DÜSSELDORF, GERMANY (Nov. 12, 2 p.m. EST) — Just when styrenic polymer producers thought business couldn't get any worse, they turned the calendar to Sept. 11.
That day's U.S. terror attacks provided the economic equivalent of a knee to the groin. Just ask Chris Pappas, styrenics president and senior vice president of Nova Chemicals Inc., North America's largest maker of such resins, whose operations have lost $133 million in the first nine months of 2001.
“We were eight months into a weak styrenics world, but business was marginally rebounding. The events of 9-11 have put us back to where we were,” he said Oct. 30 at K 2001 in Dusseldorf, where Nova commandeered a nearby restaurant for customer meetings but did not exhibit.
Pappas, a 23-year industry veteran, suggested the current market is “as bad as it's ever been.” He said the key to how this trough will be remembered historically will depend on the duration of the downturn. But he added, “I've not experienced a contiguous six months that's been as weak as this.”
He said Nova is responding by retrenching, lowering fixed costs and boosting research and product development, to try to differentiate itself further. To that end, Nova on Nov. 1 opened a $5.5 million European styrenics technology center at its production site in Breda, the Netherlands. Pappas said the firm also is increasing styrenics R&D spending by 20 percent next year.
Clay Dunn, Dow Chemical Co.'s global vice president of polystyrene, summarized many producers' hopes: “Our outlook is that 2002 will be a little bit better than 2001 — mostly, frankly, because 2001 was so crummy.”
It will take “a couple of years” for the PS industry to recoup the ground it's lost since late 2000, he said at the K show.
Still, Dow, North America's second-largest PS producer, did manage to buck the trend a bit in recent months, with strong sales in August and October, and the firm is adding capacity in Brazil and China. Dunn attributed strong recent sales in part to extremely low customer inventories, but noted that low inventories also add to the market's volatility.
German PS major BASF AG can tell you about volatility. The company has had to scrap some of the ambitious growth goals it announced just a few months ago, and has acknowledged that its plants' capacity utilization rates are at their lowest levels in years. Chairman Jurgen F. Strube told Reuters News Agency on Oct. 22 that the downturn has had “a massive impact on BASF's business.” Calling 2001 an unprecedented year, Strube said “the company's earnings in the second half of the year will be considerably lower than expected.”
In June, BASF said it would close at least 24 plants worldwide and cut capital spending 20 percent. But at the K show, a company spokeswoman reaffirmed that construction of the firm's 100 million-pound-per-year, Styrolux styrenic block copolymer plant in Altamíra, Mexico — due to open in 2003 — is going ahead as planned. She also noted that BASF is providing material for use in Microsoft Corp.'s new Xbox video game system, which rolls out Nov. 15. Some are predicting Xbox sales of 1 million units a month, but even Microsoft's muscle won't be enough to right the industry's listing ship.
Alex Lidback, styrenics director for Houston-based industry analysts Chemical Market Associates Inc., said CMAI research shows a close correlation between consumer confidence and polystyrene resin demand. And that doesn't bode well for the medium-term.
“The problem is, as you go down the whole chain, there isn't much demand. What this does is suggest lower prices tomorrow, which will have the converters buying even less. That will continue as long as there's no fear of higher prices tomorrow,” and he sees little likelihood of that during the next few months.
Dow's Dunn finds it difficult to disagree. Given the current tough conditions, he said, “We need substantial growth and a turnaround in psychology before there will be much improvement” in PS pricing.
Lidback stated: “It's an extremely competitive market, with weak demand and low operating rates” [in the percentage range of low to mid-70s].”
And to make matters worse, Atofina Petrochemicals Inc., which Lidback said is widely recognized as the low-cost PS producer, will be launching 500 million pounds of capacity early next year in Carville, La.
“We are very pessimistic for the first half of next year,” Lidback said.
On the up side, low interest rates should start to have a positive impact by mid-2002, and the underlying fundamentals of the U.S. economy remain strong.
But, he said, “You still have to absorb the capacity and make up what you lost. So, I don't think it will get tight, but I do think that the balances should begin to improve.”
In times like these, with working capital so important, everyone in the entire production chain goes into “inventory-depletion mode,” Lidback said. But that also is the good news, longer-term, “because depending on how fast demand returns, rates can come back quickly; if demand comes back slowly, then you can ramp up the rates with it.”
From the perspective of market dynamics, Dunn and Pappas both see a bit of silver lining, in that little new styrene monomer capacity is due soon.
“You can only make as much polystyrene as styrene is made,” said Dunn.
While he didn't offer a time frame, Pappas did say: “Our next cyclical peak in this business will be a monomer-driven peak. There won't be enough to satisfy demand,” and that will help to drive up prices.
