Resin prices launched themselves into orbit around the plastics world in 2004, and resin makers expect those prices to stay aloft instead of coming back to earth.
Spurred on by stratospheric costs of crude oil and natural gas - and related products like ethylene, propylene and benzene - prices for most major commodity resins are up 20-40 percent to date in 2004. Even prices for normally predictable engineering resins are up at least 20 percent.
The good news for processors is that their own sales are up, helping some of the resin increases go down a little easier, but the big question is what happens when or if the economy cools off and resin prices don't - or can't - come down.
That's a question that keeps guys like Bill Bowie awake at night. Bowie is chief operating officer with Resin Technologies Inc., a Fort Worth, Texas, consulting firm that aims to help processors make good deals when buying resin.
``Customers are busy and customers are what really empowers sales,'' Bowie said in a recent interview. ``People have been able to get some price increases at the retail level, but at some point they're going to say they can't make products at these prices anymore.
``We don't believe we'll see a respite in resin pricing,'' Bowie added. ``There's fewer players [in resin], so there's no weak sister anymore. A few years ago, they'd take unprofitable business just to keep a reactor running, but now they're choosier. Their spines have gotten stiffer.
``It's gone from how do we produce more material to how can we do what's best for our shareholders.''
And, according to Bowie, it's inevitable that this change at the resin level will continue to affect the processor world.
``The example we give to our clients is, `Did you ever dream of there not being a Union Carbide, or of Exxon and Mobil or Chevron and Phillips being together?' '' Bowie said.
``There's really not going to be any new [resin] capacity in the United States. Producers are going to say, `Why should I pay $6 for a feedstock and put up all the cash when I can pay $1 for the feedstock and only take one-third of the risk?'
``It's a new day, and processors have to do business differently,'' Bowie said.
With first-half sales growth of 5-10 percent, PE makers were smiling even as their raw material costs soared.
``We were optimistic about this year, but it's exceeded expectations,'' said Keith Cleason, gas-phase PE product director for Dow Chemical Co. of Midland, Mich.
``The U.S. economy has been improving, and the rate of imports of finished goods has slowed down this year because cost dynamics have changed in Asia. That's created business for a greater percentage of U.S. converters than in other years. For the first time in a long time, there are export opportunities for resin makers outside the United States,'' he said.
``We've seen film customers place a lot of last-minute resin orders as material's not getting into the country like it had been expected to,'' Cleason added. ``Major retailers are looking to U.S. processors more.''
Those opportunities were most evident in first-half export gains of 26 percent for high density polyethylene and 13 percent for low density PE, according to the American Plastics Council of Arlington, Va.
And unfortunately for thrifty PE processors, the outlook from industry analyst Robert Bauman is for even higher prices.
``We're not even in the [demand] fly-up yet,'' said Bauman, who's with Nexant Inc. in Houston. ``That should be in 2005. Global operating rates are at 90 percent and we're close to 90 percent in North America.
``Asia is the leading indicator,'' he added. ``[Asian processors] can pay more when supplies are tight. They need to make PE film to ship electronics. There's also a lot of PE film used in mulch, greenhouses and silos.''
Longer-term, Bauman doesn't expect North America to be a hotbed of PE plant construction.
``The next building phase in North America probably won't be until 2007 or 2008,'' he said. ``There probably will be some debottlenecking, but we expect the U.S. will be a net importer of ethylene derivatives, including PE, by 2007.
``There will be some new Mexican capacity, and we can gain some by declining the share of export material, but other than that, new PE capacity will be few and far between.''
But in the near-term, Dow's Cleason expects North American linear LDPE growth to clock in at 7-8 percent this year, with HDPE finishing as high as 10 percent. In 2005, growth in excess of 7 percent is possible again, he said.
``The industry has begun to adjust to a higher absolute price for PE,'' he said.
``Feedstock costs are higher and we're not forecasting for them to drop. The market is being more affected by supply and demand. There's been a quantum change in the industry's cost to make PE. If there's a hurricane in the gulf, natural gas price can go up 10 percent in a day.
``There's been some discipline shown on inventory control at the producer level,'' Cleason added. ``But producers are still reluctant to spend on new capital projects. However, with operating rates above 90 percent, that could start to justify some of the capital coming on.
``In film, the converter base has consolidated to counterbalance the buying power of the Wal-Marts and Targets. Film processors are looking to partner up with resin producers to make a healthy market,'' Cleason said.
Just when processors think polypropylene has conquered all the realms possible, the material charges forward. In the first half of 2004, PP surged for U.S./Canadian sales growth of 9 percent.
``We can't supply all the demand people have right now,'' said Craig Blizzard, marketing manager for North American PP market leader Basell Polyolefins of Elkton, Md. ``We have to look hard at customers who are ordering above their normal patterns, and we've had to turn down new business.
``Demand has been on such a rise and we expect margins to return to reasonable levels,'' he added. ``Growth has been in line with forecasts, but the explosion in feedstocks has made things more difficult.''
2004 should finish with U.S./Canadian growth of 6-8 percent, and Blizzard has similar expectations for 2005. Market analyst Bob Dennett is a little more conservative, foreseeing a 4-6 percent growth rate next year.
``We expect the demand growth rate to go down some,'' said Dennett, who is with Chemical Market Associates Inc., a Houston consulting firm. ``If not, there won't be enough capacity to meet domestic demand. Operating rates should stay above 90 percent in 2005.''
At Dow, North American PP product director Jerry Pritchett said that PP ``has been a little more buoyant than what most people were thinking.''
``Existing accounts have come back to higher levels,'' he said. ``There's been more optimism. [Customers'] order books are more loaded than they've been in the past. It's a big difference from last year.
``Margins are still challenged even though capacity utilization is at 90-95 percent,'' Pritchett added. ``You'd think margins would be better.''
In Pritchett's view, customers also are taking a longer-term approach to the PP market.
``Attitudes are changing,'' he said. ``Customers are more concerned about product availability and who they want to partner up with. They're seeing different price points than they're used to. Early in the year they thought [propylene] monomer prices might fall off, but they never did.''
Pritchett also agreed with Dennett's assessment of the PP capacity picture.
``If you look globally, capacity utilization rates are continuing to rise,'' he said.
``A lot of capacity came on in the late '90s, but we're still seeing 6 percent growth on a 17 billion-pound [North American] market. There's some concern that if we grow at 6 percent for the next five years, where will the material come from? But margins are unacceptable right now to reinvest,'' Pritchett said.
PP market watchers thought some of that need could be met if Basell restarted idled PP capacity at plants in Texas and Louisiana, but Basell's Blizzard was noncommital on the topic.
``There's no definite timing to restart production in Alvin [Texas],'' he said. ``We'll always look at a restart, but it will depend on our availability to return margins to reasonable levels.''
In the polystyrene market, the hammer has come down. And that hammer is engraved with the word benzene.
Prices for that key PS feedstock - an oil refinery product used to make styrene monomer - remain around $4 per gallon, almost four times its historic average. The effect on PS has been volcanic, with average market prices up at least 35 percent.
``If we get everything through, we'll have seen 42 cents in price increases,'' said Rick Salvador, PS business director for Nova Chemicals Corp. in Pittsburgh. ``That's a number no one could have imagined at the start of the year.''
``For a long time, benzene was very unattractive because of the profit margin,'' Salvador added. ``Several companies that had been making benzene have taken out capacity since 2000. So with the amount of gasoline that's being sold in the world, a lot of benzene and its precursor - toluene - is being left in [gasoline] because of its alkylation value as a gas ingredient.
``So benzene's not available. Several people are looking into making benzene again, but it's not going to happen overnight,'' Salvador said.
PS market analyst Pat Duke anticipates benzene gradually will settle in a trading range between $3 and $4 per gallon, which would keep PS prices high. Duke, who's with DeWitt & Co. consulting firm in Houston, said that PS buyers have delayed buying as much as they can this year because of high prices.
The silver lining in this benzene barrage is that North American PS sales are on track to finish the year with growth of 4-5 percent.
``The overall PS market is very strong,'' said Jeff Denton, North American PS marketing director for Dow. ``Sales growth started in early spring and went through summer. Generally, we've seen a more positive economy and a lot of growth in a wide range of markets, including TVs, refrigerators, food service and packaging.''
He added that Duke's forecast for the benzene market might be accurate because benzene is ``structurally short.''
Both Salvador and Denton expect market growth of 3 percent in 2005 as sales cool off a bit after recovering from a subpar 2003.
Nova's Salvador sees expandable PS going more into wall insulation and insulated concrete forms for the construction market, while Denton expects Dow's developmental work in improving environmental stress-crack resistance in appliances to begin paying off next year.
Duke also urged buyers not to blame PS makers for the high-priced environment.
``PS makers are pumping out material and waiting for their price increases to catch up with their raw material costs,'' he said. ``Nobody's the bad guy here.''
PET makers are drinking up North American sales growth of 8 percent this year, and a similar thirst-quenching could be in store for 2005 as well.
T.J. Stevens, polymers group vice president with the market-leading Voridian unit of Kingsport, Tenn.-based Eastman Chemical Co., analyzed the market in a recent interview.
``There's been a proliferation of juices and Powerades, and water's certainly been big,'' Stevens said. ``We're seeing solid double-digit growth in those areas, and that's pushing more PET.''
In the first half of 2004, external sales in Voridian's polymers unit, which mainly consists of PET, were up 19 percent to $1.03 billion, while sales volume in pounds was up 13 percent, according to the company's financial report.
2004 growth actually could have been higher than 8 percent, according to market analyst Edgar Acosta, but high resin prices slowed processors down somewhat.
``In any given year we could see the market up 8-12 percent,'' said Acosta, who is with DeWitt. ``Some new packages have hit the market this year.
``There's been some opening up of marketing into smaller bottles like the 500-milliliter size, but there's been more activity in multipack packages, where you've got a number of bottles wrapped in film.''
But the raw material situation has affected PET feedstocks ranging from paraxylene to purified terephthalic acid to ethylene glycol, leaving the PET market a bit unsteady in spite of the high growth rate.
``The market is very unstable right now,'' Acosta said. ``Producers are in a better margin condition, but raw material increases seem to be a step ahead of them. Market supply is fairly balanced, but there's been a lot of pre-buying - more than what we'd normally see heading into the fall.''
Capacitywise, the North American market will get two big boosts in 2006 when Voridian opens a 770 million-pound plant in Columbia, S.C., and when Shrewsbury, N.J.-based Wellman Inc. adds 300 million pounds of capacity by converting an idle polyester fiber line in Bienville, Miss. The Voridian plant will use the firm's innovative IntegRex technology, which it claims can cut costs and increase production by eliminating solid-stating from PET production.