Q. How does the natural gas situation affect resin makers and their customers?
A. Natural gas prices are high, but they have fallen sharply. What's happened is that oil prices have moved up a lot more sharply than gas prices. So with $30 oil and $5 gas, the values per million btu are the same. But now we have a dislocation, and oil is a lot more expensive than gas. And so, while gas is still high - we're spending a lot of money for gasoline to drive our cars, and we're also spending a lot of money to heat plants or drive processors for natural gas - the relative price of oil to gas has changed, making North America more competitive.
Two-thirds of our ethylene [in North America] is based on light feeds of natural gas and one-third on heavy feeds of crude oil. When heavy feeds are more economical than light feeds, the rest of the world is more competitive. This [current] situation actually helps North America. So I think we're going to limit the risks associated with products being made in other parts of the world, to compete with our customers. Use of those products [from other parts of the world] are going to decline with this change.
Q. What's the likelihood of the U.S. government intervening in the natural gas market?
A. The market works itself out in gasoline and natural gas. Because prices are so high, people might switch to other feeds and energy sources.
Q. Some people believe that if the government got involved, it would stabilize gas prices and allow people to know what to expect.
A. I don't think so. The only thing that stabilizes gas or oil is a reasonable amount of supply vs. demand growth. Then we'll see lower prices and more stable prices. But things are so close that any little mishap will change the supply/demand balance. We're not going to see stability; we're going to see volatility because the markets trade on rumors.
Q. Can you describe Nova's approach to new product development? Is the ``low-hanging fruit'' truly gone and the market now is a lot more about refining existing applications?
A. We see it totally differently. We're a medium-sized company and we've focused on two product lines - olefins/polyolefins and styrenics. We've tried to build technological advantages into our products, and we're betting on technology to change the volume of our business. If you're a commodity seller of polyethylene and polystyrene, you make very good money when the market is tight, and you lose a lot when the market is weak. If you're tightly focused on those two product chains, increasing leverage up and down also puts investors at significant risk on the downside. So we said the only way to deal with that is to build a competitive advantage through product diversification and try to make products that other people don't make. We've put a tremendous amount of investment into our technology. We're offering a range of products that no one else can match.
We have unique products with unique values in rotomolding and thin-wall injection molding. The hope there is that the billion pounds of capacity that we have for Advanced Sclairtech [PE] will be used to make unique products. We're trying hard to get up to 70 percent of unique products there by the end of this year, and hopefully the full plant will be making unique products by the end of 2008.
Q. Is it tough to preach the idea of product diversity when you've got billion-pound plants running?
A. We look for really small market segments. The polyethylene market globally is huge. A billion pounds doesn't mean very much, but it's clear to us that there is a lot more than a billion pounds of applications where we can show unique value. And where we can compare our resins to other resins available and show people how they can make money using more expensive products.
Q. So with PE, does that mean applications outside of the film market? And in PS, outside of food packaging?
A. In film markets, even in packaging, we have some uniqueness in terms of oxygen barrier properties. We think we can make film [resin] with more puncture resistance and can make thin wall injection molded products more intricate than other resins can make because our material flows better in the mold. We think we can make better products and save people a lot of money in rotomolding.
Q. Are customers today more demanding in material performance than they were five years ago?
A. Some existing customers are. Others are talking to Nova for the first time because they previously didn't see Nova as a producer of unique products. What we're doing now is working with a much broader spectrum of customers than we worked with before. We have a lot of new customers and potential new customers looking at our products for unique applications, where they didn't even talk to us before.
Q. So you've had to familiarize yourself with markets you might not have been in.
A. We're trying to build a different type of organization than we had before. Previously, we had the lowest [production] cost and sold at the lowest prices, and now we're trying to sell to more sophisticated customers in polyethylene. In polystyrene, we're even stronger than that. Very few [PS] producers have invested in R&D for products that go to existing customers. Some [producers] are going to higher-quality markets by having [PS] as the backbone [of new products], but none of the big producers have spent any money or time or focus on building better products for existing customers.
After acquiring a number of businesses in styrenics, we've picked the best of the best and focused on three or four development areas where we thought we could make a big difference, and that's what we're trying to do. We want to sell new solid polystyrene products to replace PET, polycarbonate, ABS and other kinds of polystyrene and convert our plants to make the [specialty] products we make in Belpre, Ohio. And we're out to try to show, customer by customer, what our products are and how they can make more money by using our products.
The applications we selected are freezer applications or freezer-to-microwave applications where our products' abilities stand out. Another thing we've done on the expanded polystyrene side is say that not only should we be developing new products, but we should be taking these products downstream and helping ourselves with more profit by helping markets get off the ground that use these products. So for standard EPS, we've developed new technology for making high-quality cups with in-line machinery. We've come out with a labeled cup with first-class printing and relatively low costs, and customers will be able to do this all over the world. It really ought to be taking off, especially with the focus by a lot of retail outlets on quality coffee. Starbucks has got everybody excited.
Q. When you look at the North American resin market, do you think it's reached equilibrium in production and capacity?
A. I think there's going to be a lot more consolidation. The economics of our industry and the ability to put money into R&D requires profitability. [Resin makers] have lost a tremendous amount of money trying to be successful in the styrene business. This situation demands that we continue to reduce costs, and consolidation is a significant part of that. Our joint venture in Europe has allowed us to create a pathway to reduce costs, and we're going to see a lot more of that. We're going to see more shutdowns, more acquisitions and more combinations of joint ventures, particularly in polystyrene, which has been a miserable business.
Q. But you still sound like you see more opportunities than limitations.
A. Absolutely. Because in the midst of doom and gloom, we've invested in technology to give us a point of differentiation. I don't know whether it's courage or necessity, but we've decided to bet on the styrenics market, and I think the products we've developed will eventually allow us to turn our piece of the pie around.
Q. And this optimism extends to application development?
A. I think we have opportunities to create a lot of value for our customers. We have a range of customers that are just starting off in the home-build business with integrated concrete forms using polystyrene. That's a whole new area. It's the fastest-growing new approach to building homes and offices in North America, and that's exciting for a lot of people. Customers are using it in Chile and just starting to use it in Mexico.
And we just worked with a network of rotomolders to introduce large plastic trash collectors that fit on the back of trucks. At the first show where they were available, our customer took orders for 800 or so collectors that use 250 pounds of polyethylene per trash bin.
There are big opportunities for customers based on sharing technology. They get new polymers and new technology, and off they go. I think what's good for our customers is good for us. We need to share margin in the chain to make it good for both of us going forward.
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Nova is not exhibiting at NPE but will shuttle customers to meetings at Grace O'Malley's, at 1416 S. Michigan Ave., from June 19-22 from 8 a.m. until 5 p.m. For information, visit www.novachemicals.com/events/npe.