In the wake of Hurricanes Katrina and Rita, the uncertainty surrounding North American resin markets for 2005 and into 2006 can be summed up in four simple words: All bets are off.
The one-two punch of Katrina (on Aug. 29) and Rita (Sept. 24) knocked out major amounts of resin production capacity, either by curtailing raw material availability or snarling rail and truck logistics needed to get supplies from the Gulf Coast to customers.
Sales of most major resins slipped in the first half of 2005 - compared with strong demand in 2004 - but they had started to pick up, before Mother Nature intervened.
North American processors that built up inventory in late 2004 had worked that material back down and were in need of buying again in the weeks before the hurricanes. Now the combination of low inventories and unavailable resin is causing sleepless nights throughout the industry.
A few brave resin executives recently took time away from their voice mail and BlackBerrys to talk with Plastics News about what might lie in store in the months ahead. Here's what they had to say.
North America's largest commodity resin was probably hardest hit by the extreme weather. Houston consultants Chemical Market Associates Inc. estimate that 31 percent of North America's high density polyethylene, 34 percent of low density PE and 45 percent of linear LDPE was still out of commission as of Oct. 3.
``Right now, there's a fair amount of uncertainty,'' said John Hotz, vice president of PE for Nova Chemicals Corp. ``It's hard to determine how many [resin] companies are down. There's a lot of concern around feedstocks and energy availability, as well as logistics.''
Hotz said he believes producer inventory was ``quite low'' when the storms hit.
``We were already running at capacity in Canada, so we can't increase production there, and we already had strict sales control in place with our customers,'' he said.
Pittsburgh-based Nova and other PE makers have won 19 cents in price hikes since Aug. 1, after a first half in which prices fell an average of 10 cents per pound. Another nickel increase is on the table for Oct. 1, as well as 8 cents for Nov. 1.
The 19 cent hike was made in 6, 6 and 7 cent increments. The first 6 cents went through in August, but the second 6 cents was under debate when Katrina hit. Questions surrounding resin supply pushed the second 6 cents through, along with a 7 cent increase Sept. 15.
``Processors had a lot of inventory and were in position to challenge on the second 6 [cents],'' said industry analyst Mike Burns at Resin Technologies Inc. in Fort Worth, Texas. ``But when Katrina hit, [processors] weren't able to get material and had nothing to hedge against.''
Even before the storms, PE makers were struggling with tight ethylene supplies - from production stoppages in Canada and on the Gulf Coast - and sky-high prices of natural gas feedstock, which is used in 70 percent of North American PE production.
Natural gas was trading for more than $14 per million British thermal units Sept. 29, after being below $6 on the same date a year ago.
First-half U.S./Canadian LLDPE sales were up nearly 2 percent vs. 2004, according to the American Plastics Council in Arlington, Va. For the same period, LDPE sales were down more than 3 percent and HDPE sales were down almost 2 percent.
``It's hard to tell what short-term impact on processors will be,'' Nova's Hotz said. ``Longer term, there could be a positive demand for products needed for reconstruction.''
RTI's Burns said: ``Some processors are looking for material now, but others bought ahead and are set through December. The ones who are in trouble are the ones who only order when they get orders from their sales force.''
Almost one-third of North American PP output was affected by the storms, further tightening an already stretched market.
``We were unable to satisfy demand even before the hurricane,'' said Craig Blizzard, PP business director for market leader Basell Polyolefins in Elkton, Md. ``We had been turning down orders since late July and our inventory levels were depleted.''
After first-half price declines, PP makers - with a push from Katrina - moved 5 cents through on Sept. 1. Another 6 cents is out in the market for Oct. 1.
Basell and other PP makers adjusted their production rates after the soft first half, but with the increase in demand and the hurricane fallout, Basell now finds itself ``unable to handle more business beyond the usual,'' Blizzard said.
First-half U.S./Canadian PP sales were roughly flat with totals from a year ago, according to APC.
``It's still going to be a down year for PP demand,'' said RTI market analyst Lowell Huovinen. ``But [PP] still will be a growing product long-term.''
Huovinen added that he does not anticipate much change in the running of the region's big PP makers, even though Basell recently was bought by a private equity firm and No. 2 player British Petroleum plc has an initial public offering set for its Innovene LLC PP unit later this year.
``The industry already has gone through many mergers,'' Huovinen said.
``The only potential change is that new owners might work more aggressively on margins because there's less competition in the field. With 15 producers, you always had one who would try to turn their reactor on first to get volume. Now you can't do that because it's more important to be profitable.''
And unfortunately for needy PP buyers, Blizzard said bringing back idled capacity in Texas to meet short-term demand isn't an option for Basell. ``We really couldn't bring on the old capacity this year,'' he said. ``That process takes six months. We'd have to retrain operators and do a lot of other things.''
Market leader Shintech Inc. has declared force majeure on PVC production at its plants in Geismar and Addis, La., but company controller Dick Mason said he's optimistic the market can bounce back fairly quickly.
``The normal expectation would be that some confusion and delay would create some tightness in the market,'' Mason said. ``But this is occurring at a time of year when demand is a little bit less, so the impact might not be as extreme.''
Mason added, however, that it's been difficult for Shintech to assess restart possibilities at its own plants for a number of reasons.
``It's not so much the physical facilities you have to look at, but also the workforce,'' he said. ``Some industries are moving in trailers and mobile homes just so their employees can have a place to eat and sleep.
``There are also problems with monitoring systems for natural gas,'' Mason explained. ``Gas might be available but not safe to be used if you can't tell if there's a leak or buildup somewhere.''
A resilient construction market had sales of PVC into pipe and tubing up almost 4 percent in the first half, according to APC, but overall market sales still were down about 2 percent.
``The market could end flat to slightly down for the year,'' said Steve Brien, a market analyst with CMAI. ``A majority of sales are still in construction, and pipe was strong. But some flexible markets were waning and flooring was hurt by imports of finished goods.''
Mason said, ``In talking to customers, there are no signs of construction slowing down in the next 60-90 days. Beyond that, it's hard to tell.''
PVC makers still are working on increases of 2 cents per pound for Sept. 1. Another 12-15 cent hike on the table for Oct. 1 is a result of hurricane-related raw material increases, suppliers said.
The major PET post-hurricane issues are supplies of ethylene glycol feedstock and the status of a major Wellman Inc. plant in Mississippi. Wellman's Bay St. Louis site is to resume production in November, but not at full rates.
Ethylene glycol could continue to be a bottleneck because of rail rerouting and other issues, said T.J. Stevens, polymers vice president for market leader Eastman Chemical Co. in Kingsport, Tenn. Eastman and other PET producers have a 16 cent-per-pound surcharge in place for September, to cover surging raw material and logistics costs connected with the hurricanes.
``We hope the situation will be a one-month phenomenon, then we'll be back to global parity in October,'' Stevens said.
An 8 cent hike, outside of the surcharge, has been announced for Oct. 1. As in other commodities, PET prices dipped in this year's first half but were on their way back up before the storms.
``Almost overnight, [PET makers] lost export business and imports started coming back in,'' said CMAI analyst Chase Willett. ``It took spring and summer a while to get going. Prices calmed down and that kept imports at bay, but the market was never as loose as people thought it was.''
On the demand side, PET stayed on pace for 6-8 percent growth in North America. Stevens said growth in bottled water was ``in the midteens'' and that half-liter, 12-ounce and 20-ounce bottles were providing solid growth in carbonated soft drinks. Willett added that water demand was up because of good weather in July and August.
But Willett said PET imports could rise significantly for the rest of the year. Importers have ``a huge incentive'' because of potential shortness of North American material, he said.
In early 2007 Eastman expects to launch commercial production at its major new PET plant in Kingsport. The plant, using the firm's Integrex technology, will be able to produce 770 million pounds a year. Eastman currently operates a pilot Integrex plant in Kingsport, with 20 million pounds' capacity.