Like knights in polyethylene armor, exports have rescued the North American resin market so far in 2007. But it's not a sure thing that those conditions will continue into 2008 and beyond.
Export growth - fueled by lower North American raw material costs and by a favorable exchange rate vs. the dollar - turned domestic sales losses into overall gains in high density, low density and linear low density polyethylene as well as nylon through the first seven months of 2007, according to the American Chemistry Council in Arlington, Va.
In polypropylene, exports were up almost 90 percent through July, lifting domestic growth of 2 percent to an overall growth rate of more than 7 percent. HDPE was the next biggest gainer, with exports up almost 58 percent.
But since commodity prices and currency rates are as unpredictable as the flight path of a paper airplane in a wind tunnel, resin makers realize they need to shore up their domestic sales in case the export boom cools off next year.
A number of resin executives and industry analysts recently talked with Plastics News to take their best shots at anticipating what path the various resin markets will take in the next 12-18 months. Here's what they had to say.
In an uncertain year, Dow Chemical Co.'s Howard Ungerleider is sure of one thing.
``There's no question that the import-export balance all through this year has changed,'' said Ungerleider, who serves as commercial vice president of North American plastics for Midland, Mich.-based Dow. ``When you look at exports of resin from North America to the rest of the world, it's been a dramatic swing. It shows the relative competitiveness of Gulf Coast ethylene and polyethylene using natural gas as a feedstock vs. crude oil.
``The oil-to-gas [price] ratio right now is 13, and historically it has to be at 6.5 for parity between the two materials,'' he added. ``We've seen a disconnection of natural gas liquids [ethane] from natural gas used in heating and power generation. Ethane's been tracking the price of crude oil since January 2006.''
``Domestic demand is low, since buyers are only buying material when they need it,'' noted Mike Burns, a PE market analyst with Resin Technologies Inc., a resin buying consultancy in Fort Worth, Texas. ``The [PE] film market only got busy when buyers bought ahead of demand.''
In 2007, North American ethylene feedstock has been competitive with every other region in the world, with the exception of the Middle East, because of the region's lower-priced natural gas, according to Nick Vafiadis, a PE market analyst with Houston's Chemical Market Associates Inc. consulting firm.
``The realities of this cost structure have impacted future capacity expansion plans,'' he said. Vafiadis and other CMAI executives spoke at the firm's Plastics Processors Conference East, Aug. 28 in New York.
Another result of price tracking with oil has been an overall price increase of 15 cents per pound on all grades of North American PE through the end of August. This price jump has been frustrating for North American buyers, many of whom are buying the same amount or less PE than they were in 2006.
Unfortunately, the raw material situation leaves prices with little place to go.
``If oil and natural gas and ethane stay in the same band, it's hard to see [PE] prices going down significantly,'' said Ungerleider. ``Prices are still in a prolonged ridge and should stay there in 2008. The question is when in 2009 does the inflection point occur. That hinges on new Iranian capacity and whether it comes up on schedule as expected.''
The question of Middle Eastern PE - primarily from large projects in Saudi Arabia and Iran - remains up for debate. Consultants at CMAI and other firms had expected a significant amount of PE imported from these areas to arrive in North America soon, but North America's feedstock advantage and startup problems at some Middle Eastern plants have pushed back this timetable.
``Previously, we had been more aggressive in our forecast, but a more favorable energy forecast will delay [Middle Eastern PE imports] for a few more years,'' CMAI's Vafiadis said. ``We now believe that, beginning in 2009 and beyond, North America will become a target market for both pellets and polyethylene fabricated goods. North America will be a net importer of polyethylene by 2012.''
Ungerleider sees a similar picture at Dow.
``Our long-term view is that, with the buildup of capacity in the Mideast and Asia, North America now is a domestic market for domestic consumption,'' he said. ``This year is an aberration in the trend line. It's not going to go the same way forever. The dynamic we see today will moderate and then start to decline.
``Eventually we'll become a net importer, but the increase in resin exports could last through 2008,'' Ungerleider said. ``New polyethylene capacity in the Middle East will cause the next margin trough, and that will impact North America, but you have to think in economic terms.
``The Mideast is adding polyethylene to monetize stranded gas. There's no economic way to transport [gas] around the world, so they have to put in units and crackers so they can move polyethylene around the world. But if they want to make the most money for the shareholders, the first place to move [PE] isn't North America, it's Asia ... That market is lower cost and it's closer.
``Some Mideast polyethylene will come into North America, but if you look at global impact, it will be the smallest here,'' Ungerleider said.
Others are more skeptical of the Mideast influence. Officials at PE maker Nova Chemicals Corp. of Pittsburgh have said publicly that they don't believe the impact of the Middle East material will be as large as expected. At RTI, Burns said less than 20 percent of its PE client base currently is sourcing material from the Middle East.
``If you're a big commodity resin guy, you don't want to lose your connection with a prime North American supplier,'' he said. ``Until they line up 100 rail cars in Houston, buying polyethylene from the Middle East is still impractical.''
One unexpected impact of the export boom has been a revival of business for U.S. PE bag makers. The amount of PE bags imported from China and other parts of Asia dropped almost 70 percent between mid-2006 and early 2007.
The situation ``is helping [Dow's] customers compete with [film] machinery they couldn't compete with in the past,'' Ungerleider said. ``They can use machinery that's been idled over time or that they thought was uncompetitive.''
Exports also have kept operating rates extremely high for North American PE makers. In the first six months of 2007, regional PE works had a 94 percent operating rate, which was the highest for any six-month period since the mid-1990s, according to CMAI's Vafiadis.
Longer-term, Ungerleider said that he expects packaging to remain ``a significant chunk'' of PE demand.
``Flexible packaging will continue to lead the charge vs. paper and metal,'' he said. ``It can't be beat for weight reduction and savings. The pipe market also will continue to grow and get back on its trend line after taking a breather this year.
``Polyethylene is a sustainable material. It's big and it will continue to grow in new applications. It's truly a differentiated commodity.''
No commodity resin has benefited more from the export boom than PP. Through July, exports were up almost 90 percent vs. 2006, surpassing 1.2 billion pounds. Exports accounted for almost 11 percent of total U.S./Canadian PP sales in that period.
``I guess we might consider exports a windfall, but we're concerned about the low level of growth in the domestic market,'' said Craig Blizzard, marketing manager for market leader Basell Holdings NV of Hoofddorp, Netherlands.
``That's got us scratching our heads a little bit, but we're optimistic going into 2008 because of new applications that are going into polypropylene,'' he said
Through July, domestic sales of PP were up 2 percent - a low number, but one that's better than the domestic losses posted by most other commodity resins.
``Our expectations are for the domestic market to see flat to moderate growth in the U.S. and Canada in 2007 and 2008,'' Blizzard said from Basell's North American headquarters in Elkton, Md.
``There are several factors affecting demand in North America. We're seeing continued imports of finished products made of polypropylene and lack of exports of finished products. Instead of [PP] film being made here and shipped elsewhere, it's being brought in.
``There's also a lot of downgauging in many applications as customers push to make things lighter. That lowers resin consumption. The automotive market also is off, but that's not affecting polypropylene's use in a growing number of applications in that segment.''
High export levels could last for as long as 18 months, according to polyolefins director Esteban Sagel at CMAI. But North America won't have long-term export opportunities, he said. By 2012, North American exports could decline by as much as 30 percent from their current levels.
However, a similar short-term export situation could repeat itself at some point in the future, he added.
Globally, new capacity will begin to impact PP operating rates by the end of 2008, according to Sagel. Large amounts of new capacity from Saudi Arabia and elsewhere in the Middle East should arrive in 2009 and 2010. As a result, global operating rates will be under 90 percent from 2008-11.
``Those will be tough years for [PP] producers,'' Sagel said.
The only North American capacity event for 2008 will occur when Basell closes an older, 385 million-pound capacity plant in Sarnia, Ontario. The firm then will reopen an idled 485 million-pound line in Bayport, Texas, later in the year.
The struggles of the U.S. housing market have hit PVC hard, since construction-related uses account for more than 60 percent of domestic PVC sales.
The market may have hit bottom in August, when U.S. housing starts fell 19 percent vs. 2007 to an annual rate of 1.3 million units - the market's lowest level in 12 years, according to the National Association of Home Builders in Washington.
That slippage clearly is seen in U.S./Canadian PVC sales numbers through July. Overall domestic sales were down 6 percent, with sales into siding, fencing/decking and windows/doors down anywhere from 9-23 percent. The behemoth rigid pipe and tubing segment - with almost half of domestic demand - fared slightly better, with a loss of just over 3 percent.