PVC
As if watching natural gas prices weren't enough, PVC makers also have to keep an eye on mortgage rates, since at least 60 percent of their output goes into the construction market.
``It's been a good overall market for housing, which is about what we expected,'' said Barry Hendrix, a vice president with leading PVC maker Oxy Vinyls LP of Dallas. ``Now we're all wondering what effect rising interest rates are going to have on new-home sales and on refinancing for renovations.''
Through June, U.S./Canadian PVC sales were down almost 7 percent vs. 2002, according to APC. Sales in the market's massive rigid pipe and tubing segment were down more than 5 percent.
``Commercial construction activity has been very slow for the last two or three years,'' Hendrix added. ``There's been a minor pickup in conduit and things of that nature, but states and cities aren't spending. There are a lot of budget problems and there's the sense that a lot of projects have been curtailed.''
``If we see a pickup in commercial construction of office buildings, hospitals, schools and shopping centers, it could really boost PVC, since those projects use larger-diameter pipe that's thicker and weighs more and as a result consumes more PVC.''
Increased consumer confidence also could boost housing starts and overall construction activity, according to Nick Vafiadis, a PVC analyst with CMAI in Houston.
Oxy Vinyls' Hendrix expects North American operating rates to be in the high 80s in 2004, with overall PVC use climbing as well. Similarly, Vafiadis pegs the '04 rate at just over 87 percent. The market could see ``limited periods of tightness'' during the year, but there should be adequate capacity in the system to meet demand, Vafiadis said. Hendrix pointed out that capacity has been taken out in the form of two former Borden Chemicals and Plastics plants that remain idled in Geismar and Addis, La.
And in spite of a jump of more than 13 percent in average per-pound selling prices through August, industry margins have not changed all that much.
``PVC prices have been stable at historically high levels but margins are still thin,'' Hendrix said.
According to Vafiadis, profit margins for North American PVC makers haven't yet returned to the levels they saw in the fourth quarter of 2002. Price increases won this year also have not been enough to cover increased production costs, he added.
On the end-market front, Hendrix said PVC makers have penetrated further into fencing markets and have seen stable demand in the medical field, but also have seen a good deal of wire and cable business move offshore.
Those shifting markets and the volatile raw material situation have caused PVC makers to adjust while on the move.
``PVC and [vinyl chloride monomer] makers have learned to balance production with inventory, so they're not producing big inventories anymore,'' Hendrix said. ``For years, we tried to max everything out and now we're scaling back. It's a new kind of cyclical behavior where we're meeting cyclical demand, and it's better for the industry.''
Polystyrene
Anyone looking to help the North American PS market can do so tonight, by taking the family to Outback Steakhouse, Chili's or any other restaurant with an expanded takeout menu that calls for massive amounts of PS-based food-service products.
``That's a segment that wasn't there before, and it's really showing good growth,'' said Kevin McQuade, PS business director for BASF Corp. of Mount Olive, N.J.
But aside from food service - where sales grew 2.5 percent in the first half - the North American PS market was on track to post a demand loss in 2003. Producers expect the 8 percent first-half loss to be down to 2-4 percent by the end of the year.
``It's been a very challenging year because of low volume and elevated costs,'' said Jeff Denton, PS business director for Dow Chemical Co.
Denton said, ``We've seen pretty significant fluctuations in demand and that's complicated our ability to make the appropriate moves at the appropriate times.
``The market was negative in '01, up in '02 and negative in '03,'' he added. ``That's driven the marketplace to react in abnormal ways. If the economy simmers down, we can get back to 2-3 percent, [gross domestic product]-type growth.''
Supply isn't expected to be much of an issue in 2004, as moves by BASF and Nova in the past 18 months have idled about 200 million pounds of capacity and prevented inventory from building in the chain. Industry operating rates were in the low 80s in 2003, but need to be close to 90 for profitability.
BASF's McQuade also reports seeing ``encouraging signs'' in such food-service products as disposable cups, cutlery and partyware. Denton at Dow added that PS makers still have some opportunities to convert from paper to plastic in the fast-food marketplace.
High costs for styrene monomer and benzene also pinched margins in 2003, even as average per-pound selling prices rose an average of 11 percent through August. The threat of PS-based finished goods - such as electrical products and cutlery - coming into North America from Asia also increased in 2003.
BASF is trying to counter some of the competitive pressure by launching new grades for the injection molding market. McQuade said the grades are finding uses in computer housings and thin-wall parts. The company also is promoting blending PS with its Styrolux-brand styrenic block copolymer in clear cups, medical applications and shrink film.
PET
PET makers like it hot, so 2003 was not quite up to their sweaty standards.
Cooler summer weather curtailed sales in the market-leading carbonated soft drink end segment and kept bottled-water growth under 20 percent for the first time in three years.
``In the eastern half of the U.S., it was wet and not very hot,'' said Edgar Acosta, a PET analyst with Dewitt & Co. in Houston. ``The overall market saw 6-7 percent growth, but in a normal-weather year, it would have been 8-10 percent.''
And although Acosta pegged bottled-water growth at ``only'' 18 percent in 2003, that segment continues to outpace the industry.
``Water is definitely a strong market that continues to surprise us,'' said T.J. Stevens, polymers group vice president with market leader Voridian of Kingsport, Tenn. ``We're seeing the effect of the marketing muscle of Coke with its Dasani brand and Pepsi with its Aquafina brand. There's still a huge potential to convert from tap water and a lot of people also are becoming comfortable buying private-label brands.''
Stevens said Voridian continues to work to improve bottled-water grades of PET. ``Water companies prefer the clearest possible resin with low acid levels so there's no impact on taste,'' he said.
Twelve-ounce bottles for juices and soft drinks also could spur growth in 2004.
From a supply standpoint, the North American PET market still is working to absorb almost a billion pounds of new capacity added in the past two years by M&G Group and DAK Americas Inc. Some production from those sites is being exported to Europe and South America, Acosta said.
Stevens said once that capacity is absorbed, the region should be in need of more capacity in 2006 or 2007.
In 2004, North American PET operating rates should be about 90 percent, he said. Acosta expects them to be in the high 80s, but added that the rates could hit 90 percent if the export market improves.
``What we really need is for the Asian economy to start consuming some of the goods it produces instead of shipping almost everything to North America,'' Acosta said. ``Even if Asia starts consuming 10 percent of its output, it could have a big impact.''
Beer is still on PET makers' radar screens, but Stevens acknowledged that the concept now seems to have a better chance for success outside the United States.
``Beer is an excellent opportunity, but it's not going to move the volume needle,'' he said.
Through August, average per-pound selling prices for North American PET bottle resin were up about 8 percent. Price pressures from feedstocks paraxylene and ethylene glycol could keep prices elevated next year as well, according to Stevens.
