AKRON, OHIO (Oct. 6, 10 a.m. EDT) — 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 2½ 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.
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.”
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 mon-omer 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 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.
Stacks of blank compact discs at mass-market retailers might be good news for music fans, but they are viewed a bit differently by PC makers.
“It's a little bit distressing to see the value of the product driven down with the emergence of blank CDs, but overall volume has gone up,” said Roger Rumer, Americas PC product management director for Bayer Corp. of Pittsburgh.
Even with the first half slightly down because of the SARS virus, global PC demand should finish up 3-4 percent in 2003, said John Dineen, vice president and general manager of Lexan-brand PC for market leader GE Plastics of Pittsfield, Mass. Smaller injection molded parts and business equipment continued to move from North America to Asia in 2003.
“The automotive market has been stable and we've seen good growth in DVDs, offsetting a loss in CD business,” Dineen said. “We also plan on creating demand with Flexplay 48-hours DVDs and in large parts for recreational vehicles that use our SLX-brand PC film.”
At Bayer, there's been strong activity in the medical market for dialysis parts and oxygenators. Blow molding sales also have been strong, Rumer said. The firm has also targeted specialty markets with its Fantasia color program.
Dineen added that his firm has seen evidence that the pace of work moving from North America to Asia is slowing down. He said that global PC growth in 2004 could hit 3-5 percent as a result of new applications and technology.
“We're seeing the most growth around new product technology and blended products like Geloy [acrylic styrene acrylonitrile] and Lexan SLX,” Dineen said. “There's also growth in the outdoor market, in vehicles and other areas where you need paint replacement.”
Global PC operating rates dipped to about 70 percent in 2003. Those rates need to be in the high 80s to have a healthy market, Dineen said. GE's only capacity event is the completion of its second plant in Cartagena, Spain. If brought on in 2004, the project would create almost 80 million pounds of new capacity.
Average per-pound selling prices for North American PC were up about 5 percent through August, but pricing spikes for raw materials such as benzene limited margin growth.
In spite of a soft year for auto builds, the nylon resin market held its own in the first half of 2003 with sales up more than 3 percent. Nylon resin makers expect that number to improve in 2004 as the auto market recovers.
“Auto builds are predicted to go up from 16.4 [million] to 16.6 million in 2004, which should create penetration for our [nylon 6/6] resins in rocker covers and under-hood beauty covers and for high-temperature nylon in transmission covers,” said Dave Flitman, North American nylon business director for market leader DuPont Co. of Wilmington, Del.
“We're also looking at a lot of new areas,” he added. “We're not just sitting back on our core business. Fibers have been strong and film's been steady.”
Lance Altizer, nylon business manager for BASF Corp. of Mount Olive, N.J., expects North American sales to finish flat to slightly up in 2003.
“The market hasn't lived up to expectations,” Altizer said. “In our case, automotive has still been strong, but in other areas, such as power tools, more business is moving to China. It's amazing how quickly it's accelerated, especially at accounts that are dealing with big-box retailers.”
BASF has a number of auto manifold programs coming on in the second half of 2003, but Altizer pointed out that a lot of automotive projects now are more demanding, and that nylon is seeing more competition from PP in engine covers, fans and shrouds.
BASF also is seeing more small-engine conversion from metal to nylon in housings for lawnmowers and leaf blowers, where producers are looking for weight reduction and part integration.
Overcapacity remains an issue in North America, especially with a good deal of compounding capacity added in recent years. As a result, DuPont's Flitman said operating rates in the region were between 80-90 percent in 2003, but should be above 90 percent in 2004.
Average per-pound selling prices for North American nylon resin were up about 10 percent through August, as producers worked to pass on raw material hikes.
It's a challenge to paint the North American ABS market in a good light, as it has lost sales and struggled with overcapacity. 2003 looks to be more of the same, with producers expecting to close the year with demand down about 5-8 percent, in spite of a solid second half to date.
“There's been business moving overseas and a mix of things going on,” said Herman Savenije, styrenic copolymers business director for BASF. “Fifty million pounds of [North American ABS] demand has gone overseas in the last 12-18 months.
“Margins have been compressed this year and have never really come back to acceptable levels,” Savenije added.
“Global operating rates are in the low- to mid-70s, and they really need to be in the low- to mid-80s. There's been a lot of capacity added in Asia and an overflow in Europe.”
In North America, ABS was hit particularly by cutbacks in automotive and construction, according to Kevin Dunay, Bayer styrenics product line manager.
2004 also could represent a challenge, but Savenije is hopeful of growth in the electric market because of the operating efficiency of global suppliers.
Savenije also described ABS/ nylon alloy as “an up-and-coming product” that's competing globally in auto interiors, instrument panels and consoles.
The material is being used in exterior mirror housing holders on the 2003 Honda Accord.
At Bayer, Dunay said opportunities exist for the firm's Lus-tran ABS weatherable polymers in external panels for re-creational vehicles and for Bayblend PC/ABS in instrument panels. Market opportunities in therm-o-forming include parts for boats, buses, ground effects and spas, he said.
The highly diverse world of thermoplastic elastomers almost exists in a pocket universe when compared with commodity or engineering materials. As a result, its performance for 2003 and prospects for 2004 are all over the board.
“We saw double-digit growth in K-Resin [styrenic block copolymers] this year,” said David Morgan, K-Resin business director for Chevron Phillips Chemical Co. LP of Houston. “That's more impressive because the economy's down.”
“We can usually do GDP plus 1 or 2 percent,” he added. “But we've added 13 new grades in the last 16 months for all of our markets — film, injection molding, blends with polystyrene — and that's really helped. We'll continue to introduce new grades in '04 but not at the same rate,” Morgan said.
Faisal Syed, a TPE analyst with Chemical Market Resources Inc. in Houston, is a little skeptical of Morgan's claims.
“Pricing has dropped for SBCs [like K-Resin] because of overcapacity and sluggish demand,” Syed said.
“New firms like Asahi, Septon, Kuraray and Dynasol are entering the market as people are looking for cheaper alternatives or for materials to blend with other resins,” he said.
“Growth this year has been closer to 5 percent. Double-digit is too optimistic.”
The market for thermoplastic polyurethanes should be flat to slightly up in 2003, according to Stephane Morin, TPU market manager for BASF.
Morin said the market has been hurt somewhat by automotive business switching from TPUs to other TPEs because of price pressure.
Some injection molding TPU business also has moved to Asia, he said.
Syed added that North American TPUs have major overcapacity and that prices have been dropping. The material still is relatively high-priced vs. other resins, due in part to its excellent abrasion resistance, he said.
BASF's alliance with GLS Corp. to develop new TPU-based compounds has led to new business in hydraulic tubing, according to Morin. BASF also is adding five to six new TPU grades in 2004, with more of an extrusion focus, he said.
The firm also is streamlining its TPU plant in Wyandotte, Mich., to increase capacity 15 percent by the end of the year.
Other TPEs — such as thermoplastic vulcanizates, thermoplastic olefins and copolyesters — have held up better this year, Syed said.
TPVs and TPOs are enjoying high-single-digit growth, driven by major applications in automotive. Copolyesters also “are holding up pretty well” as a result of specialty work in under-the-hood applications, according to Syed.