a safe bet that their competitors were sailing through the same choppy waters. Profit at Dow's plastics units - which brought in more than 40 percent of the firm's first-quarter sales - was down more than 55 percent from the same period in 2000. Nova lost $10 million in the quarter after earning $60 million in profit in the same quarter a year earlier.
First-quarter resin sales totals from the American Plastics Council provided further evidence, showing sales of major commodity and engineering resins down anywhere from 2-25 percent. Per-pound selling prices for most of the materials have dropped as well.
Most resin makers offered mild words of encouragement for the second half of the year, but the questions remain: Will nine years of economic growth in the U.S. be followed by a brief cooling period before resuming? Or is the plastics industry - like the rest of the U.S. economy - teetering on the brink of a recession?
Signs of a rebound typically are tied to one of two areas: inventory and integration.
Inventory is a basic fact of life in any industry. But with demand down across the board, plastics processors have cut their inventories of both resin and finished products down below the just-in-time levels that most of them have adopted to cut costs in recent years.
``Wal-Mart's not floating in stuff,'' said Robert Bauman, a market analyst with IBM Chem Systems in Tarrytown, N.Y. ``Businesses that traditionally carry four weeks of inventory are only carrying two or three. This could really tighten supply and help demand in the third quarter and on into the fourth quarter.''
But even if that kind of inventory restocking occurs, it probably won't be a sign of longer-term financial health, according to Howard Rappaport, an industry consultant with Chemical Market Associates Inc. in Houston.
``There may be an occasional buying spurt because of emaciated inventories, but there won't be a sustained buying surge,'' Rappaport said. ``We don't see any profit improvement on the horizon until early 2002.''
So fewer plastics parts and products equals less resin on hand equals lower inventory equals lower resin profit. That's not so hard to grasp. The integration topic is a little more complex.
The basic concept is that savings can result from upward integration. If you're making polyethylene, you can save by making feedstock ethylene and save even more by refining the crude oil or natural gas from which ethylene is extracted.
That would seem to put oil firms like Exxon Mobil Corp. or firms linked to oil refiners like Chevron Phillips Chemical Co. LP in good shape. So it's sobering that Exxon Mobil's U.S. chemicals profit, including PE and polypropylene, were down 75 percent in the first quarter, even though sales were up 4 percent. At Phillips Petroleum Corp., its half of PE/PP/PS maker Chevron Phillips yielded a loss of $39 million in the first three months of 2001.
Now before you weep for either firm, keep in mind that Exxon Mobil cleared $5 billion in the first quarter, while Phillips pocketed $500 million. Still, it would seem the economy is hurting even the most integrated of the integrated, as well as those without such advantages.
However, integration still remains the key to future success.
``The big oil and gas companies have the broadest shoulders because they go back to the hole in the ground,'' CMAI's Rappaport said.
The biggest cost/integration factor in North America was the unforeseen runup in natural-gas prices, which soared to $10 per million Btu in January after fluctuating between $1.50 and $2.50 for much of the previous decade. Even the June 13 price of $3.86 was well above historic averages.
That elevation is an especially big deal in North America, where natural gas is used to produce roughly 70 percent of the ethylene used in PE production.
``We could be seeing a step change in the underpinning cost structure of the polyethylene business,'' an executive at a major PE maker said. ``Prices won't fall as much as they have historically, but more producers will also shut down capacity instead of losing money.''
Other factors affect the impact of integration. For example, PE makers Dow, Equistar Chemicals LP, Huntsman Corp. and Formosa Plastics Corp. USA are all back-integrated into ethylene, but Dow and Equistar would have advantages of scale in buying the feedstocks they need to produce ethylene, industry contacts said.
But there still are more factors in that scenario, since Dow traditionally has been able to command a slight premium for its higher-end resins, while Equistar carries a fairly heavy debt load through its biggest stakeholder, Lyondell Chemical Co.
The higher gas prices also have eliminated cost advantages North American resin makers enjoyed over their European competitors, IBM Chem Systems' Bauman said. European resin makers have been more competitive with their North American counterparts in Latin American markets recently as a result, according to Bauman.
Newly opened Canadian PE capacity from Dow and Nova also is impacting the U.S., Rappaport said.
``Because of the drop in exports and the tremendous amount of western Canadian capacity, the United States is now a net importer of polyethylene,'' he said. ``I can't remember any other time in recent history when that was true.''
Bauman also contends that it's important for North American resin makers to diversify their export offerings with metallocenes and other specialty resins, since burgeoning capacity in Asia and the Middle East will reduce exports of commodity-type resins to those regions.
In Bauman's estimation, the current slowdown is already worse than the recessionary period of 1992-93, since feedstock prices have remained high instead of falling along with demand and resin prices as they did earlier.
But resin makers should take some solace in the fact that neither Rappaport nor Bauman view the current pinch that natural gas has placed on profits as an ongoing concern.
``There's a lot of drilling and exploration [for natural gas] going on right now, which should show some results in the next six to twelve months,'' Rappaport said. ``There's a race on to find more natural gas to meet our needs.''
``It's difficult to say if any of these [resin makers] won't survive since most of them have significant borrowing power if they need it,'' said Bauman. ``No one's really biting the bullet or thinking of going out of business yet. Most of the people we talk to think this will be a half-year to a year phenomenon.''