Buy less resin! Pay more!
That doesn't sound like a very effective ad campaign, but it's one that North American resin makers had to trot out to their customers this year. A slowing economy reduced demand, while high oil prices sent prices for oil-based plastic feedstocks through the roof. Resin prices followed suit.
Add to that resin supply disruptions caused by Hurricane Gustav in Louisiana and by Hurricane Ike in Texas in recent weeks and you've got a supply/demand diagram as convoluted as a pretzel made under the influence of vertigo.
Here are some key numbers to keep in mind where North American resin markets are concerned:
* Crude oil futures peaked at $147 per barrel in mid-July, but prices had fallen under $89 in late trading Oct. 9. That's a drop of about 39 percent from the peak. Cash prices for natural gas used to make most North American polyethylene were above $13 midyear but near $6.50 on Oct. 8.
* U.S. housing starts in August fell to an annual rate of 895,000 units the slowest production pace in more than 17 years. U.S. housing starts peaked at almost 2.1 million in 2005, but fell to 1.8 million in 2006 and to less than 1.4 million last year. Construction accounts for more than half of North American PVC sales.
* Through September, North American car builds were down 6 percent vs. the year-ago period. Regional truck builds were down 22 percent. That's a total loss of about 1.8 million vehicles in the first nine months of the year. Auto sales play a major role in many plastics markets, including nylon and thermoplastic elastomers.
North American resin prices are set to decline somewhat in the latter half of 2008 but will that trend continue on into 2009? Or will another oil price run-up wreak havoc with the economics of the plastics market, regardless of what demand does?
Plastics News recently checked in with industry executives representing a variety of resins on the reality of 2008 and options for 2009. Here's what they had to say:
As the market's largest commodity resin, PE clearly has felt the effect of the high feedstocks/low demand conundrum.
``It hasn't been a great year for demand,'' said John Hotz, vice president of PE for Nova Chemicals Corp. in Pittsburgh. ``We're plugging along, and we could get a little boost as the Gulf Coast rebuilds again after the hurricanes.''
Average selling prices for PE shot up 17 cents per pound in the first eight months of 2008 about 20 percent before taking a 7 cent tumble in September. Buyers are looking for more in October, and from the demand side, it's not hard to see why.
Overall, U.S./Canadian high density PE sales were flat through July, according to the American Chemistry Council in Arlington, Va. Regional LDPE sales were down 4 percent in that time frame, while LLDPE sales were up only 1 percent.
But taking increased export sales out of those totals leaves quite a different picture. Domestic HDPE sales were down 6 percent in those seven months, with domestic LDPE sliding 6 percent as well and domestic LLDPE slumping 2 percent.
Processors ``are doing what they can to use less resin because of the high prices,'' said Mike Burns, a PE market analyst with Resin Technology Inc. in Fort Worth, Texas. ``Anyone with extra inventory is getting killed. You need to be smart with inventory.''
In spite of the slump, sales into LLDPE food packaging film were up 4 percent and sales into HDPE packaging film were up 5 percent through July, according to ACC.
``Packaging is holding up reasonably well,'' Hotz said. ``It's holding its own with consumer-oriented packaging. These are life's necessities.
``If you overlay recession periods since 1990 over packaging growth, packaging blows right through them.''
Hotz and Burns were divided on the fate of North American exports and the impact of new PE capacity arriving in the Middle East. Burns along with many in the industry expect North American exports to fade as the more profitable Middle Eastern material meets needs throughout the world.
This could be a substantial issue for the North American PE market, since exports accounted for 21 percent of both LDPE and LLDPE sales and 15 percent of HDPE sales through July.
``The first thing we'll see is global capacity expansion showing up in other regions of the world,'' Burns said. ``Exports will start to come down, and that will affect the market. Then, North American producers either will shut down production or lower prices.''
Hotz realizes he's in the minority opinion regarding Middle East resin, but he makes a solid argument.
``Every pellet in Saudi Arabia doesn't go to every market,'' he said. ``Half of what they're making is HDPE. That doesn't help the guy making [LLDPE] packaging film in Latin America.
``North America still has the No. 2 cost advantage and we're still competitive. I don't see [PE] material backing up into North America because of lower exports.''
Shorter-term, hurricane-related inventory issues could have an impact. August inventory built up by producers equaled less than 10 days of production, according to Hotz.
``The problem is having enough raw material to run plants,'' said Hotz, adding that Nova's PE plants are in western Canada and not on the Gulf Coast.
Looking to 2009, Hotz said the U.S. economy could limit PE market growth just as it has done in 2007 and 2008.
If anything, the recent reality endured by the PP field is more extreme than what PE has muddled through.
PP prices shot up 28 cents per pound or 30 percent through August, including a massive 11 cent jump in July. But the pricing giant fell hard in September, with prices slipping an astonishing 14 cents.
This tumult and chaos came in a market where seven-month sales were off almost 8 percent in 2008, according to ACC. Unlike PE, exports hurt the overall PP market, falling 30 percent from the record levels enjoyed in 2007. The domestic market, by comparison, fell only 5 percent.
``If prices drop, exports could come back, but domestic demand probably won't,'' said Scott Newell, PP market analyst with RTI. ``I don't think we're going to see the growth we used to see. It's a maturing market.''
In spite of the steep run-up in price, Newell said that PP makers ``haven't had much opportunity to profit'' because of similar hikes in price for propylene monomer feedstock.
North American PP sales into fiber and filaments fell 8 percent, taking out about 160 million pounds of market demand through August. Regional PP sales into injection molded consumer products fell 6 percent, chopping 90 million pounds of demand along the way.
Among the few bright spots for North American PP through July were sales into injection molded cups and containers (up 9 percent) and film (up 5 percent).
``Almost every category is down because of a mix of high prices and the slowing economy,'' said Newell. ``Housing and automotive are using less polypropylene and we're still seeing some work going offshore.''
Various closings and startups throughout North America produced a net loss of 500 million pounds of annual capacity. Even with the closings, current demand accounts for only 87 percent of current capacity, according to Newell.
Slowing exports could worsen that ratio, he added. If North America loses half of its resin export market roughly 1 billion pounds of annual demand because of new overseas capacity, the ratio of demand-to-capacity would fall all the way to 82 percent, Newell said. That level likely would lead to further reductions in the region's capacity, he added.
For 2009, Newell said he expects North American PP demand growth either to be flat or no higher than 2 percent.
Tough times in the construction market almost always translate into similar doings in the PVC market. 2008 has proved to be no exception and 2009 could offer more of the same.
Housing starts fell 6 percent in August to their lowest level in 17 years, according to the National Association of Home Builders in Washington.
``The demand outlook is bleak,'' said Steve Brien, PVC market analyst with Chemical Market Associates Inc. in Houston. ``2009 could be flat or up 2-3 percent vs. '08, but we're in an era of stabilization and 2008 is looking like the bottom year.
``The market is still off 2007 levels, even with exports doing better in 2008. But export market growth won't be there in 2009 because of global price differences.''
Brad Esckilsen, regional business director for PVC maker Formosa Plastics Corp. USA of Livingston, N.J., said that housing starts ``seem to be bottoming out,'' but demand loss for 2008 still might hit 6 percent.
ACC's July report backs up these statements, showing U.S./Canadian PVC sales down 3 percent in the first seven months of 2007. That incorporates a 10 percent drop in the domestic market and an eye-popping 72 percent gain in export sales.
The domestic drop reflects a 16 percent plunge in the dominant rigid pipe and tubing category, and drops of 9 percent each in siding, extruded windows and doors, and fencing and decking. Construction related applications accounted for about two-thirds of domestic PVC sales through July.
The market's only real bright spot was in sales of PVC to compounders, which were up almost 14 percent through July, adding about 50 million pounds of demand.
In 2008 pricing, North American PVC makers hammered through 14 cents of increases about 20 percent through July, but prices were expected to decline later in the year.
Surprisingly, capacity expansions by Shintech Inc. in Addis, La.; Westlake Chemical Corp. in Calvert City, Ky.; and Formosa in Point Comfort, Texas, will add almost 1 billion pounds of PVC capacity in North America in 2009. That equates to an increase of about 5 percent in overall market capacity even after Georgia Gulf Corp.'s closing of 250 million pounds of capacity in Oklahoma City is taken into account. Some market watchers also have speculated that the second half of Shintech's massive new plant might not come on line until 2010.
North American PVC makers ``made a lot of money in 2005 and early 2006 and had high profit margins,'' CMAI's Brien said. ``But by the time these new plants get built, the market isn't looking as good. Lower domestic demand and shrinking exports will rein operating rates in to the low to mid 80s in 2008 and closer to the low 80s in 2009.''
Formosa's Esckilsen does not share Brien's view of a declining export field.
``We depend on the global economy as a pull for PVC in developing countries, and even though [gross domestic product] in some places has slowed, we still see growth,'' Esckilsen explained. ``The lowest cost producer will supply, and North America should be strong in that area for the next few years. We'll remain the second-lowest cost outside of the Middle East.''
Esckilsen added that rising costs in other parts of the world might return production of some PVC products to North America.
``Some manufacturers had shuttered capacity in North America because of imports, but imports are no longer bargains,'' he said. ``So we could see more business in wire and cable, consumer goods and industrial parts.''
Shorter term, the 2008 hurricanes aren't expected to impact the PVC market as much as their predecessors did in 2005.
``When you look at '05 with [Hurricanes] Katrina and Rita, there was more lost PVC production than there was in '08,'' Brien said. ``The '05 economy was doing much better and [PVC] pipe and siding operating rates were much higher. Resin demand also was at a higher level, so lost PVC production led to higher prices.''
Brien added that North America ``could see more rationalization on the PVC processing side until the construction market bottoms out. Longer term, Brien said that he expects the PVC market to rebound, even if the market posts lower growth rates than it did in the past.
``[Water and sewer] infrastructure in the U.S. will continue to grow, both through repairing old infrastructure and installing new,'' he said. ``PVC remains a preferred product, and if the economy gets better, it will be in good shape.
``PVC is a leading indicator. We saw PVC demand start to drop two or three years before the economy slowed and we'll see it rebound sooner as well.''
Formosa's Esckilsen pointed out that infrastructure business was good early in 2008 but later waned. He also took solace in historical trends.
``If you go back to 1950s government data, the U.S. has had five housing corrections that lasted three to five years each, and we're in year three of this current correction,'' Esckilsen said. ``When a correction troughs out, the next year bounces back pretty strong.
``We could be looking at the same thing now. It's kind of like being an undervalued stock sector,'' Esckilsen said.
The well hasn't run dry for PET, but lower beverage demand and redesigned packages have put a dent in the material's recent performance.
North American PET demand is set to grow 2 percent in 2008, according to T.J. Stevens, North American business director with market leader Eastman Chemical Co. in Kingsport, Tenn.
Stevens points out that 2008's 2 percent rate was less than the 5 percent growth enjoyed in 2007, but he added that he expects the market can rebound to 3-4 percent growth next year.
In 2008, Stevens has seen a two-pronged attack on PET.
``There's been a significant amount of [bottle] lightweighting by companies,'' he said. ``That's reduced the amount of PET in water bottles from 16 grams to 12. [Coca-Cola Co.] also lightweighted their bottles and used smaller caps with smaller thread.''
PET market analyst Mike Dewsbury of RTI agreed that lightweighting played a major role in PET in 2008. In some cases, Dewsbury said, water bottles that used 24 grams of PET dropped to 12 and now are trying to find ways to use only 9 grams per bottle.
``They've taken half the resin out of the bottle,'' he said. ``I don't think they can lightweight water bottles any more, but now they can go after soft drinks and food packaging.''
Eastman ``has a lightweighting number'' that the firm anticipates each year, according to Stevens. But 2008 ``was the highest in recent memory.''
``All of the bottlers have ongoing programs in lightweighting and they all hit in 2008,'' he added. ``But this whole process didn't just happen in one year. The industry can't react that quickly.''
As a result, PET sales into water bottles fell from low double-digit growth in 2007 to low single-digit growth in 2008. Meanwhile, the dominant carbonated soft drink market went from flat to negative 1-2 percent in that same comparison.
The second big factor for PET in 2008, according to Stevens, was higher energy and raw material costs.
``Brand owners raised prices because of these higher costs,'' he said. ``Along with high gas prices, that led to reduced discretionary spending and less consumer spending.''
Beverages are ``a discretionary purchase, and if people are afraid about the economy, they don't spend money,'' added Dewsbury.
In spite of this cloudy picture, more capacity is on the way. Eastman will add 385 million pounds via a debottlenecking in Columbia, S.C., by the end of 2008. That project partially will replace capacity that was decommissioned there earlier this year.
Indorama Polymers also will add more than 1 billion pounds of capacity at a new plant in Decatur, Ala., next year. M&G Group has announced plans to add almost 2 billion pounds, but has yet to announce a site or timetable for the project.
The only capacity coming out of the market is in Greer, S.C., where Invista recently announced plans to decommission 330 million pounds of capacity.
Some concern exists in the market as to the impact of the new capacity, given the slowing growth rate.
``There's some growth from ongoing replacement of aluminum and metal in soups and sauces,'' Dewsbury said. ``But there's already more capacity than demand and [PET makers] can't go past zero on margin.''
On the pricing front, North American PET makers were able to jockey prices up 15 cents per pound about 19 percent through July, before prices took a combined 10 cent tumble in August and September.
The going was tough once again for the North American PS market in 2008. Unfortunately, 2009 might offer more of the same.
``I don't think there's reason to be hopeful,'' said Greg Smith, a PS market analyst with RTI. ``A flat demand year in 2009 would be looked at as a good year.''
Record-high prices for PS feedstock benzene have caused PS to price itself out of a number of applications. The ensuing falloff in demand has taken almost a billion pounds of capacity out of commission and left the region with three major producers.
``Products are moving [from PS] because of cost, which has led to conversion in new tools to polypropylene and high density polyethylene,'' Smith said. ``And processors don't switch back after making that kind of change.''
In recessionlike conditions, mainstay PS food-service items like plates, cups and cutlery will be affected less than durable goods in the auto and household sectors, but Smith said the market will continue to be ``fundamentally long'' on capacity. Utilization rates will remain under 85 percent, even with less capacity available, he said.
Through July, U.S./Canadian PS sales were down 3 percent, according to ACC. That total combines a 2 percent gain in exports with a 4 percent drop in the domestic market.
PS sales into the food-service market remained flat and sales into consumer and institutional products even grew 4 percent but sales into expandable PS tumbled 7 percent in the seven-month period.
In pricing, North American PS makers were able to boost prices an average of 23 cents or 25 percent through July, but prices were expected to fall later in the year.
Hope could arrive in 2009 in the form of lower benzene prices, which Smith said could be achieved if oil prices remain between $90 and $100 per barrel.
North American PC makers have battled a slowing auto market and a tough optical media field so far in 2008. But growth of around 2.5 percent is possible in 2008 and 2009, even in a challenging marketplace.
That's the expectation of Bill Russell, product general manager for Lexan-brand PC at market leader Sabic Innovative Plastics LP of Pittsfield, Mass.
``North American car builds have been soft, and that's affected polycarbonate resin and blends used in instrument panels, metalized surfaces and front-end lighting,'' said Russell.
The optical media market including compact discs and DVDs also may have reached its peak two years ago, he added. Slow downs there have been offset somewhat by upticks in electronics and medical applications, but the market remains under pressure.
``We want to be the preferred player in the marketplace,'' Russell said. ``And right now, there's economic uncertainty for us and for the whole polycarbonate business.''
Sabic IP also expects to continue to grapple with high feedstock prices for benzene in particular in 2009. In part, this trend can be fought with new products, such as new flame-retardant grades that Sabic IP is developing for the electrical and telecommunications markets.
Russell said that Sabic IP ``has expanded its primary categories'' for high-heat Lexan grades used in front-end auto lighting and other applications. Other grades now have improved flame/smoke performance for aircraft frames and rail parts.
North American nylon makers clearly are hurting from the automotive slowdown, since that market accounted for about 30 percent of total sales through July. In previous years, auto has generated as much as 40 percent of the region's nylon business.
Sales of North American nylon into the automotive and truck sector fell 14 percent in the first seven months of 2007, according to ACC. Overall regional sales were flat, with domestic sales down 6 percent, but export sales up 20 percent.
``There's a lot of uncertainty right now, not just in automotive, but in consumer and industrial and electronics as well,'' said Dave Donofrio, global nylon product manager for DuPont Co. in Wilmington, Del. ``We thought it had hit bottom earlier this year.''
At the same time, Donofrio said that he sees the shift to smaller, more fuel-efficient vehicles a move brought on by high gasoline prices as ``a tremendous opportunity for engineering plastics.''
``Automakers have to push vehicle weights down to get better mileage and to promote sustainability,'' he said. ``So some barriers that have been there in the past might slide.
``Chassis components and parts in particular might see plastic-metal hybrid concepts. The technology is available and we can extend it to smaller parts.''
Donofrio added that automakers ``are trying to accelerate concepts they've pursued in the past.''
``I think they need to do that, because North American OEMs and car dealers are stuck with a product offering that's not selling,'' he said.
DuPont also is looking at getting its nylon resins which lead the global market into oil-contact auto parts like powertrains. These types of parts are more developed in Europe, where the industry has been more concerned with vehicle weight.
At nylon 6/6 maker Solutia Inc. of St. Louis, Americas sales manager Robert Jacobs said that the strength of the nylon market in 2009 will follow the recovery of the auto and housing markets in North America. Jacobs added that nylon ``is a globally used performance material, and growth in developing regions shouldn't be overlooked.''
On the feedstock side, Donofrio said the nylon market has seen more cost increases in 2008 than in the previous four years combined.
``We're doing everything we can to take cost out, but we've got little choice than to pass on our costs to our customer base,'' he said. ``There's no way companies could just take these increases and have sustainable business.''
Factors far outside the nylon market have influenced the material, Donofrio added. High oil prices have led petrochemical makers to crack lower-priced natural gas instead of light crude, but natural gas produces far lower amounts of nylon feedstock butadiene. Prices for nylon feedstock ammonia also have soared because of strong demand for fertilizer ammonia's primary use in the agricultural sector. Supplies of adipic acid feedstock also are tight, he added.
Solutia's Jacobs also sees how feedstocks and markets are interconnected, saying that ``a decline in oil price does not necessarily translate to lower nylon prices.''
Solutia remains optimistic on nylon's future, having added about 300 million pounds of capacity at its Pensacola, Fla., plant in the past two years. The firm also is near completion on a new pack-out and logistics expansion area in Pensacola, for better accuracy and efficiency in fulfilling orders. The facility will be fully operational by January 2009, Jacobs said.
The design switch to smaller vehicles as well as other new applications ``is a good opportunity for those folks who have the capability to innovate,'' said Donofrio at DuPont. ``Sometimes, you need the right timing.''
Even with the auto market down, the North American thermoplastic elastomer sector could find big things in small packages in 2009.
That's the theory of Robert Eller, an industry consultant who's president of Robert Eller & Associates in Akron, Ohio. Eller said the move to smaller, more fuel-efficient vehicles will use European and Asian designs that tend to use more TPEs per vehicle.
``Bumper fascias and instrument panels will be 10 percent smaller, but that will be offset by more intensive [TPE] use in the rest of the car,'' said Eller, whose firm has completed a multiclient study of TPE markets in Europe and North and South America.
European designs, in particular, use more TPEs in body seals, air-bag doors and energy management applications.
``The American market had been much more conservative in its use of TPEs,'' Eller said. ``We've been wealthy and not concerned with cost or weight or scrap utilization.
``But now, [automakers] are willing to spend more per pound for weight savings. They're not insensitive to price, but they see getting one or two more miles per gallon as more valuable than they used to.''
Stephane Morin, senior market development specialist at BASF Corp. in Florham Park, N.J., said he's seen a lot of recent interest in aliphatic thermoplastic polyurethanes for auomotive knobs, buttons and other instrument-panel parts.
``There's been a revival and interest in TPU for auto interiors,'' Morin said. TPU ``had been used [in those applications] in Europe, but not in North America. Now I'm getting calls about it on a weekly basis.
``Designers are looking for very specific items. It's not so much about cost, as it is performance. They're replacing rubber and PVC and other TPEs.
The auto sector carries great weight in the TPE world, accounting for 40-50 percent of total demand, according to Eller. Other automotive opportunities listed by Eller for TPEs in 2009 include:
* Thermoplastic vulcanizates in glazing seals.
* TPU in coated fabrics, cable jacketing and under-the-hood ducts and hose.
* Blow molded thermoplastic olefins in boots and bellows.
Outside of automotive, Morin said that BASF has seen growth in industrial applications like hoses and tubes, film and sheet and wire and cable. There's also been ``a lot of interest'' in flame-retardant and halogen-free material, he said.
BASF's TPU business also has responded to high raw material costs with two price increases so far this year. Morin said that prices for isocyanate and polyol feedstocks ``are both climbing.''
Eller estimated that overall North American TPE demand will finish down 1-2 percent in 2008 and might do the same next year. Morin said that BASF's TPU unit has seen ``single-digit'' growth in 2008 and should repeat that feat in 2009.