Buyers face challenging PE resins market

By Staff -- Purchasing, 5/4/2000

Strong demand and a dramatic run-up in crude oil pricing has triggered responses in ethylene derivatives markets, causing resin prices to rise about 3¢-4¢/lb since January. With additional increases on the table and a recent plant explosion, resin buyers can expect to see more price hikes in the near future. The market for polyethylene (PE) is expected to remain robust overall through most of 2000.

While demand has been strong, feedstock costs have been the real price drivers for ethylene and its derivatives. Crude oil prices have risen sharply in recent months due to opec production cuts, raising the floor on ethylene pricing, and passed price increases on to PE markets.

"We have seen resin price increases on almost a weekly basis for the last month," says C. J. Wherrett, purchasing manager at Orangeburg Pipe, a fabricator located in Greeneville, Tenn. "This has made the PE market very challenging for buyers," says Wherrett. "Resin pricing in recent years has remained fairly stable, but last year all that changed," he says.

The ethylene story

Ethylene feedstock prices have risen considerably in the past year-about 14¢/lb for contracts and 12¢/lb for spot buys. At this time last year, buyers reported ethylene contract prices at 22¢/lb and spot tags at 21¢, according to Purchasing's monthly survey of chemical prices. Then, tight supply due to strong demand and several production outages caused prices to start rising last summer. By fourth quarter 1999, ethylene had moved to an average of about 32¢/lb for contracts and 26¢/lb for spot, according to buyers' data.

In first quarter 2000, ethylene prices advanced to about 33¢/lb for contracts and 30¢/lb on the spot market. Buyers expect ethylene prices to increase another 3¢-5¢/lb in second quarter 2000, to average about 36¢/lb for contracts and 33¢for spot tags.

For high-density polyethylene (hdpe), resins producers made three price-hike announcements at the start of 2000. The first increase-5¢/lb-was scheduled for January 1, but due to buyer price protection agreements, the increase was pushed back to February, at which time buyers and analysts estimate that about 3¢-4¢of the increase actually went through.

The second price increase, also for 5¢/lb, had been scheduled for March 1, but was moved to April. Most sources expect the increase to go through with some buyers calling it a "slam dunk" for producers.

The third price increase, proposed for April, has been held off for 30-60 days while producers and buyers negotiate the increase already on the table.

Buyers' forecasts

At the start of the year, many PE buyers had predicted a price run-up in first half 2000, followed by offsetting price declines during the second half. Major reasons for the anticipated third quarter price decline were an expected seasonal decline in production for North American construction activity plus expected new production capacity from Nova Chemical, Dow Chemical and Union Carbide locations in Canada in the final quarter of the year. However, these predictions didn't account for the dramatic run-up in oil prices, and many buyers are now predicting flat-to-rising resin prices through much of 2000.

For hdpe, prices for blow-molding, injection-molding and film-grade material have gone up about 10¢/lb in the past year, according to buyers responding to Purchasing's monthly chemical transaction price survey. Currently, blow-molding hdpe contracts average 46¢/lb, while spot tags are about 45¢/lb. Injection molding contract and spot prices are also within a cent of each other (48¢/lb and 47¢, respectively), and film-grade material prices average 55¢/lb for contracts and 54¢/lb for spot.

According to Purchasing's survey, buyers expect blow-molding and film-grade prices to slide somewhat in third quarter 2000 (by 2¢/lb and 1¢/lb, respectively), while buyers of injection-molding hdpe expect prices to increase, averaging 49¢/lb for both contracts and spot during that time.

Data from Houston, Texas-based petrochemicals industry analysis firm, The pace Consultants, also show hdpe prices rising substantially over the past year, from about 35¢/lb during second quarter 1999 to about 41¢/lb currently. (Note: pace prices are lower because they're based on U.S. Gulf-Coast estimates. Purchasing data are based on average responses from buyers located across the country.)

For low-density polyethylene (ldpe) grades, prices have risen about 13¢/lb on average in the last year. Contracts for extrusion-grade and film-liner ldpe currently average about 50¢/lb and 56¢/lb, respectively, while spot tags for the same grades average 49¢/lb and 56¢/lb, according to buyers' data.

Look for these prices to slide only slightly (1¢-2¢/lb) in the next six months closing the year at an average 49¢/lb for extrusion-grade contracts (47¢/lb for spot) and 54¢/lb for film-liner contracts (53¢/lb for spot).

Linear low-density polyethylene (lldpe) prices have risen about 15¢/lb since second quarter 1999. Contract prices for both film-grade and general-purpose lldpe are about 52¢/lb, while spot tags average 50¢/lb, according to buyers responding to Purchasing's monthly survey.

Buyers expect lldpe film-grade contract and spot tags to soften slightly in the next six months, averaging at about 50¢/lb for contracts and 49¢/lb for spot buys in fourth quarter 2000. General-purpose-grade material, however, is expected to remain flat at 52¢/lb (contract) and 50¢/lb (spot) through the end of 2000, according to buyers.

Supply disruption

Strong demand and rising feedstock costs are the major culprits behind the PE price rise. Until recently, however, supplies had remained fairly loose, leaving some leverage for buyers in negotiations. But a recent explosion at Phillips Petroleum's Pasadena, Texas, PE facility has diminished this leverage. It's expected that the accident will add support to price increases currently on the table and could bring about more price hikes.

"It's a large plant with a history of outages," says one buyer located in the South. In fact, the plant was the site of a 1989 explosion that killed 23. Last June, an explosion at the plant's K-resin facility resulted in two deaths and the issuance of fines from governmental safety regulators. The most recent explosion killed one and injured 74. At the time of this writing, the cause of the explosion had not been determined and was still under investigation.

Ramifications of the explosion, according to the Southern buyer, "will lend psychological support to the price increases on the table and, depending on how long the plant is closed, could lead to further producer price hikes in the next few months."

Some buyers foresee more PE price hikes regardless of the Phillips plant situation. C.J. Wherrett says he expects additional hdpe increases in coming months, on the order of about 3¢-5¢/lb. "Prices will probably continue to increase until about mid-summer," he says, "At which time seasonal conditions will begin to apply downward pressure to demand and prices."