Just when it looked like resin makers could kick back and enjoy the increases in sales volume and selling prices that took place in 2002, storm clouds appeared on the horizon.
Price increases on major commodity resins through September ranged from 14 percent on PET bottle resin to a whopping 54 percent on pipe-grade PVC.
But price increases on feedstocks such as natural gas and crude oil, both of which have doubled since January, soaked up most of the profit improvement that might have resulted from those increases, according to several industry executives.
Economies in North America and around the world have not bounced back as hoped so far in the second half of 2002, leading many resin makers to view 2002's strength partially as a reaction to the doldrums of 2001, rather than a new phase of high growth.
Growing insecurities over corporate corruption, consumer confidence and a potential war with Iraq also are weighing on the minds of resin execs and those who watch them. Those concerns pushed Wall Street brokerages Morgan Stanley and Salomon Smith Barney to downgrade several stocks with major resin businesses in recent weeks, including Dow Chemical Co., Eastman Chemical Co., Georgia Gulf Corp., Solutia Inc., Nova Chemical Corp., Lyondell Chemical Co. and Wellman Inc.
To their credit, resin makers seem undeterred in developing new materials and seeking out material substitution opportunities, in spite of the shaky ground they find themselves walking. Plastics News recently spent some time with the major resin powers that be, talking about the months ahead. Here's what they had to say.
The largest of the commodity resins found itself in a new world in 2002.
``When you look at the age of productivity that we live in, and the things every corporation does to streamline processes, I'm not sure if we'll ever go back to the old way that inventory was handled,'' said Bob Beil, North American polyolefins director for PE giant Dow.
``Unpredictable natural gas pricing - and the way that saber-rattling over the Persian Gulf tweaks feedstock costs - make it look risky to take inventory positions.''
Final expectations for the 2002 North American PE market are all over the board, with Beil expecting the year to close up 7-8 percent, while Mike Goins of PE maker Atofina Petrochemicals Inc. of Houston sees high density PE up only 4-6 percent. But industry consultant Robert Bauman of Tarrytown, N.Y.-based Nexant Chem Systems is more bullish, with a target of 10 percent growth for PE for 2002.
HDPE supply will be affected in early 2003 by 700 million pounds of new capacity being brought on through a joint Solvay Polymers/ Chevron Phillips Chemical Co. plant in Pasadena, Texas. No new low or linear low density PE capacity is set for 2003.
Industry execs were unsure what impact the new HDPE could have, but Bauman said it could affect LLDPE as well if resin makers that operate swing HDPE/LLDPE lines focus production on LLDPE to avoid glutting the HDPE field. If that happens, the market could see some looseness in both areas, Bauman said.
Dow's Beil described the current market as ``not long, but there is some oversupply.'' He added the overall PE market could see ``a pinch'' sometime in 2004 or 2005 if no new capacity is announced.
``Clearly, we're operating our facilities with an eye on demand,'' Beil said. ``We're not running as hard as we'd like, but we're managing inventory levels.''
Goins, who serves as product manager of Atofina's North American PE business, said the price fluctuations of 2002 need to be looked at in a larger context.
``Profitability has been outrageously poor for the last couple of years,'' he said. ``When prices swing down like they did [in 2001], it looks severe and out of control, so when they swing up again like they did this year, it also looks severe and out of control.''
Beil added that 2002 order patterns - including indicators like consignment taps, replenishment patterns and rail-car use - lead him to believe that most of the year's growth was true growth and not inventory rebuilding.
Applications such as can liners and specialty food packaging are giving Beil cause for optimism going into 2003, since they're not as tied to the economy as other products such as stretch film and HDPE pipe.
The PE film market ``isn't as bad as industry statistics show'' when imports - which were up as much as 12 percent in 2001 - are taken into account, Bauman said.
Sales of HDPE into household industrial chemical markets were ``OK in general,'' Goins said, mostly because of the aesthetic appeal of new packaging.
Atofina hopes to capture growth in 2003 by introducing new metallocene grades of PE for film and blow molding markets. Dow's efforts will center on new grades of HDPE for high-pressure pipe used in gas and water infrastructure.
A strong finish in 2002 could push 2003 growth as high as 12 percent, according to Bauman. But the industry still has to improve its bottom line next year, even with operating rates expected to be in the low 90s.
``Today there's really no margin,'' he said. ``[PE makers] aren't at reinvestment economics.''
The North American PVC supply and demand scene tightened considerably in 2002, allowing producers to lift prices more than 50 percent. 2003 could bring more of the same, but the operation of plants sold off by bankrupt Borden Chemicals and Plastics LP is a wild card in the picture.
``There's been a reduction in [chlorine] capacity and no new announced expansions,'' said Barry Hendrix, a vice president with Oxy Vinyls LP of Dallas. ``The economic reality is there's not any capital to invest. Chlorine and [vinyl chloride monomer] could be constraining elements in the production of PVC [in 2003].''
Shintech Inc. bought Borden's Addis, La., plant, while Formosa Plastics Corp. USA snatched up Borden's Illiopolis, Ill., site and Westlake Group made a surprise purchase of Borden's Geismar, La., works through a newly formed subsidiary, Geismar Vinyls Corp. Combined, those sites can produce about 1.6 billion pounds of PVC each year, though all but 200 million pounds currently is idled.
If that existing capacity is brought back - an action that would require a good deal of chlorine/VCM feedstock - it could loosen PVC supply in North America. No PVC expansions are planned, but a drop in export business could force PVC makers to run their plants at lower operating rates, according to industry consultant Pat Duke of DeWitt & Co. in Houston.
Hendrix believes North American PVC could finish 2002 with a growth rate of 4-5 percent, with expectations for 2003 checking in at 11/2 times gross domestic product growth.
Duke contends that PVC makers ``are in good shape long term because there's no inventory in caustic soda and chlorine. That will limit the amount available to make PVC.''
Construction again accounts for about 60 percent of all North American PVC uses via pipe, siding and windows. There, Hendrix is enthusiastic about a growing demand for housing driven by a surge in population with the ``baby boomlet'' coming into the job market.
``A lot of people are at the entry point for smaller homes, which tend to be vinyl-friendly,'' he said.
Duke added that PVC has been helped in construction by low interest rates and refinancing.
``A lot of people are upgrading their homes and that renovation helps vinyl windows and siding,'' he said. ``Interest rates are also helping home sales.''
This business has helped pick up the slack for a slowdown in government infrastructure spending, Duke added.
``We're spending a lot on missiles instead of roads,'' he said.
Hendrix also sees promise in windows, which he described as ``a high-growth segment.''
``We saw vinyl replace a lot of wood and aluminum in siding in the '80s and '90s,'' Hendrix said. ``Now that's happening in windows because of vinyl's good thermal qualities and low maintenance needs. Even higher-end homes are going with vinyl windows.''
Hendrix added that sales of PVC into automotive and wire and cable markets ``are hanging in there, in spite of the [anti-PVC] rhetoric'' from environmental groups.
Duke likes some of what he sees in PVC, but pointed out that producers hold their future in their own hands.
``In the five-year window, PVC is in a better position to be profitable than other commodity plastics,'' he said. ``But producers will be under a little pressure in '03 to see if they can adapt their behavior and stop shooting themselves in the foot.''
After a couple of years of wallowing in excess material, the North American PP market may finally be returning to a reasonable supply/demand balance in 2003.
``Capacity will just barely cover growth for the next couple of years,'' said Craig Blizzard, marketing manager for Basell North America, the Wilmington, Del.-based PP giant. ``We're talking about polypropylene like it's a commodity, but it's tough to try and substitute for it and have all the requirements you need in consumer products.''
Basell and BP Corp. of Naperville, Ill., have combined to remove about 1.5 billion pounds of PP capacity from North America in the last two years. Those moves and natural growth of 7-8 percent this year somewhat have offset the 3 billion pounds of capacity added to the market from 1997-2000. The last spasm of this building boom - a plant with 780 million pounds of capacity opened by Phillips Petroleum Corp. in Linden, N.J. - will affect the 2003 market.
And while supply/demand might be tightening - as implied by fewer spot sales and more contract deals, according to Blizzard - profitability is a different matter altogether.
``It's a battle over the question of profitability vs. market share,'' said BP's business director for PP, Phil Fusco. ``We need to improve margin. We're tired of beating each other up for market share.''
``The industry has made fairly good strides, but we still have a long way to go to get to profitability,'' Blizzard added. ``The  price increases helped and we saw more solid demand in taking substitution business out of polystyrene, PVC and polyester.''
Those particular price increases had totaled about 9 cents per pound through September. On injection-grade homopolymer PP, that reflects a jump of about 30 percent. Total U.S./Canadian PVC sales were up more than 7 percent through July, according to the American Plastics Council in Arlington, Va.
For 2003, Blizzard, Fusco and DeWitt's Duke each expect growth of 6-8 percent in North American PP.
A number of end markets remain strong, with Blizzard singling out consumer products and Fusco highlighting the potential of the auto market, where straight reactor thermoplastic polyolefin-grade PP could be replacing compounded versions of the same product.
``You've got a hard time finding anything negative in PP end-use markets,'' Duke said. ``Automotive has done really well and the material is still developing technically and is continuing to replace other materials. It's still penetrating against polyethylene and polystyrene.''
But have PP makers learned from the past? Basell's Blizzard seems to think so.
``We get the sense that people realize that building a polypropylene plant isn't a guarantee of making a profit,'' he said. ``It's not that easy, because the market's changing all the time.''
But Duke's not so sure.
``If you're an integrated oil company, your job is to monetize spare propylene and try to move pounds, even if that doesn't support the rest of the PP industry,'' he said. ``[PP makers] are behaving better than they have in the past, but there's still little reason for reinvestment.''
The North American PET market was all wet in 2002. And PET manufacturers couldn't have been happier.
Fueled by growth of more than 20 percent in bottled water, the market could finish 2002 at up 8-10 percent. Big market pushes of Coca-Cola's Dasani brand and Pepsi-Cola's Aquafina brand certainly played a role.
``Coke has really been pushing [bottled water],'' said Todd Murray, strategic planning manager for PET maker KoSa of Houston. ``They said last year they were going to make Dasani the top brand and they've done everything to get there,'' Murray said.
``Bottled water has really taken off,'' added industry consultant Edgar Acosta of DeWitt. ``It's a marketing issue because of the distribution muscle of Coke and Pepsi. People also are gravitating toward healthier products.''
The market's core carbonated soft drink end market continued minimal growth of 2-3 percent - in spite of product launches like Vanilla Coke, Pepsi Blue and lemon-flavored colas - although juices climbed about 10 percent. In 2003, the high growth of water and juice will be up against more than a billion pounds of new and previously idled capacity from M&G Group, DAK Americas Inc. and Voridian Co.
M&G is adding 475 million pounds in Altam¡ra, Mexico; DAK is boosting production in Cape Fear, N.C., by 330 million pounds; and Voridian is bringing 260 million pounds of existing capacity back on line in either Toronto or Greer, S.C.
The new capacity could deflate pricing next year, according to Acosta, but that could lead to increased sales as processors cash in on lower prices. That trend and continuation of the bottled-water wave should yield North American growth of 11 percent next year, he said.
A decrease in the amount of material sold into South America also could increase North American supply and put downward pressure on pricing, Acosta added. PET bottle resin prices climbed 14 percent in 2002 as PET makers successfully took advantage of seasonal buying trends.
Voridian North American PET business director T.J. Stevens and KoSa's Murray pegged industry operating rates in the low 90s for 2003, although Acosta said they could be as much as 10 points lower.
Murray pointed out that the impact of the new capacity could be lessened if it comes onstream after the industry's high-demand second quarter.
The new Voridian capacity will be split with competitor Wellman Inc., which is supplying feedstock for the relaunch. Acosta described the deal as ``unusual, because a lot of people thought Wellman's inability to expand was a real weak point.'' Voridian also was ``under pressure from some customers to show a certain percentage of growth each year, and the deal helps them do that,'' he said.
One other fact that's becoming clear as the PET market enters 2003 is that the buzz is wearing off of the beer market, which was once expected to lift PET to new heights.
``Expectations for beer growth were so far out of proportion that they were impossible to meet,'' said Voridian's Stevens. ``The overall beer category isn't growing, it's slow to change and dominated by a few players. We just have to be patient with it.''
``For beer, the technology hurdles are still out there,'' KoSa's Murray added. ``Plus, the big [beer] players in the U.S. already have existing can and glass infrastructure and they don't have an incentive to switch [to PET].''
Instead, growth in 2003 could come from ``malternatives'' - malt liquor-based alcoholic beverages, such as Mike's Hard Lemonade and Smirnoff Ice, which are being marketed as alternatives to beer.
``Material requirements [for malternative PET bottles] aren't as stringent as they are for beer,'' Stevens said. ``Beer is a complex product.''
``Malternatives have a greater possibility in supermarkets than beer did, because lower property requirements yield prices that are closer to glass,'' said Murray. ``But at the same time they're probably cannibalizing markets for beer, wine and mixed drinks.''