America right now is at a crossroads, with possibilities of a slowdown or a recession ahead. How will the polyolefins markets perform in either scenario?
Shannon Schneider, a consultant with Nexant Inc.'s ChemSystems division in Houston, delivered an analysis of the situation at Plastics Recycling 2008.
``There are two divergent opinions about 2008, with the biggest variable being the economy,'' Schneider said.
The American Chemistry Council said there is a 50 percent chance of a recession, but Nexant foresees only a slowdown. ``It is likely that the economic growth will slow down but not recede,'' she said.
In a recession scenario, operating rates and prices both would decline. Domestic polyolefin demand would shrink 1-5 percent, and demand in countries with a high U.S. export component also would decline over time.
``Latin American countries will particularly be vulnerable,'' Schneider said. Exports of polyolefins would be likely to tumble 10-20 percent by year's end.
If a recession occurred, resin plant operating rates would drop 3-6 percent, she said. Prices would decline, following operating rates. Although price changes are hard to predict, ``prices could drop $1,000-$1,100 per ton in the domestic market,'' Schneider said. Any unplanned outage, unless massive, would not have a significant impact on prices.
Recyclers could expect lower prices and a drop in demand, she said. The export market then would depend entirely on China.
Officially, it takes two consecutive quarters of negative growth for an economy to be in recession.
``The first half of 2008 could still be relatively strong,'' Schneider said, adding that the government could intervene to prevent a recession in an election year.
In a slowdown scenario, on the other hand, operating rates would remain high and prices would increase. Schneider predicts that domestic polyolefin demand would grow 1-2 percent, following the 1-2.5 percent gross domestic product growth. Exports would continue with demand growing 1-5 percent, though demand would be limited by logistics, namely Houston port congestion and shortages of ships and containers.
In the meantime, operating rates would stay around 93-97 percent. Any outages or operating problems would exacerbate tight supply and raise prices.
In an economic slowdown, high prices for virgin polyolefins would lead to higher prices for recycled plastics. But sustaining supply to meet increased demand could be problematic, along with logistics. Potentially strong demand from overseas would depend on Chinese laws and how they are enforced.
Schneider warned that, in the slowdown scenario, a downturn of operating rates is expected to begin in 2009.
``The bottom years could be worse than what happened in 2001,'' she said.
No matter which scenario develops, the supply situation is independent of the economy. Schneider gave a rundown of capacity buildup and shutdown and concluded that both polyethylene and polypropylene capacities in North America will decline.
On the PE side, Canada's Petromont & Co. LP is shutting down 580 million pounds per year of high density PE capacity in April. ``They are doing this due to the high prices of crude oil and relative strengthening of the Canadian dollar,'' Schneider said. Petromont is a 50-50 joint venture between Dow Chemical Co. and state-owned Ethylec Inc.
No new PE capacity is planned in North America.
The dynamics of PP capacity include Dow's shutdown of 450 million pounds per year in December 2007, the shutdown of 790 million pounds per year by Basell Canada in mid-2008, the start of a 440 million-pound-per-year line by Basell, also at midyear, as well as a 770 million-pound-per-year project of Indelpro SA de CV of Monterrey, Mexico, that is to start later this year.
``Ethylene cracker turnarounds will not be postponed. ... Olefins annual effective capacity will decrease for the rest of 2008,'' she added.
New PE and PP capacity is mainly in the Middle East and China. However, the new plants will be delayed by one to two years.
Schneider also believes that restrictive policies on plastic bags in China and probably Australia and India may affect demand as well as recycled resin purchases and prices. However, the impact is still uncertain and enforcement questionable.
Regardless of which scenario occurs, 2008 will be a transition year, Schneider said.