The echoes of Hurricanes Katrina and Rita were heard throughout North American resin markets in 2006, leaving both processors and producers hoping for a return to normalcy in 2007.
The storms that hit in August and September of 2005 disrupted buying patterns throughout the region. Once production was restored in late 2005, many processors bought more resin than they normally would have, leaving demand weak going into 2006. Then for several months, demand fluctuated, affected by supply/demand constraints, raw material costs and falloff in the automotive and construction sectors. Per-pound selling prices for many materials fell in the first part of the year - once production was restored - but remained above pre-hurricane levels, to the dismay of many processors. Some materials regained pricing traction during the summer months and headed up again.
Resin executives and consultants who were tongue-tied by post-hurricane uncertainty last year are chatty once again. Here's what they had to tell Plastics News about prospects for the year ahead.
After losing an average of 16 cents per pound in early 2006, PE prices regained an average of 11 cents as demand improved. Through July, U.S./Canadian sales of linear low density PE were up about 4 percent, according to the American Plastics Council in Arlington, Va. Regional sales of high density PE had climbed 3 percent, while sales of low density PE had pumped up 1 percent.
``We undervalued the extent of destocking in the first four months of the year,'' said Howard Ungerleider, commercial vice president of plastics for PE leader Dow Chemical Co. of Midland, Mich. ``Demand started out slower than expected, but we've continued to see higher demand month over month.''
``Through the second and third quarter [of 2006], price increases were lagging and weren't able to keep pace with feedstock cost,'' he added. ``That abated somewhat with softness in [prices for] oil and hydrocarbons, but feedstock costs are still relatively high.''
Ungerleider also pointed out that supplies of PE feedstock ethylene are ``at a bottleneck right now,'' and that 8-12 percent of ethylene capacity will be off-line for planned maintenance during parts of the rest of 2006, further tightening supply and putting pressure on PE prices.
Robert Bauman, an industry analyst with Nexant Inc. in Houston, agreed that limited ethylene supplies are impacting the North American PE field.
``There's not enough ethylene or propylene to make a major expansion in North America,'' Bauman said. ``As the industry gets tight, supply/demand is the main factor affecting pricing. Even at a 3 percent growth rate, [PE] operating rates are very high.''
``Every [PE maker] that we talk to is basically sold out. There's no idle capacity. It used to be that they could always cut back on exports to meet domestic demand, but now they're treating exports as a full customer,'' Bauman said.
``If they go in and out of export markets now, they won't have that business when they need it.''
In end markets, Ungerleider and Bauman both singled out packaging as an area of continued growth.
``Film and bag continues to be pretty strong,'' Ungerleider said. ``On LLDPE, food packaging will lead the way. On HDPE, pipe will continue to grow, displacing concrete and PVC.''
``Packaging is still the No. 1 demand area,'' said Bauman.
``We're still a throwaway society. There's not much conservation going on.''
Looking to 2007, North American PE growth should be similar to that of the U.S. gross domestic product, which is expected to be in the 3-4 percent range.
The LDPE market will be tightened by Dow's closing of 220 million pounds of capacity in Sarnia, Ontario. New capacity for the region will take the form of ``capacity creep'' - mechanical improvements that can increase existing capacity 1-2 percent per year.
Bauman said he expects the PE industry's profit margins to shrink in the third quarter of 2006, but improve in the fourth quarter and remain solid in 2007.
But change should remain a constant as well, he said.
``It's hard to cite seasonal trends anymore,'' Ungerleider said. ``When the hurricanes hit last year, everyone was concerned about access to resin. Then [resin] production came back and we saw resin building up in silos and more finished goods coming in from offshore. It's always changing.''
Better days lie ahead for the North American PP market, which saw sales drop almost 1 percent in the first seven months of 2006, according to APC.
``We don't expect any slowdown in 2007 or 2008,'' said Craig Blizzard, North American marketing manager for PP leader Basell Polyolefins of Elkton, Md.
``2006 was a transition year coming out of the challenge of 2005. We've seen growth restart in summer 2006, and we expect more normalized growth in 2007 and 2008,'' Blizzard said.
In spite of the low demand number, PP sales grew almost 8 percent in transportation and 3 percent in rigid packaging.
``To a degree, there's still some product substitution going on,'' said Jerry Fordyce, a market analyst with Townsend Polymer Services & Information Inc. in Houston. ``There's growth potential [for PP] in automotive with hybrid vehicles. [Automakers] still need to make cars lighter.''
The only new capacity in the region in 2007 will come from Indelpro SA, which is adding almost 700 million pounds in Mexico. Blizzard said Basell can increase the output of its plants by using different catalysts in the polymerization process.
``Capacity utilization today is in the mid-90s, but there's still room for production growth before we experience any shortages,'' he added. ``As the value of polypropylene has increased, opportunities to export have lessened. That will keep material that might have been exported within the region.''
In post-hurricane pricing, PP slipped an average of 4 cents per pound, but has zoomed up 12 cents since then. Blizzard and Fordyce agree that demand is likely to grow 3-4 percent in 2007, though 5-6 percent growth is still possible.
With a better 2007 ahead, Blizzard said 2006 has played out as expected for Basell.
``There was a slow, steady inventory build as people recovered from the storms,'' Blizzard said. ``We never did expect a lot of pre-buying. There's a limit to how much resin that processors can financially and physically handle.''
PS prices tumbled an average of 7 cents per pound in early 2006, but have bounced back at least 6 cents, with some buyers seeing as much as 11 cent increases to date.
``Pricing has drawn a lot of attention, but in my view volatility's been more of a factor,'' said Robert Snyder, vice president and general manager of the Styrenix business for PS leader Nova Chemicals Corp. of Pittsburgh.
``Consumers are hesitant to buy if they don't know what's going on, but everything is up. Polyethylene, polypropylene, paper, energy, metals. And [PS feedstock] benzene has been more volatile because of the complexity of the gasoline market.''
Nova and Dow have combined to remove 600 million pounds of PS capacity from the market by the end of the year. Higher prices and interpolymer substitution have hurt PS demand in recent years, with APC reporting a demand drop of almost 2 percent in the first seven months of 2006.
``We've taken a significant amount of capacity out and now are operating the right amount of capacity at the right levels,'' Snyder said.
Townsend market analyst Frances Moore-Jones countered that raw materials might play an even larger role in the future of PS.
``The biggest thing right now is that benzene probably isn't going to settle down,'' said Moore-Jones. ``So shutdown of capacity probably won't have that much of an effect.''
Snyder anticipates that demand could grow 2-3 percent in 2007. If crude oil prices drop, benzene prices also could come down, making PS more affordable.
And although some market watchers are expecting imported goods to erode the massive food-service end market - which accounts for nearly 40 percent of domestic PS demand - both Snyder and Moore-Jones said that sector can protect itself.
``Material prices are less an issue in kitchenware and tableware,'' Snyder said. ``You don't see the same rapid run-up in logistics in moving a box of 48 forks from China to California as you do with some other products.''
``A lot of food service is still going to stay in the U.S.,'' added Moore-Jones. ``The large processors' perspective is that they want to look all over the globe to source resin and build processing plants so that they'll have a foothold in all parts of the world and be close to their customers.
``The big guys in tableware will stay here and try to match up their resin contracts with their business cycles.''
That roaring sound being heard by PET buyers is a flood of new capacity that will increase North American PET-making volume by 20 percent by mid-2007.
But industry veteran T.J. Stevens - polymers vice president with PET leader Eastman Chemical Co. of Kingsport, Tenn. - isn't ready to hop into a lifeboat.
``It's tough in a commodity business to match supply/demand as new capacity is coming on,'' Stevens said. ``But that 20 percent [of new capacity] comes on over time. It's not coming on all at once.
``Rationalization of older assets also should remove at least 200 million pounds of capacity. That's Commodity Fundamentals 101, but that never seems to get mentioned. It's not that black-and-white as to what the effect of the new capacity will be. There are a number of uncertainties.''
Stevens added that regaining sales volume from Asian imports will help absorb some of the new capacity, which will include a 770 million-pound addition from Eastman in Columbia, S.C.
``Asian [PET] imports are expected to be more than 800 million pounds in 2006 and I think we can knock back half of that,'' he said.
But a number of market watchers - including analyst Mark Kallman with Resin Technology Inc. of Fort Worth, Texas - believe the new capacity will provide a temporary challenge for the industry.
``The new capacity ultimately will have the impact of driving resin prices as low as raw materials will allow, and that will thin profit margins,'' Kallman said. ``We're getting to a [profit] level past which producers won't produce, but I don't see them slowing or delaying expansions.''
PET prices tumbled rapidly after the hurricane shakeout, losing an average of 25 cents per pound between September and January, but since have regained about 13 cents.
Pricing could be further tightened by PET feedstock paraxylene, which Stevens said could be in short supply through 2008.
Stevens has pegged 2007 North American PET demand growth at 6-8 percent, while Kallman expects a slightly lower mark of 5-6 percent. Kallman said 2007 could be ``a transition year where the market is in an oversupply situation.''
On the PET end-market front, Stevens said the dominant carbonated soft drink sector will continue to grow at low-single-digit rates, but could gain more business from conversion to smaller sizes like 12- and 8-ounce bottles.
Bottled water ``isn't slowing down'' and should enjoy demand growth in the mid- or low teens in 2007, he said. Growth for sports drinks and juices should be in the mid- to high teens. Stevens added that he expects to see PET show more activity competing with PS in the food market.