Push has met shove in the polyethylene market, where producers are enforcing increases of 5 cents per pound at a time when many processors say they have yet to pass on the full range of increases they accepted in 2002.
``I know [PE makers] need to do something, but they don't need to take it out of me,'' a Midwest PE buyer said.
Producers spotlight a host of reasons for the increase, including the possibility of war with Iraq, higher natural gas prices, and lost oil production resulting from political unrest in Venezuela.
``With natural gas over $5 and oil over $30 [a barrel], our whole cost structure is being impacted,'' an executive at a major PE maker said.
``As we came into this period of feedstock spiking, natural gas went from $3 to $5 in 60 days,'' said Bob Beil, North American polyolefins director for Dow Chemical Co. of Midland, Mich. ``Results have gone from unacceptable to untenable.''
Natural gas, used to produce 70 percent of North America's ethylene, plays a prominent role in rocking PE profit. After being about $2 per million Btu for several years, the unit price stood at about $5.25 on Jan. 15 - more than double the price a year ago.
Frigid temperatures and tight supplies are having a near-term impact, but PE executives have long-term natural gas concerns as well.
``If natural gas normalizes at $3.50, that's 40 percent more than the previous normalized price of $2.50,'' Beil said. ``And if gas normalizes higher, [PE] prices will have to normalize higher as well.''
Another 6 cents per pound in increases is on the table for Feb. 1, with PE makers saying they're going to be just as firm on that one as they have been on the January move.
The film extrusion market will be among those hard hit by the increase, according to John Powers, executive vice president of sales and marketing for AEP Industries Inc., a South Hackensack, N.J.-based firm that ranks as one of North America's largest makers of PE stretch film.
``Last year, we were able to pass on only about 5 cents out of the 12 cents in increases we took on polyethylene,'' Powers said. ``This time [stretch film extruders] have to pass on the whole 5 or look at shutting lines down.''
Powers added that demand is ``not tremendous,'' as is typical for the immediate post-holiday season, and that massive overcapacity has kept regional stretch film operating rates at 60-70 percent.
Other PE buyers echoed Powers' concern, especially in light of the 10-14 cents in increases that took hold in PE in 2002. An Ohio-based buyer said that passing on the new 5 cent increase ``is going to be hard, to say the least,'' while a buyer based in the Southeast said the increase ``is coming at a time when I don't think we can get it from our customers.''
Both PE producers and processors agree that supply and demand isn't a big factor in the increase, since PE demand isn't that robust right now and producers have capacity available if needed. Instead, two years of poor financial results are taking their toll on PE makers, placing their backs against the wall.
``This has been the worst downturn in the history of the petrochemical market,'' said Robert Bauman, president of industry consultant Nexant Chem Systems in Tarrytown, N.Y. ``Profits have been down for two or 21/2 years. Polyethylene producers are viewing the situation as desperate, and there's a limit to what they can suffer.''
``There's no way to avoid [the increase],'' added Pat Duke, a market analyst with DeWitt & Co. in Houston. ``[PE makers'] margins have totally eroded.''
The impact of the increase on standard 30-day price protection also is causing buyers some concern. Dow has described its increase as the lifting of a temporary voluntary allowance from an increase announced in June. Other producers have positioned the move as a Jan. 1 increase taking effect before 30-day protection expires.
Some industry watchers see that as a step toward eliminating price protection, which had extended to 60 days for larger buyers in some cases.
``The pattern with the way the industry prices resin isn't fast enough to keep up with the run-up in feedstocks,'' a PE executive said. ``We need to be able to react faster.''
``The [PE] industry can't continue to operate in this manner,'' Chem Systems' Bauman added. ``Price protection has been hurting the industry, which has had to eat increases in feedstock costs until price protection expired. [PE makers] are always trailing and never ahead.''
According to Dow's Beil, the industry climate has changed, making price protection, which was partially intended as a courtesy to customers, difficult for PE makers.
``We afforded customers price protection in the past, but that was in a period when feedstock costs moved at a fairly defined pace,'' he said. ``Now we're seeing unprecedented spikes at a volatile pace, so it makes more sense to have polymer prices move on a timely basis.''
AEP's Powers said if PE makers alter their price-protection policies, PE processors probably will have to make similar changes in dealing with their own customers.
``We're not insensitive to the pressures our customers are under, but this is what has to happen,'' Beil added.
It's not hard to read the writing on the wall at publicly held PE firms like Dow, Nova Chemicals Inc. of Pittsburgh and Equistar Chemicals LP, a joint venture between Lyondell Chemical Co. and Millennium Chemicals.
Dow's plastics unit - which includes PE, polypropylene and polystyrene - saw sales drop 6 percent to $4.8 billion in the first nine months of 2002. The unit's pretax profit fell 7 percent to $532 million in that time. Nova's olefins/polyolefins unit lost $9 million through September as sales fell 14 percent to $1.4 billion.
Equistar, a major producer of polyolefins, olefins and other feedstock chemicals, took the biggest hit of the three. The Houston-based company lost $1.2 billion through September, when its polymer sales fell more than 10 percent to $1.4 billion.
Using prices of extrusion liner film grades of butene-based linear low density PE as a guide, the successful January increase puts PE prices at their highest levels since mid-1997, according to the Plastics News resin pricing chart.