Maybe blame for the uncertain fate of plastics feedstocks can be placed on Marion King Hubbert.
Hubbert, better known as M. King, was the Shell Oil scientist who correctly predicted that U.S. oil production would peak in the late 1960s or early 1970s. Hubbert was criticized when he made that statement in 1956, but was validated when his prediction came true in 1970. He died at age 86 in 1989, but his ideas still are used in the study of peak oil theory.
Or, maybe it's better to point at George Bissell, who in 1853 confirmed his belief that crude oil could be used as a source of lighting fuel. Three years later, he hired a salt drilling crew, struck oil in the fields of northwestern Pennsylvania and the race was on.
Hubbert and Bissell were mere messengers, but their actions had an impact on plastics, since crude oil and natural gas are the primary feedstocks for most commodity and engineering resins. Plastics markets have been whipsawed back and forth during the past 20 years as oil prices and availability have surged and fallen again and again.
The future may hold more of the same, but it's apparent that all roads lead to the Middle East for feedstock and resin production.
“The Middle East will remain the low-cost region for petrochemical production simply because of its unparalleled cost base for ethane and natural gas,” market analyst Howard Rappaport said recently by phone. “Saudi Arabia still has its natural gas price fixed at 75 cents per [million Btu].”
By comparison, the U.S. cash price for natural gas was $3.90 in midday trading March 11. That discrepancy has led most new production of polyethylene, the world's most widely used commodity resin, to be focused in the Middle East for most of the last decade. No new capacity has been added in North America since the early part of this decade. That trend won't be changing any time soon.
“North America has been oversupplied,” said Rappaport, global plastics business director for Chemical Market Associates Inc., a consulting firm in Houston. Consequently, he noted, North American resin makers are taking steps to shut down higher-cost capacity.
“In 2008 more than 2 billion pounds [of North American PE capacity] were shut down and additional quantities were taken off-line temporarily,” Rappaport said.
Howard Blum, chemicals and materials director for consultants Kline & Co. in Little Falls, N.J., agreed with Rappaport's assessment. Blum added that renewable non-oil feedstocks might play a bigger role in North American plastics in years ahead.
“Overall, the long-term view probably isn't going to change that significantly, even with oil prices down in the last half of 2008,” said Blum, who has more than 25 years of plastics and chemicals experience. “But certain biorenewable raw materials, because of green legislation, may start to more rapidly supplement North American use of traditional raw materials.”
Recent enzyme research has improved the productivity and reduced the cost of extracting plastic building blocks from corn and sugar, he added. Nonfood crops like flax, straw and lumber also have entered the picture.
Rappaport — who spent more than 20 years with various resin makers before joining CMAI in 1999 — pointed out that the perspective of plastics processors also has changed, and that shift will affect buying habits in the next 20 years and beyond.
“If I'm a U.S. resin buyer, it used to be very important to buy domestic resin,” he said. “I can remember U.S. resin suppliers exporting offshore when the local market was tight, and processors asking why they were shipping it when it was needed here.
“But the market is changing and [processors] are looking outside their borders. They may include supply other than from a local vendor, even if there are risks of quality and supply.”
Although resin prices are currently low in a climate of global recession, more than 20 billion pounds of PE is set to come on stream in the Middle East between 2008 and 2012. The plants might be delayed somewhat, but Blum pointed out that the low feedstock cost position means that resin plants in that region “can survive at 60 percent of capacity, but ours [in North America] can't. That's why we're seeing consolidation.”
Biorenewables will continue to react to the price of crude oil, Blum said. In July, crude oil futures prices peaked at $147 per barrel, but were at $45.30 around midday March 11.
“Anything under $50 per barrel for oil is no-man's land for the biorenewable side,” Blum said. “At around $70, oil becomes somewhat less attractive — $80, $90 and $100 oil makes most biorenewables viable again. And if oil's at $150, they're back on the table in a strong way.”
The nature of ownership of resin production also has changed, which Rappaport said could bring more change to how resin makers operate and are evaluated.
“New interests are represented in resin,” he said. Major companies like LyondellBasell and Ineos are owned by financial interests. That brings a different perspective on how to run the business. Financial difficulties then can lead to increased oversight and decisions are scrutinized more than they were in the past. You'll need to have more justification for [capacity] expansion than you did before,” he said.
Rappaport chose timely examples, since Ineos Group of Lyndhurst, England, and parts of LyondellBasell Industries AF SCA of Rotterdam, the Netherlands, recently filed for bankruptcy.
Looking forward, the impact of foreign resin may be blunted in North America for the simple reason that, according to Rappaport, the region will be consuming less PE and polypropylene. CMAI expects regional PP demand growth to average only 1.5 percent annually between 2008 and 2013. In PE, demand will grow at an even slower rate of 1.2 percent per year during that period.
“It will take three to five years to recover to get back to [resin consumption] levels of 2007,” Rappaport said. “It's a combination of a negative year in 2008 and anticipation of a weak year in 2009 and the after-effects of a global recession. That takes a big bite out of demand growth.
“The industry is recovering from a major economic meltdown. It's the three C's — credit, cash and confidence — and total lack of each.”