Propylene and polypropylene prices see slight rebound on tight supplies
Supplies of propylene and polypropylene, meanwhile, are tight, as producers have throttled back production due to weak demand. However, no shortages of these products have been reported.
By Gordon Graff -- Purchasing, 4/30/2009 2:00:00 AM
Propylene and polypropylene prices have edged up a bit since they hit rock bottom last December. But there is little chance of runaway inflation for either commodity in the coming months. The reasons, say analysts, are the likelihood of low crude oil rates and a depressed economy for at least the rest of the year.
Supplies of propylene and polypropylene, meanwhile, are tight, as producers have throttled back production due to weak demand. However, no shortages of these products have been reported.
Propylene
Propylene and polypropylene prices have been on a wild ride over the past year. Prices of propylene, which closely track crude oil, hit an all-time high last summer and then plunged to less than half those peak values by year's end. That happened because the final few months of 2008 saw a "big drop-off in demand" for propylene, says Scott Newell, director of client services for polypropylene at Resin Technology Inc., a consulting firm in Fort Worth, Texas. As a result, he adds, the propylene market became "completely oversupplied, and prices just kept falling and falling." In fact, prices got so low by the end of 2008 that it wasn't worth selling and petrochemical plants actually started converting the propylene to propane and using that gas for fuel. Burning propylene for its fuel value "is something we haven't seen, at least in recent history," says Newell.
As more propylene got diverted into the propane stream by the end of 2008, supplies of that chemical "began to tighten up a bit" says Newell. At the same time, he adds, refineries and petrochemical plants began to curtail production of propylene and other basic chemical building blocks "because the economy started to fall apart." That further constricted propylene supplies and led to a round of price increases for the chemical in the early months of 2009.
From a low of 43¢/lb in January, U.S. propylene prices inched up to 48¢/lb in March according to Purchasingdata.com. Nonetheless, "demand for propylene remains dismal," says Michael Greenberg, CEO of The Plastics Exchange, a plastics trading firm based in Chicago. Markets for propylene may liven up in the next few months, Greenberg adds, as the summer driving season gets underway. (Propylene is used to make alkylate blending components for the high-octane gasoline used in the summer months.) But with the economy still flat, he adds, it is unclear how much of a bounce this will give propylene producers.
Polypropylene
Those propylene producers aren't getting much help from their customers in the polypropylene industry, who are producing just enough of that resin to meet forecast demand, Greenberg notes. That cautiousness, he adds, stems from last year, when polypropylene manufacturers got burned by excess inventories and eroding prices.
Polypropylene prices have mostly moved in tandem with propylene rates, reaching historic highs last summer, crash landing by December, and rebounding slightly in recent months.
The underlying weakness in polypropylene demand, however, is reflected in the difference between asking price and actual contracts. For example, Greenberg points out that U.S. producers proposed hikes of 4¢–8¢/lb on polypropylene for March, but were only likely to get a 1¢/lb increase. "In this environment, the best that polypropylene producers can do is maintain their minimally acceptable margins, without any real gains in profitability," Greenberg says.
That restrained pricing has cheered at least some buyers. One purchasing manager at a plastics molder on the East Coast says she took advantage of the recent price declines in prices to buy "the balance of our polypropylene requirements for the year." And she continues to stock up on the resin in anticipation of future price hikes.
But other buyers are more wary. Michael Scott, who handles purchasing and procurement at Braeside Displays, an Antioch, Ill. manufacturer of signs and merchandising displays, says he has taken advantage of cheaper polypropylene when he can. However, many of the products his firm produces are exported to Europe and the demand for them "has just not been there," he says. As a result, he is not replenishing his polypropylene inventories for future needs.
"While I am sure the economy will recover," says Scott, "I am not sure when. So I am holding on to as much cash as I can to weather the storm."
Such caution is prudent, advises Newell. When it comes to polypropylene, he says, "now is not the time to buy heavy." He believes prices of the resin may retreat a bit this spring, "or at worst go flat."
In any case, not that much buying is taking place. Even before the economy turned sour, polypropylene demand was on the skids. Sales and captive use of the resin in the U.S. for 2008 were some 11% lower than in the previous year, reports the American Chemistry Council. And this is part of a longer-term trend. "We've had three or four years of negative domestic growth in polypropylene," says Bob Dennett, director for polypropylene at Chemical Market Associates Inc. (CMAI). "And looking at the economy the way it is, with our forecast of GDP, we're looking at another year of negative growth for 2009." As for 2010, Dennett believes polypropylene growth will be positive when compared to 2009, but will still fall short of 2008, which itself was a poor year. In fact, he predicts that "it will take several years of growth to get back to where we were in 2007."
One reason the recession has had a disproportionate impact on polypropylene, says Dennett, is that "it is used in a few more durable goods applications" than other commodity resins. These include automobiles, appliances and carpeting and "all those things that people tend not to buy when they don't have any money." Still, about 60–65% of polypropylene goes into nondurable goods such as food wrapping, microwavable trays and yogurt cups, and Dennett says these segments are holding up well.
One bright spot in polypropylene is exports from the U.S. These are "not bad" at the moment, says Greenberg, with shipments abroad running pretty consistently at about 9% of total sales. But the gloomy overall picture has prompted a wave of cutbacks in both propylene and polypropylene production. The propylene reductions have come about through general retrenchment at refineries and petrochemical plants, which produce propylene as part of a wide slate of products. The polypropylene cutbacks have been more targeted and reflect the unfavorable outlook for that specific resin. Since the end of 2007, a long list of major producers in the U.S. have announced polypropylene plant shutdowns, including Dow Chemical, Ineos, Basell and Sunoco. Few, if any, of these units are likely to re-open anytime soon, say industry observers.
"There's still too much capacity" in polypropylene, says Newell. He predicts that there will be more U.S. plant closures in polypropylene, particularly units that are "older and less competitive."
Even as U.S. plants close their doors, a wave of new polypropylene capacity is due to come on stream in China and other Asian countries over the next few years. This is likely to provide stiff competition for U.S. producers in foreign and possibly domestic markets, say industry sources. But U.S. polypropylene producers may be able to "protect their home turf," says Dennett. One reason, he explains, is that Asian exporters typically package their polypropylene in bags or supersacks, while U.S. plastics converters prefer delivery of the resin in railcars. The logistics—and cost—of transferring bagged imports to railcars could make Asian polypropylene less competitive in the U.S. than domestically produced material.
Even if the domestic producers manage to ward off some foreign competition, the new offshore polypropylene capacity will likely cause some margin compression in the industry over the next few years by exerting downward pressure on prices of that commodity, Dennett predicts. In the nearer term, 2009 should be a period of "relative stability" in both propylene and polypropylene prices, says Newell, as energy prices are unlikely to shift radically this year. "That's not to say that we won't see some upward movement" in propylene and polypropylene as things improve with the economy. "But I don't see anything like the volatility we've had in the past couple of years."
| 1 Source: ChemSystems 2 Source: Townsend Solutions 3 Source: Chemical Market Associates, Inc. (CMAI) |
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| Annual Worldwide Production (2008)1 | 45 million tons |
| Average Annual Growth Rate1 (Worldwide, 2008) | -1% |
| Production | Catalytic polymerization of propylene, sometimes with ethylene or other olefin comonomers. |
| Grades | Homopolymer, random copolymer, impact copolymer. |
| Share of consumption by region (2007)2 | China — 23% |
| North America — 18% | |
| Western Europe — 18% | |
| Asia/Pacific — 16% | |
| Middle East/Africa — 9% | |
| Japan — 6% | |
| Central/Eastern Europe — 5% | |
| Central/South America — 5% | |
| Key Products | Packaging, textiles, fibers, automotive components, cups, cutlery, housewares, appliances, electronic components, carpeting, photo and graphic arts products. |
| Top 10 world producers by 2008 market share (in descending order)3 | LyondellBasell |
| Sinopec Group | |
| Saudi Basic Industries Corp. (SABIC) | |
| PetroChina Group | |
| Reliance Industries | |
| ExxonMobil | |
| Borealis | |
| Total PC | |
| Ineos | |
| Formosa Plastics | |
| *Source: SRI Consulting | |
| Annual Worldwide Production (2007)* | 75.3 million metric tons |
| Projected Average Annual Growth Rate* (Worldwide, 2007–2012) | 4.4% |
| Production | Obtained through fractional distillation of crude oil. Also made as a co-product of ethylene production, via steam cracking of hydrocarbon feedstocks. Feedstocks can be ethane, naphtha and gas oil. |
| Grades (market share)* | Refinery grade (10%) |
| Chemical grade (26%) | |
| Polymer grade (64%) | |
| Key Products | Polypropylene |
| Cumene | |
| Propylene oxide | |
| Acrylic acid | |
| Acrylonitrile | |
| Oxo alcohols | |
| Isopropanol | |
| Alkylates for gasoline blending | |
| Leading worldwide producers | Dow Chemical |
| ExxonMobil | |
| Equistar Chemical | |
| Huntsman | |
| Chevron Phillips Chemical | |
| Nova Chemicals | |
| Polimeri Europa | |
| Repsol YPF | |
| Mitsubishi Chemical | |
| Mitsui Chemicals | |
| Tosoh | |
| LG Chem | |
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