The 3-cent price increase that hit the North American polypropylene market in December is looking like the calm before the storm since an increase of as much as 20 cents per pound is bearing down on buyers for January.
Both moves are the result of a series of unplanned outages that hit propylene production sites throughout the Gulf Coast beginning in late November. Most recently, Dow Chemical Co.'s St. Charles plant in Hahnville, La., has experienced production problems for propylene, polyethylene and related products because of a Jan. 3 electrical outage.
Startup problems at a propylene site run by new firm PetroLogistics in the Houston area have added to propylene tightness, or at least to that perception. Although the site a former ExxonMobil Chemical Co. facility would have added less than 5 percent to the region's total propylene supply, it was expected to alleviate some of the supply pressure experienced by existing propylene makers. PetroLogistics LLC now is expected to resume production by Jan. 31.
And a longer-term factor affecting propylene supply and, as a result, regional PP prices is continued use of lower-priced natural gas as a petrochemical feedstock over crude oil. The ethane derived from natural gas produces less propylene than crude oil-based naphtha does, but the economics of the situation means that a switch back to crude is unlikely.
As a result, the regional PP market is looking at an extended period of tight propylene supplies.
These short- and long-term factors have collided in North America in recent weeks, creating an atmosphere where many buyers are expecting to see a double-digit price increase by the end of the month. A number of buyers contacted by Plastics News said they believe the increase amount eventually will settle at 17 cents per pound for the month, but that total still was being negotiated and is not reflected on this week's PN resin pricing chart.
The January increase on propylene monomer at first was expected to total only 7-8 cents per pound, but the need for product accelerated it, according to Scott Newell, a PP market analyst with Resin Technology Inc. in Fort Worth, Texas.
Phil Karig, president of the Mathelin Bay Associates LLC consulting firm in St. Louis, described the huge price increase attempt as a classic market-clearing action caused by the short-term propylene monomer shortage.
The market is kind of on edge because not as much propylene is being produced as was expected, Karig said. It's not fair to [PP] processors, but that's the situation that many of them find themselves in.
North American PP makers had been living for a while with [profit] margins squeezed and now are looking to improve, according to Craig Blizzard, a PP industry veteran now working as an industry consultant in West Chester, Pa.
Producers have seen high polymer-grade propylene prices, and that's an unhappy position for them to be in, Blizzard said. Current margins are unsustainable for them.
The big January increase attempt has buyers in a bind, since it's shaping up to be the third time in less than three years that North American prices have taken a one-month jump of 10 cents or more, according to the PN resin pricing chart. The problem becomes trickier when you realize that in both previous cases in July 2008 and September 2009 prices fell by at least 10 cents in the next month or two.
And that's not even counting the situation last year when PP prices rose a total of 12 cents per pound in March and April, only to slip by 12 cents in May and another 8 cents in June.
The situation in mid-2008 was the beginning of a broader economic meltdown that ultimately would cause regional PP prices to slide 62 cents from their peak, but the 2009 double-digit up-down swing, in hindsight, was purely a result of propylene market volatility.
Needless to say, these moves do not sit well with many buyers.
It's getting ugly again, with no sensitivity for the burden and stress placed on processor/retailer relationships, a Pennsylvania-based PP buyer said. 2011 spring programs are set and now we face increasing prices midseason to stay revenue-neutral.
At RTI, Newell expects there again will be a downward correction to January's big PP increase, but it remains a question of how much. As a result, he's advising clients not to delay any attempts to pass the increases on to their own customers.
Karig added that he's advising his clients to buy only as much as they need this month.
The barrage of price volatility surrounding PP also has some buyers considering their options for using other plastic resins including polystyrene and high density PE in their products.
The expectation is that for a significant period of time over a molded product's life cycle, the delta between polyethylene and polypropylene will be fairly significant, Blizzard said. If you look at ethylene and propylene from an economic standpoint, a processor might consider switching [from PP to HDPE] if they can overcome any performance issues that might exist.
Products such as plastic cutlery could switch from PP back to PS, a move that could easily be made if processors held on to previous molds. But Karig cautioned that moving out of PP might only be a short-term solution.
Every time there's an earthquake or a flood, people talk about buying earthquake or flood insurance, he said. So now we're hearing talk about switching to another resin or even to paper or metal.
But these increases could be short-lived. You want to be flexible, but you also have to think long-term.
Any big PP price increase or potential material switch could dampen a domestic PP market that had rebounded well through the first 11 months of 2010, according to the American Chemistry Council in Washington. Sales of PP within North America grew almost 10 percent in that time frame, but a drop of almost 45 percent in export sales reduced total market growth to 2 percent.
Eleven-month growth in the domestic PP market was led by sales into sheet (up almost 18 percent) and injection molded caps and closures (up almost 19 percent).