Jeff Lipton's optimism is intact even as the company he leads - Nova Chemicals Inc. of Pittsburgh - looks to rebound in a tough market for resin makers.
Lipton, 63, joined Nova in 1994 after a 28-year career with DuPont Co. He became Nova's president and chief executive officer in 1998 and has led the firm to become North America's largest polystyrene maker and fifth-largest polyethylene maker. Since 2001, Nova's annual sales have climbed from $3.2 billion to a 2005 total of $5.6 billion.
But the road has had a few unexpected turns. High raw material costs and energy prices - along with some recent production outages - caused Nova to post losses in four of the last five years. During that time, Nova's profitable olefins/polyolefins unit has been overshadowed by its money-losing styrenics business.
But Lipton is convinced that brighter days are ahead, led by Nova's higher-margin products such as Arcel- and Dylark-brand specialty resins. In addition to his duties at Nova, Lipton currently serves as chairman of the American Chemistry Council and as a director of the Canadian Council of Chief Executives and of specialty chemicals maker Hercules Inc.
Lipton recently sat down with Plastics News to share his thoughts on a wide range of topics that affect Nova and the plastics processors that make up a large portion of its customer base.
Q. What's your overall perspective on the plastic processing market in 2006? It's been tough for a lot of companies. Do you see it improving?
A. Fundamentals actually have been pretty good for just about everyone in the chain. The thing that's been the wild card is inventory moving either up or down. For the most part, your readers are right in the middle of it all. If you go back to 2004, we had a year-end run-up in inventory because people were concerned about pricing. We started 2005, and inventory got consumed because people didn't have concern about pricing at first, and inventory went down sharply from January to June and all through the plastic chain in every market in the world.
Then we start June  and it was clear to everyone that we had to see purchasing for inventory as well as for consumption. Then summer [demand] started to take off, and the storms hit, and that just threw the world into chaos. When production capability got rebuilt in the latter part of 2005, inventory got rebuilt.
We've been through a period since November when everyone's been consuming inventory, and we're just now at an inflection point.
Q. Was the market affected by a cutback in resin production in the first half of 2005?
A. There was a little bit of that, but the only significant cutbacks were storm-related [in late 2005]. Producers saw inventory being built, so they did slow down production in the second quarter of 2005, but it wasn't all that significant throughout the chain.
Now what you have is, if you look at inventory in the hands of producers, it's about average in days of sales. If you look at inventory in the hands of customers, it's dramatically low. If you look at the fundamental relationship of GDP and industrial production in North America vs. consumption of large volume petrochemicals like ethylene, there's a tremendously close correlation over the last 15 to 20 years. But in the last two years, it's dislocated, which indicates to me that there had been inventory consumption of a very significant amount of products that contain ethylene. I think that dislocation is about to be corrected.
Q. So in a sense it's been an 18-month inventory correction.
A. That's what I believe it is.
Q. Whereas typically an inventory correction event would be much shorter.
A. That's right, shorter and less significant. It's been a correction in actual ethylene consumption vs. theoretical, according to ACC economists. Eleven billion pounds of ethylene in material should have been consumed based on economic activity, but it wasn't. So we're talking about a very significant inventory dislocation, and if you talk to our customers, as I've been doing over the last couple months, some customers are even waiting until they get orders and then begging, borrowing or stealing the resin they need. They just didn't want to build inventory with resin that's going to be cheaper next month.
So the question was: Are inventories going to get so low that [customers] had to be buying? Or are they going to get concerned about pricing? Or are they going to get concerned about supply because of storms or something else?
Q. I think you just described the challenge in understanding the resin market. In six months, it's gone from processors being worried about having enough resin to run their machines to them saying they're not going to buy this month.
A. Right, they're building up inventory then saying they're not going to buy. But look at underlying consumption, which we measure by empty hopper [rail] cars coming back to our plants. Hopper cars are a closed system. There's a finite number of cars and we can track every car at every location these days. So we've been putting together charts that show hopper car movement, and what we look at is how many hopper cars are full on customer [rail] sidings and how many are empty and on their way back to us. If you look at the first quarter [of 2006], we were having cars come back at record levels.
So customers were consuming resin at record levels in the first quarter, and it turns out sales were matching those record levels. But inventory in customers' hands was coming down, and our own inventories were coming down dramatically.
Q. At some point does it become less of a temporary thing and more of a long-term change in resin inventory?
A. I don't think so. What we're seeing now is that customers are taking big risks in terms of supply. Some customers are literally borrowing polyethylene from other customers in order to make product for orders. And that can't continue, because when the second customer gets frightened, there's no way they're going to send polyethylene over to the first one.
So I think we're seeing a change in psychology. There were a couple of price increase announcements that people questioned as to if they'd go in or not; then people stopped questioning and asked how they can buy more now.
Then we had this [Huntsman] accident that really got people excited. (An April 29 fire shut down a Huntsman Corp. feedstocks plant in Port Arthur, Texas.)
So we have orders in our hands as of the beginning of [May] that in some of our product lines are the equal of what we sold all of last month. So there's a lot of concern on the part of our customers.
Q. The number that keeps getting thrown back at us is 32, which is the amount in cents per pound that PE prices went up after the hurricanes. Prices dropped some in the first part of the year, but they are still up from last year. That number must get thrown back at you a lot.
A. The practical side of it is the supply/demand balance. Is the market tight or weak? If the market has excess supply, prices come down. Nothing stays stable. If customers are concerned about there not being enough supply, either for themselves or for the industry in general, they're going to be buying regardless of price.
So I think it's not a question of sitting there and saying what will customers be willing to pay, because plastics price themselves. If they're used for simple food packaging or more sophisticated products, they're worth a lot more than what our industry gets for them. Prices can move up in chain without impacting fundamental demand. It's just a question of who has power.