Wary buyers keep polyethylene supplies lean despite low prices
By Gordon Graff -- Purchasing, 4/9/2009 2:00:00 AM
Polyethylene prices have been in freefall over the past six months, and are now little more than half of what they were last summer, when they rode the inflationary oil price rocket to record highs. But polyethylene buyers, worried about feeble downstream demand for their products, are not rushing to stock up on the material even at bargain prices. Polyethylene prices may inch up in the next quarter, but no one is predicting an imminent return of the towering rates seen last year.
The tumbling polyethylene prices of the final quarter of 2008 were due in large part to the drop in the cash cost of producing ethylene, says Howard Rappaport, global business director for plastics at Chemical Market Associates Inc. (CMAI) in Houston. That trend, he adds, was linked to plummeting crude oil prices.
Other factors also contributed to the polyethylene price slide. A limp economic demand was one of them, says Michael Greenberg, CEO of The Plastics Exchange, a Chicago-based resin trading platform. But he says that destocking on the part of polyethylene producers and processors "was one of the biggest reasons" polyethylene markets declined in late 2008.
Prices of all grades of polyethylene bottomed out last December, asserts Mike Burns, global business director for polyethylene at Resin Technology, a Fort Worth, Texas-based consulting firm. Burns says polyethylene buyers who signed contracts in December, or were able to get December prices in January, "took advantage of [low] prices that we will not see again for a long time."
But many buyers have remained on the sidelines, despite the attractive polyethylene prices. Since polyethylene reached new lows "we've seen little blips of demand" due to price-based restocking, says Rappaport. But any inventory restocking, he adds, "is going to be limited by the amount of downstream demand and the buyers' working capital."
One cautious buyer is Gary Jones, who purchases injection molding grades of high-density polyethylene (HDPE) for Press-Seal Gasket Corp., a Fort Wayne, Ind. maker of gaskets for concrete, plastic, clay and steel piping. "Our main markets—the construction and railroad industry—have been very slow," says Jones, "so we have not been able to take advantage of lower prices" for polyethylene. "Most of our products are specific to a customer, so we do not order resin until we receive orders." Jones is not stocking up on HDPE for future needs. "Right now the economy is too uncertain for that," he notes. "We are still reducing inventories."
Being stuck with unwanted inventories is less of a concern at Diamond Foods, a producer of packaged nuts. Bruce Cudd, procurement manager at the Stockton, Calif.-based firm, uses a vendor-managed inventory system to minimize the cost risks of the polytheylene-based flexible packaging he uses. Over the years, this packaging has employed several resins, including linear low-density polyethylene (LLDPE). After putting out requests for proposals to the suppliers that fabricate and print the finished packaging, Cudd weighs many factors in choosing suppliers. "I try to monitor one or more databases of resin costs," he says. If prices of resins drop, as they have recently, he examines the supplier bids to make sure they reflect those declines. Once Cudd's firm commits to a specific size packaging run, the chosen supplier is responsible for all resin purchasing decisions and for storing inventories on its own premises.
Projected annual growth rates for polyethylene in North America in the next five years will be 1–2%, CMAI reports, down from the 3–4% growth a few years ago. A great deal of that slump in polyethylene demand is due to the economic meltdown, notes Rappaport. But this short-term development, he adds, is obscuring several longer term trends. One is the drift of polyethylene markets offshore.
"In Asia, particularly in China and India, you have some of the highest growth rates in the world for polyethylene consumption," says Rappaport. In the past, those markets would have been promising outlets for North American polyethylene producers. But today, the mammoth new capacity expansions now under construction in the Middle East and Far East will soon churn out an abundance of low-cost polyethylene to supply these high-growth markets at prices North American producers cannot match. Rappaport also says that more and more finished polyethylene goods made in China will be imported to the U.S. in the next few years, depressing domestic demand for polyethylene.
Right now, U.S. polyethylene producers are partially offsetting weak domestic market for their product by exporting some of it to Europe. Last year, the weakening of the U.S. dollar against the Euro spurred a strong export market to Europe. The dollar's more recent recovery has "hampered" but not eliminated export activity to Europe, says Greenberg.
Polyethylene producers in the U.S. have "dialed down their production rates" according to Rappaport, and let their existing inventories run down. Meanwhile, ethylene prices started to rise again very early this year, squeezing margins at polyethylene producers, that couldn't immediately pass along those higher costs. This, says Greenberg, forced polyethylene producers to exert greater production limits on their resin output.
The tightness in supplies and higher feedstock costs have prompted some recent polyethylene price hikes. U.S. producers passed through a 7¢/lb increase for polyethylene for January and February. In March, they sought another 5¢/lb hike. But analysts are not sure the producers will be able to fully implement this rate.
Early indications are that "we're at the top of the mountain" of ethylene prices, says Burns, and that those rates should ease up as the year progresses. If that happens, he adds, "you'll see margins of polyethylene suppliers improve, and less pressure on them to get their prices up."
Polyethylene prices in 2009 "will probably stabilize at a higher level than they were at the start of the year," says Rappaport, though demand for the resin will continue to be "tenuous and fragile" until they recover in 2010. But even if demand seriously perks up, he doubts whether prices will return to the stratospheric highs of last year.
| 1Source: American Chemistry Council 2Townsend Polymer Services & Information 3Source: Chemical Market Associates Inc. |
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| U.S. polyethylene production (2007)1 | LDPE (Low-density polyethylene) — 7.9 billion lbs |
| LLDPE (Linear low-density polyethylene) — 13.6 billion lbs | |
| HDPE (High-density polyethylene) — 18.2 billion lbs | |
| Global polyethylene production (2007)2 | All types — 156.5 billion lbs |
| Projected annual growth rate through 20122 | 4.5% |
| U.S. projected annual growth rate through 20143 | 1.5%–2% |
| Major producers | Borealis, Chevron Phillips, Dow Chemical, Equistar Chemicals, ExxonMobil, Nova Chemicals, Polimeri Europa, Repsol YPF Samsung Total Petrochemicals, Tosoh |
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