The old dogs of the North American polyethylene market learned some new tricks in 2005. And they just might be carrying those lessons with them in 2006 and beyond.
The education process was hastened by Hurricanes Katrina and Rita, which knocked out 50-60 percent of the region's PE capacity for several weeks in the fall. Faced with that reality, PE processors did what they had to do to stay in business.
``The legacy of the hurricanes is that [North American] buyers have discovered that they can import [PE] if it's financially attractive,'' said Howard Rappaport, a PE analyst with Chemical Market Associates Inc. in Houston. ``There are lead times and other issues to deal with, but they can do it.
``Buyers who hadn't used 1 pound of foreign resin before were calling around the world to find resin. In some cases, it took six to eight weeks for the resin to arrive, and it arrived in supersacks or 50-pound bags, but [PE processors] kept their plants running,'' Rappaport said.
Rappaport, speaking at his firm's World Petrochemical Conference, March 22-23 in Houston, said that although the incentive to import has diminished in recent months, he believes that many processors will keep ``a trickle'' of material coming in from overseas in case this year's hurricane season is a severe one.
Attempts to balance PE supply and demand in 2004 and 2005 made the shortage worse in late 2005, Rappaport explained. In late 2004 and the first half of 2005, North American PE makers had built up about 1 billion pounds of inventory. But with prices dropping, they responded by drawing down inventories by 900 million pounds in the three-month period from June to August.
As a result, supplies were low when Hurricane Katrina hit in late August. Shortages then drained the market of another 550 million pounds in September alone. That shortfall caused fourth-quarter U.S. PE imports to zoom up 500 percent vs. the same quarter in 2004.
In the first 10 months of 2005, the U.S. had imported about 200 million pounds of PE. The year closed with the U.S. importing more than 300 million pounds of PE in the last two months of the year.
Although U.S.-Canadian PE demand dropped more than 3 percent in 2005, Rappaport said he expects the market to recover and average annual growth of 2-5 percent from 2005-10. North American prices remain high, but should achieve parity on a global basis by 2010.
Globally, the Middle East will continue to lead the way with new PE capacity, adding 2.2 billion pounds this year and 3.3 billion pounds in 2007. About 40 percent of the new capacity will be in Saudi Arabia, with another 30 percent in Iran.
But the high cost of domestic resin has led U.S. retailers to increase the pace of an already-growing stream of imported finished products. Pat Duke, a PE analyst with Houston's DeWitt & Co. Inc. consulting firm, addressed that topic and other issues surrounding PE at his firm's World Petrochemical Review, March 21-22 in Houston.
``On the one hand, consumers want `low cost, always low cost,' and on the other, we want a good job, better jobs and assurance of jobs,'' Duke said.
``The Federal Reserve can tell us that high oil prices only have limited impact on the U.S. economy ... but when you add the significant trade imbalance and the sharp rise in plastic goods and polymers imports, the U.S. plastics industry will beg to differ from the federal view.''
CMAI's Rappaport estimated that the amount of plastic bags imported to the U.S. in 2005 equaled 2.7 billion pounds of PE resin demand. About 30 percent of 2005 bag imports came from China.
PE maker Nova Chemicals Corp. of Pittsburgh also expects regional PE demand to bounce back in 2006, according to industry dynamics director Chris Gick. North American demand could grow as much as 8 percent this year, Gick said at the DeWitt event.
Operating rates for North American PE makers also hit 92 percent in February after being between 80-85 percent, which Gick said indicated low inventories and recovery in resin demand.
Gick added that U.S./Canadian PE exports to Mexico and Latin America could continue to grow in the years ahead. Those markets currently account for about 60 percent of all U.S./Canadian PE exports, while China accounts for less than 15 percent.