HOUSTON (April 5, 11 a.m. EDT) — Someone forgot to tell the North American polypropylene market that the economy's been in bad shape.
In spite of struggling with overcapacity and high feedstock costs, U.S./Canadian PP demand climbed almost 3 percent last year, according to the American Plastics Council in Arlington, Va. That gain came during a year in which both polyethylene and polystyrene sales were down in the region. Growth of 4-6 percent now is expected for 2004.
Sunoco Inc. of Philadelphia benefited from the market's relative strength, as its PP sales volume grew 16 percent to almost 1.6 billion pounds. The firm also saw its per-pound margin on PP increase from 9.5 cents to 11 cents in 2003.
“The industry has gone through a period of consolidation and rationalization and has continued to grow at or above GDP,” Sunoco Polymers Vice President Bruce Rubin said at the CMAI World Petrochemical Conference, held March 24-25 in Houston. “Now the operating rate is over 95 percent and nobody's looking to add capacity, so we see good signs ahead.”
Since 2000, Sunoco has put together a PP unit that now ranks third in North America in terms of annual capacity with 2.4 billion pounds. The firm purchased Aristech Chemical Corp. for almost $700 million in late 2000, then in early 2003 bought a PP plant from Equistar Chemicals LP. Sunoco also co-owns a PP plant in Marcus Hook, Pa., along with Bar-L Inc., a division of leading PP compounder Washington Penn Plastic Co.
Sunoco's chemical business, which includes a leading position in phenol as well as other specialty chemicals, added 68 cents to the firm's per-share earnings last year after contributing only 7 cents in 2001. The firm has lowered business costs by 20 percent through consolidation and labor reductions and also has reduced its physical inventory levels by 30 percent, Rubin said.
The Equistar deal also helped Sunoco's PP business source 40 percent of its propylene feedstock internally last year. In 2001, that number was only 20 percent. Rubin said internal propylene sourcing could be as high as 50 percent in the future.
“Being a small player in poly-propylene in North America, you can't compete,” he added. “Scale matters in driving overhead costs down, leveraging technology and building purchasing leverage. Running the right production on the right lines with the right technology is critical to us.”
Bob May, PP business director for BP Petrochemicals in Naperville, Ill., told a similar story at the DeWitt World Petrochemical Review, held March 24-25 in Houston. May said North American PP operating rates have increased steadily since late 2001 and are now in the low-to-mid 90s. Capacity cutbacks — including BP's decommissioning more than a billion pounds in Texas — helped to reduce this gap.
BP ranks second in North American market capacity, trailing only Basell Americas of Elkton, Md.
“With demand growing at 4-6 percent a year, we're going to need new capacity by 2006 to meet demand,” he said. “That means announcements need to be made later this year, because it takes 18-24 months to build new capacity.”
Most new capacity will take the from of debottlenecking, since recent overcapacity problems — the result of a 30 percent capacity boost between 1998 and 2002 — are still fresh in the minds of PP makers. Capacity totals presented by May were eye-opening. Between 1999 and 2003, North American PP makers added 4.8 billion pounds of capacity. But by 2001, a shakeout already had begun, leading to the shutdown of almost 1.9 billion pounds of capacity in 2001 and 2002.
“The lessons learned have caused many [PP] suppliers to be very cautious and critical before spending $125 million to $200 million on a grass-roots polypropylene plant,” May said.
May foresees PP prices rising through 2006. CMAI market analyst Graham Harris sees prices rising also, but he added that PP will remain “the polymer of choice.”
PP “is the largest single polymer, and it's still cheap and cost-effective,” Harris said. “It's made massive penetration in injection molding because of improvements in melt-strength and clarity. There's been a lot of research and development money thrown at polypropylene technology.”
Improved PP technology also could allow the material to compete with PET in hot-fill applications, said Harris, who expects U.S. PET prices to peak in 2005.
For full-year 2004, U.S./Canadian PP operating rates should come in at just under 95 percent, according to CMAI. That number should be more than 95 percent by the end of 2005, according to a recent report from the firm. At DeWitt, analyst Pat Duke expects global PP operating rates to climb above 91 percent by 2006 and climb above 96 percent by 2010.
Global PP capacity additions will far outpace those made in North America, experts said. By 2010, the Middle East and Africa will hold 13 percent of global PP capacity, according to Duke. In 2002, the region had only 5 percent.
BP's May also pointed out that China still holds a cost advantage over other parts of the world where finished PP products are concerned. Taking into account raw materials, labor and overhead — and subtracting freight, customs, insurance and logistics — leaves China with an 11-14 percent cost advantage on a standard rigid PP container, according to May.
In the automotive market, PP continues to be “the best polymer for the job,” according to CMAI's Harris. Since 1996, PP has accounted for almost 45 percent of all plastic weight in Western European midsize cars.
Emerging auto markets in China and India also could ring up big sales for PP, Harris added, since India currently has only one car per 1,000 residents, while in China the number is only 3 per 1,000. By comparison, established markets in Germany and France have 60 and 82 cars per 1,000, respectively.