North American resin makers will shed no tears as they toss their 2003 calendars onto the trash heap.
The year started out well - with a stronger-than-expected first quarter - but demand quickly waned because of high natural gas costs, sluggish consumer and industrial demand, uncertainty surrounding the Iraq war and an increasing amount of finished plastic products coming into North America from Asia.
Higher raw material prices lifted resin costs, but also made North American material uncompetitive globally. Export sales suffered as a result.
Strong building programs in the late 1990s also have satisfied the region's resin demand. For the first time in recent memory, there are no major resin plants being built - or scheduled to be built in the next couple of years - in North America.
With 2004 on the horizon, the resin crowd is hoping that embers seen in rebounding third-quarter demand will turn into flames for the new year. Many resin makers are banking on new technology and higher-end products leading the anticipated wave.
Executives at a number of major resin makers recently took time from preparing their 2004 budgets - and lunching on Rolaids - to talk with Plastics News about the year ahead. Here's what they had to say.
Talk with any North American PE executive and the topic soon turns to natural gas, since that feedstock is used to make 70 percent of the region's PE output.
Natural gas futures stood at around $4.70 per million British thermal units. That's down a bit from the $5-$6 range they occupied for much of the year, but still more than double the level PE makers enjoyed for most of the 1990s. Those high levels - which spiked to $9 in January because of extreme winter cold - led PE makers to implement their first-ever energy surcharge, an instant price increase to cover rising raw material costs.
``Clearly, natural gas prices are playing a big role,'' said Robert Bauman, a PE analyst with Nexant Inc. in White Plains, N.Y. ``We could easily see another spike where prices would rise dramatically. It could be a mirror image of the first and second quarter of 2003.''
Government data backs up Bauman's concern. As of Sept. 19, gas storage in the 48 contiguous states was down about 10 percent from where it was a year ago, according to the Department of Energy.
``Gas has created a topsy-turvy cost structure,'' said Howard Rappaport, a PE analyst with Chemical Market Associates Inc. in Houston. ``The U.S. and Canada used to have a price advantage, but now prices are two to 21/2 times that. It's gone from the most competitive market to an uncompetitive one.
``If we have a mild winter, the amount of natural gas in storage should be sufficient,'' he added. ``But if there's a hint of trouble it could lead to fall pre-buying.''
``If natural gas inventory isn't built up anymore and we have some early harsh weather, we could have a higher chance of volatility than last year,'' added Bob Beil, North American polyolefins director for market leader Dow Chemical Co. of Midland, Mich.
``Unless the government opens up drilling areas to put supply and demand in a different light, a natural gas price with a 4 in front might be the norm.''
Average per-pound selling prices for most grades of high, low and linear low density PE were up more than 30 percent through September, even though first-half demand for those materials lagged 7-9 percent, according to the American Plastics Council in Arlington, Va.
``If you look at the long-term growth of PE in North America, we were down 5 percent through seven months of 2003, but we've felt good about demand since May,'' Beil said ``If you were a guy buying from three resin companies and you see 16 cents [in increases] coming at you in May, you might call a fourth guy and see if you can buy another car or two because the market's been so volatile and uncertain.''
``We've been able to get price increases because of raw material costs more so than strong supply and demand factors,'' added Grant Thomson, North American business director for Nova Chemicals Corp. of Pittsburgh. ``Basically, resin makers aren't making money.''
Hope for the 2004 North American PE market comes from a couple of places. Dow has tightened supply by idling almost 900 million pounds of capacity in the region - though Beil said that capacity can be ramped back up in 30-60 days if needed. Other older, less-efficient capacity has been idled by other producers as well.
Nova's Thomson said that indicators tracked by his firm look positive for 2004, with PE demand growing as much as 6-8 percent.
``Operating rates are still in the low 80s right now, but 2004 could be the start of tightness in the market because there's not going to be any new capacity,'' Thomson said. ``If we have 6-8 percent growth, operating rates could surpass 90 percent.''
Bauman also points to a pending Federal Trade Commission ruling regarding dumping of plastic bags from China and Malaysia as a potential pick-me-up for North American PE. Lower-price bags from Asia now equate to almost 1.5 billion pounds of resin use, according to CMAI.
Bauman already is predicting 8-9 percent growth for North American PE demand in 2004, and he contends that sanctions against foreign bags could add another 2-3 percent to that total. Next year's growth then will lead to ``a major fly-up'' in PE demand in 2005, according to Bauman.
At CMAI, Rappaport is not quite as optimistic.
``Pull from the demand side has been very weak,'' he said. ``Prospects are looking better in 2004, but we need to recover to where we were before Y2K. There will be short-term surges and restocking, but now we think a substantial upswing won't begin until 2005. We previously thought it would begin in 2004, but we've pushed it back because of weakness in the economy and sustained higher energy prices.
``U.S. PE makers have to look at the market with both a domestic and global perspective,'' he added. ``Most of this capacity coming on in the Mideast will be commodity HDPE and LLDPE, which will be used to make goods in Asia. Film and bags are coming over because they're easily transportable commodities, but blow molded containers and tanks and large injection molded parts aren't. Processors also have to ask, if they're going to expand, will it be in the U.S. or offshore?''
Dow has made a long-term commitment to sourcing natural gas from outside the region through its investment in a liquefied natural gas terminal in Texas. The terminal, which should be operational by 2007, will be able to regasify LNG brought in from other parts of the world for use in Dow's ethylene crackers.
``Companies that make ethylene will have to make a big decision as to whether they use light feedstocks like natural gas or heavy feedstocks like crude oil,'' CMAI's Rappaort said. ``The industry in North America has learned a harsh lesson - that they need to have flexibility at their crackers. They had been at low-cost and built their industry on that platform.''
On the development side, Bauman said PE makers need to focus on metallocene and specialty-type material that's not being produced in other parts of the world. Dow's Beil said his firm will continue to focus on innovations in higher-end film. Dow also is improving its materials for the pipe industry and is working on lighter-weight materials for blow molding.
Beil added that the film market - a major PE consumer - is healthier than some might think.
``If you look at the film industry, there's been tremendous consolidation at places like Tyco, Pliant and Bemis,'' he said. ``What you're seeing today is a little bit of shakeout from a decade of industry consolidation. The big guys are fundamentally sound. Everybody's learning to run leaner.''
Price protection has been another casualty of the natural gas climate. Customers accustomed to having a cushion of 30 or 60 to 90 days to take resin price increases will have to adjust to a new set of rules.
``The general mind-set on the need for pricing flexibility is there,'' Beil said. ``Sellers are realizing they can't restrict things in the face of volatile feedstocks. We can't have a feedstock scenario with gas where it goes from $5 to $6 to $7 to $8 to $4, and resin prices don't keep up. It's economic suicide.''
If a drop of ``only'' 3 percent is OK, then the North American PP market had a pretty good first half.
But the region's PP makers obviously were hoping for more, based on the healthy growth rates the market had seen in the past 15 years.
``We've seen a somewhat broad-based rebound in inventory builds and finished goods'' in the second half, said Craig Blizzard, North American marketing director for market leader Basell Polyolefins of Elkton, Md.
``There's been a bit more consumption of polypropylene in the last few months.''
PP market analyst Pat Duke of Dewitt & Co. in Houston agreed, saying that the PP market's second-half recovery could help it finish the year flat vs. 2002.
``Structurally, the market is in pretty good shape,'' said Duke. ``No one's added a lot of new capacity for a couple years. We could see a 6-7 percent increase in demand in 2004 and there could be a real fly-up in pricing in 2006, because of a disconnect between the propylene that's available and polypropylene production.''
Duke added that PP is ``on a technological upswing'' and as a result is ``gaining advantages in certain end uses'' vs. HDPE and polystyrene.
Basell's Blizzard confirmed that his firm is seeing ``continued oportunity for material substitution,'' especially in the packaging arena. In food packaging, he said PP is gaining vs. PS and PET. Duke listed automotive, fibers and housewares as markets that should be strong for PP in 2004.
Increased business from new products could lead Basell to restart 900 million pounds of idled capacity in Bayport, Texas, and Lake Charles, La., next year and in 2005.
Industry profitability also needs to be improved, Blizzard said, even with average selling prices up almost 24 percent through September.
Blizzard added that he expects North American operating rates to escalate into the mid-90s in 2004, with tight supply a possibility next year and in 2005.