The PET story hasn't been an uplifting one in recent years, but consolidation in the North American market might lead to some positive change.
More than $1 billion was spent on previously owned assets, Chemical Market Associates Inc. market analyst Chase Willett said at his firm's World Petrochemical Conference, held March 23-24 in Houston. And those companies didn't spend $1 billion for low margins. They want to see those margins increase.
In the recent deals that Willett was referring to, DAK Americas LLC bought the North American PET assets of Eastman Chemical Co., and Indorama Ventures Public Co. Ltd. made a similar deal with Invista. DAK, of Charlotte, N.C., and Indorama, based in Bangkok, now share the title of the region's largest PET supplier, each with a 31 percent share of the market's annual capacity.
But the overall market continues to struggle with excess capacity and sluggish growth in demand, caused in part by high raw material prices and in part by lightweighting, which has drastically reduced the amount of PET resin used in each bottle for the market's dominant beverage sector.
Although PET prices climbed in the 12-month period ended in February, prices for PET raw materials such as paraxylene, purified terephthalic acid and ethylene glycol climbed at even higher rates, resulting in negative margins for PET makers, Willett said.
In the bottled water example, extreme lightweighting has driven the amount of PET used per bottle from 25 grams down to 12 grams and lower, according to Willett.
Today, there are no major brands [of bottled water] that have a 12-gram bottle, he said. Most have a 9 gram and some have an 8.5. We'll have a 6 gram in the future, and at that point you can argue that's actually a bag.
PET water bottle makers have done an amazing job of lowering the footprint of the bottle, Willett added. They've responded to the desires of consumers and retailers. There's been less lightweighting in [carbonated soft drinks], but there's been some.
Globally, PET operating rates continue to struggle to reach the 80 percent mark, with the 85 percent level being needed for decent profitability.
Global demand also is growing, Willett said. But with lighter-weight bottles, he said it's shocking how much PET capacity is being added throughout the world.
PET is a relatively inexpensive material to add capacity for, and global excess capacity now exceeds 13 billion pounds. This excess capacity typically suppresses margins for PET operations, Willett said.
China, in particular, has a large amount of excess PET capacity, which will keep Asia's PET operating rates under 80 percent to 2015. China has tried to export some of its excess PET, but hasn't had much success, according to Willett.
In Europe, PET demand growth is expected to be static, partly because consumers in that region have different beverage habits and drink fewer carbonated soft drinks. Central Europe, however, has developed a solid market for PET in beer bottles.
The Middle East's cost advantage in plastic raw materials doesn't extend to PET, Willett said, since it's mostly an aromatic product. Central and South America are rapidly growing in PET consumption but are expected to remain net importers.
And despite PET demand growth being roughly flat in North America, the region's cost position has improved globally, allowing it to move from a net import position in 2009 to that of a net exporter in 2010-13.
Recycling also has played a role in reducing North American demand for virgin PET resin, although recyclers in the region still export most of their output outside of North America to get better prices. As a result, North American plastics processors looking to use recycled PET often have to source from outside the region.
Overall, Willett said he expects the PET recycling rate in the U.S. and Canada to improve from 27 percent in 2010 to 32 percent by 2015. Results in the virgin PET market should improve as well.
There should be run-ups in cost and pricing to mid-2011, and even then they'll only subside slightly, he explained. But improved industry strength in North America and Europe should yield margin improvement beginning in 2011.