Polypropylene's days as an affordable commodity resin might be coming to an end.
And if that happens, PP exports from North America will decline as well.
This somewhat gloomy outlook came courtesy of market analysts Esteban Sagel and Mike Smith. Sagel, of Chemical Market Associates Inc., and Smith, who is with DeWitt & Co., each spoke at their firms' World Petrochemical Conferences, held March 24-25 in Houston.
The crux of the problem, described by Sagel and Smith, is that with low-priced natural gas-based feedstock being used by petrochemical firms, less propylene is being produced. As a result, tight propylene supplies are pushing up prices and taking average North American selling prices for PP along with them. Prices for most PP grades are up more than 50 percent since mid-2008 and don't look to be coming down any time soon.
“Polypropylene is at the edge of losing its competitive advantage,” Sagel said. “Ten years ago, it was a cheap product vs. polystyrene, PET and polyethylene, but not anymore.”
“It's not the end of the world, but [PP's] ability to grow rapidly based on cheap price is not going to be there.”
And this lack of competitive pricing will drain exports, which enjoyed a banner year in 2009. North American exports to China surged 340 percent year-over-year in 2009, allowing regional PP makers to keep their lines running at good rates and to pass on price increases to their customers.
But even during the course of the year, exports peaked near 180 million pounds per month to less than 50 million by the start of 2010. With propylene tightness becoming a structural part of the PP market, these high prices might not be temporary.
“The first [PP] exports to go will be commodity grades like raffia and fiber and fast-running injection molding grades,” Smith said. “Domestic demand [in North America] may not see the peak of the mid-2000s for a while.”
China remains a surging goliath on the world PP scene. The country consumed 25 percent of world PP demand in 2007 and is expected to hit 31 percent by 2013. North America's share of global PP demand is expected to drop from 17 percent to 13 percent during that time.
But China could be sourcing more of its material from nearby suppliers, as roughly 9 billion pounds of PP capacity was set to come on line in Asia during 2009 and 2010. That also would reduce opportunities for exports from North America and Western Europe.
Amid all this gloom, North American domestic PP demand is expected to rebound 4-5 percent in 2010, according to both Sagel and Smith. This bounce-back could be led by “optimistic new applications” such as high-clarity thermoformed food packaging and foam applications, Smith said. Sagel also pointed out that Starbucks recently changed many of its beverage cups to PP. Improved construction and automotive spending also should help PP prospects, he added.
Sagel also commended North American PP producers with showing discipline during 2009, not cutting prices in order to gain market share. As a result, profit margins for the year were much better than expected. But he also cautioned that this discipline “may crack as financial resources become more accessible.”
Low operating rates — estimated to be around 80-83 percent in North America, according to Smith — also could lead in more plant closings and consolidations, even after more than 2 billion pounds of capacity has been removed in recent years.
“North America is moving to the top of the polypropylene price chain,” Sagel said. “Demand is going to improve, but long-term growth will be affected by high prices.”
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