After a few years of scraping by, North American polypropylene makers are seeing good demand and solid profits. And they're hoping that both of those trends continue in 2016.
Through October, North American PP sales were up 5.1 percent vs. the same period in 2014, according to the American Chemistry Council in Washington. Domestic sales were up almost 6 percent, but the overall growth rate was dampened by a 14 percent drop in export sales.
“We're pleased with the growth, but we're not surprised,” said Mark Nikolich, commercial and supply vice president at North American PP leader Braskem America of Philadelphia. “We think demand growth will continue at 2-5 percent for the next several years. We believe in the competitiveness of North American feedstocks and [natural gas liquids] and we believe in the competitiveness of propylene [monomer] going forward.”
Nikolich added that he expects the North American market to benefit from more supplies of propylene coming from “on-purpose” PDH technology, which he said will make regional propylene “competitive with the rest of the world.”
PP reshoring work coming back to the U.S. also is showing “a fundamental belief in the polymer, according to Nikolich. “This market feels really retro, like it's going back to the way it was 12 or 14 years ago,” he said. “The value and use of polypropylene is extremely high.”
During 2015, North American PP makers were able to add at least 10 cents in profit margin by not moving resin prices in tandem with propylene monomer as they had done in previous years. As a result, the region's PP makers “are swimming in money — and it's going to get deeper,” industry consultant Robert Bauman said. Bauman is owner of Polyolefins Consulting International in Spring, Texas.
At Resin Technology Inc. in Fort Worth, Texas, PP market analyst Scott Newell said that 2015 “definitely looks like the beginning of a new era.” North American PP demand “is having a breakout year,” he said, but that growth might be hard to repeat in 2016 because of tight PP supplies.
“All that growth is pushing operating rates above 92 percent,” Newell explained. “The asset base hasn't proven it can go beyond that.” But he agreed that new propylene capacity — as lower oil prices allowed propylene-rich heavier feedstocks to be used — have given North American PP makers “a lot of pricing power,” allowing them to “expand margins significantly.”
PP suppliers “are not letting a good opportunity go to waste,” said Phil Karig, managing director at the Mathelin Bay Associates LLC consulting firm in St. Louis. “After years of suffering from reduced supplies of propylene monomer … falling crude oil prices finally gave PP producers the opportunity to get their costs back in line and to pick up incremental demand from some competing polyethylene applications.”
He added that “it took a long time for the PP industry to get to its current seller's market state — and that won't change in 2016.
“Any meaningful PP expansions are years away, so PP should continue to remain tight and supplier margins will definitely continue to expand,” Karig said. “As a result, security of supply as well as finding innovative ways to reduce costs — rather than prices — will be the key challenge for PP buyers in 2016.”
Braskem, for one, is considering building a new world-scale PP unit either in the Gulf Coast area or at its existing production site in Marcus Hook, Pa., Nikolich said. “Our business outlook is approaching reinvestment and is continuing to accelerate,” he added. “A new line fits with our strategy.”
The only new PP capacity project that's been formally announced is a 1 billion pound capacity line from Formosa Plastics Corp. USA at a location in Texas. But Formosa officials have not confirmed a timeline for that initiative.
Bauman agreed that the industry is at reinvestment economics and added that he expects at least two other PP makers to announce major expansion projects. RTi's Newell also anticipates that more capacity will be added. “There are a lot of conversations going on behind closed doors,” he said.
In the short term, however, North American PP supply tightness will open the door for material to be imported into the region. Braskem has acknowledged this situation, Nikolich said, and already is working to bring in material from Brazilian plants operated by its parent firm, Braskem SA of São Paulo.
“North America hasn't grown [PP] capacity in 10 years, and assets have been rationalized, so our ability to respond to demand is challenged,” he explained. “The only way to solve it is imports from a lot of different parts of the world. Imports will solve the problem until there's enough local capacity to displace them. It's more cost-effective to produce locally.”
At a recent industry conference, PP market analyst Joel Morales, who is with IHS Chemical in Houston, said that by 2016 North America should be importing more PP than it's exporting.
PP imports in 2016 are expected to be more than 600 million pounds — more than triple their rate from a decade ago. As a result, Morales said, PP buyers in the region may have to deal with payment terms, lead times and other import-related issues.
Some market watchers have suggested that excessive tightness for North American PP could create an opportunity for competing resins such as polystyrene or high density polyethylene — but Nikolich doesn't see this happening.
“Supply tightness could hinder some growth, but we're still going to grow,” he said. “We've had peak prices for propylene and PP and we've lost very little share to other resins. If something like that was going happen, it would have happened between 2008 and 2012.”
Among individual end markets, domestic sales of PP into injection molded housewares were up 15 percent through October, while sales of the material into sheet were up more than 8 percent and into film were up almost 5 percent.
“Automotive has been very strong, and packaging and sheet have been healthy in applications like heavy containers,” Nikolich said. “Caps and closures also have been steady.”
The market has seen “good demand” from automotive and packaging, with domestic processors picking up business from global competitors, according to David Barry, a market analyst with PetroChem Wire LLC in Houston. Barry also expects regional PP margins to remain high in 2016 and on into 2017 as well.
Newell at RTi said that industrial end markets for PP “are doing well,” as are PP consumer products, housewares and rigid packaging.