Prices will stabilize when resin supply meets demand
Jason Seigel -- Purchasing, 8/17/2004 2:00:00 AM
Tight global supply caused by a number of plant outages in Europe pushed benzene prices in the U.S. higher by a nickel to a record-high 58¢/lb in June. As a result, styrene monomer producers put polystyrene resin producers on allocation. The plastics suppliers, in turn, were working to sell general purpose PS at 74¢ in July, an increase of 3¢.
U.S. and Canadian PS demand essentially has been stagnant since 1998, says Kevin McQuade, polystyrene business director for BASF Corp. The loss of injection molding business to Asia has hurt the market, as has an increase in imports of PS cutlery and cups and competition from polypropylene and PET. Although extrusion-based PS uses have grown by 700 million pounds since 2001, molding demand has dropped by a similar amount. Still, if benzene feedstock stays high in price, so will polystyrene, McQuade says. Conversely, if benzene supply returns to equilibrium and the price yields, so will the costs of polystyrene.
Regional PS demand was poor in 2003 even though it began to recover in the second half of last year, in line with the cyclical recovery in the manufacturing sector, says analyst Frantz Price at globalinsight.com. For the year, purchasing dropped 4%. He expects PS demand to rise 4% this year "even though imports of PS-contained finished products from Asia continue to erode PS's demand base here." That's why McQuade is less bullish, projecting 2.5% regional demand growth. American Plastics Council data shows that polystyrene demand is up only 2% for the first five months of the year, but May's demand alone rose 9% when compared to same month in 2003.
The key issue for prices, both analysts agree, is that selling prices haven't kept up with increased raw material costs during the past decade. And what increases in resin costs were achieved weren't passed along in full to end-user plastic parts buyers.
Polystyrene is used extensively for such disposable applications as cups, plates, forks and food-packaging clamshells, "so second quarter is usually the high demand season for the resin," says analyst Craig Fisher at Houston-based Townsend's Polymer Services and Information. "Going into the third quarter, demand is still hanging in there," he says, "but most of the year's pricing has been dictated by feedstock costs and is not directly related to demand. Styrene costs are killing margins for polystyrene."
"Polystyrene producers and distributors are just not happy about rising feedstock costs," agrees analyst Beth Daniel at ICIS-LOR in Houston. "Basically, the feedstocks have been very volatile this year," explains an executive at a top polystyrene production plant: "Record-high benzene is the main driver, ethylene contributes a bit, and you also have natural gas that's a plant expense for production itself."
So, producers raised polystyrene prices to cover feedstock costs, and limited supply to decrease operating costs. "Producers don't want to produce a bunch of really expensive inventory they'll have to sell later at a lower price," says Fisher. Most polystyrene producers had operating rates in the low 80% range for June—even though weather damage temporarily stopped production at BASF's plant in Joliet, Ill.—still operating rates are already "a little higher for the industry (into the mid-80s) with improved demand," a polystyrene production source says. "Supply is coming back a little bit at the end of the second quarter, and that's running in tandem with improving demand," Fisher agrees.
Still, Frantz sees feedstock costs weakening and demand moderating in the coming months, as customers cut back inventories, causing PS prices to stabilize. "Demand should strengthen again by year-end on improving market fundamentals, but we expect benzene and styrene prices to decline from their current highs in response to lower energy prices," he forecasts. "Thereafter, we forecast PS prices to remain firm and peak in 2006, giving producers a strong opportunity to improve their margins."
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