Pricing peaks Expansions applydownward pressure

By By Christopher Reilly -- Purchasing, 8/10/2000

The markets for ethylene monomer and its derivatives have been driven up significantly for the past year. Last summer, polyethylene (PE) prices soared due to tight material availability caused by a slew of unscheduled plant outages. And while seasonal demand for PE dissipated somewhat in the third quarter and early fourth quarter of last year, supply disruptions caused by these plant outages were enough to keep prices from falling much before the end of the year.

With the start of 2000, polyethylene prices skyrocketed once again with higher feedstock ethylene costs, which were triggered by announcements from the Organization of Petroleum Exporting Countries (opec) regarding production cutbacks. As the price of crude oil topped $20/bbl and then $30/bbl, price increases were passed on to buyers of ethylene and the derivatives.

But there may be price relief in sight for PE buyers. Now, even with crude oil costs still in the stratosphere, many buyers, analysts and market observers believe the PE markets are at a turning point. And though energy costs continue to rise, most sources believe that PE prices have gone as high as they're going to go.

Support behind this belief is the fact that significant material capacity is scheduled to come on line during the second half of this year and first half of 2001. Several major expansions are planned in North America, the Middle East and elsewhere around the world, which should flood the marketplace with material and put downward pressure on prices. Just how much prices will fall depends on a number of factors including energy costs, the performance of the U.S. economy and other global markets, pressure on producer profit margins, and other factors. However, some analysts are calling for price slides in the next six months for PE grades on the order of 10%-15%.

Purchasing's forecast: Buyers should look for prices to fall about 3¢/lb to 4¢/lb for most PE grades by the end of the year as new capacity enters the marketplace. Planned capacity expansions in the first and second quarters of next year could push prices down an additional 5% to 7% by the end of second quarter 2001.

Pricing for most resins is high compared to historical levels. "With new capacity slated to come on stream, prices could fall an additional 5% in the first and second quarters of 2001," says Howard Rappaport, director of polyolefins at Chemical Market Associates Inc (cmai), an industrial market research firm in Houston, Texas. "By this time next year, we will be at the bottom of a price trough," he says.

This is good news for buyers. "We're tired of all the PE price increases," says Dave Wilson, purchasing manager, F.P. International, a Redwood City, Calif.-based manufacturer of interior packaging products. "It appears that hdpe blow-molding prices are now at a plateau, and I hope they stay there or trend down a little before the end of the year," he says. "We certainly don't want to see any more price increases in the near term."

All eyes are on the supply and demand balance for PE resins. "Supply and demand will be the main market drivers," says Jerry Davis, director of purchasing at Baxter Hemoglobin Therapeutics, based in Round Lake, Ill. Davis buys primarily hdpe film-grade resin for use in healthcare product packaging. "We expect them to begin to fall in the third quarter and fourth quarters, probably in nickel/lb increments," he says.

All eyes on supply

PE resin supply is set to increase with the startup of several new capacity expansions planned during the second half of this year and in the early months of 2001.

The most significant of these expansions includes the startup of Dow-Carbide's unipol PE unit in Joffre, Alberta, Canada, which is expected in the late third quarter of this year. Also, Nova Chemicals had an expansion planned for its unit in Joffre, Alberta, Canada, for the third quarter, but the company has postponed that startup until early 2001.

Capacity from these two expansions will total almost two billion lb of PE. For the North American market, this means about a 3%-5% increase in capacity.

Exxon-Mobil is expanding its joint venture in Al Jubail, Saudi Arabia. That expansion is expected to bring about 240,000 tons/yr into the marketplace. Also, the company has an expansion planned at its Singapore lldpe plant, which will bring about 480,000 tons on stream annually.

Also, Dow Chemical Co., Midland, Mich., is planning to construct a new 600,000-tonne/yr ethylene cracker based in Terneusen, The Netherlands. This capacity should enter the marketplace in mid-2001, say analysts.

In other supply news, Exxon-Mobil is enhancing existing capacity in the U.S. According to cmai's Rappaport, the company has improved its gas-phase reactors in Mt. Belleview with condensing techniques, which will allow the plant to run at higher operating rates. "In effect, they're doubling the potential capacity of the plant," Rappaport says.

Exxon also plans to increase the current 1.6 billion lb/yr capacity of hdpe at its Paxon Polymers plant in Baton Rouge, La. According to a company source, the expansion (planned for the first half of 2001) will bring total annual capacity at the plant to more than two billion lb of hdpe resin.

Formosa Plastics Corp., USA, Livingston, N.J., is starting a loop-slurry process, licensed from Phillips Petroleum Co., that will produce hdpe blow-molding material. The company is currently capable of producing 525 million lb of hdpe and 582 million lb of lldpe annually for a total polyethylene capacity of 1.1 billion lb/yr. That expanded capacity, appropriated for blow molding, sheet and profile extrusion, injection molding, and pipe applications, is scheduled for completion during first quarter 2001.

Demand cools

Analysts predict better-than-GDP long-term growth for the combined PE resins markets. Global PE market growth is estimated at about 5% annually through 2005, according to market information from Exxon-Mobil Corp., Houston, Texas. However, many sources feel that current demand is not particularly strong.

"The demand situation for ethylene derivatives appears to have cooled," says Earl H. Simpson, polyethylenes analyst with The pace Consultants Inc., a petrochemicals market research firm based in Houston, Texas. "Demand hasn't stagnated, but things have slowed down considerably since the first quarter," he says.

And while demand cools, Simpson believes that the market will continue to weaken. "We see demand softening ahead for the PE markets. We won't see a precipitous falloff, but the softening will perhaps provide some relief from the high price pressure," Simpson says.

It should be noted that demand patterns for PE material grades are not affected in the same way by economic factors that affect other resins, such as polypropylene (PP). Economic conditions have much more of an effect on PP resins, because these mostly find their way into the production of durable goods. When the economy is slumping, people don't buy durable goods with the same frequency and, ultimately, demand for PP is affected.

"Most commodity PE grades go into packaging applications in the form of trash bags, stretch wrap, shrink wrap, plastic bottles, etc.," says cmai's Howard Rappaport. "People still have to eat, bundle up their trash, and package their shipments with products made from PE," Rappaport says. "Demand usually keeps marching on."

While most PE resins usually follow similar demand and pricing trends, some market factors are particular to the various polymer resin grades. For a more in-depth look at what's happening in the derivative markets, the following is a breakdown of pricing, demand, and market trends for each resin type:

Ethylene

Most analysts predict that demand growth in 2000 will be an improvement for the petrochemicals industry. For ethylene monomer, most analysts forecast demand to grow at a rate of between 3.5% and 4.5 %/yr for 2000 and exceed 200 billion lb/yr.

Prices for ethylene monomer, according to buyers who responded to Purchasing's monthly survey of chemical transaction prices, appear to have peaked in the second quarter of this year. Buyers place average contract prices at about 34¢/lb for the second quarter, and spot tags were just a little higher, at about 34.3¢/lb. Buyers expect prices to be largely stable in the third quarter of this year at about 34¢/lb for contracts and spot tags.

With the addition of new capacity on the market expected in the fourth quarter, prices for ethylene will begin to see some downward pressure. Buyers expect spot prices to fall by about 3¢/lb in the fourth quarter. Contract prices will likely fall to about 32¢/lb to close out the year.

Downward momentum from capacity added during the fourth quarter of this year will be fueled by additional capacity expansions in the first and second quarters of 2001. As a result, prices will continue to fall. Buyers predict another price slide of about 2¢/lb for both contracts and spot prices during the first quarter of 2001.

Ethylene spot prices averaged 30¢/lb for July, according to Gulf Coast data gathered by pace. Contracts were just a little higher, averaging around 34¢/lb.

Ethylene production demand is expected to pick up somewhat in the next year, from 14.6 billion lb/yr currently to about 14.7 billion lb/yr by this time next year. Operating rates are currently in the high 90s, but are forecast to slow to the low 90s by next year, according to pace.

Exports for ethylene are still very low despite the recovery of the economies in the Far East, which tend to import a lot of ethylene from the U.S. pace estimates export levels at around 20 million lb in second quarter 2000. This export level is expected to increase by only five million lb by the end of this year, according to pace forecasts.

In the U.S. alone, there are more than 20 ethylene producers, accounting for an annual capacity of approximately 59 billion lb/yr of material.

High-density polyethylene (HDPE)

High-density polyethylene prices will see a similar price trend in the year ahead, say buyers. Current prices for hdpe blow-molding grade, which is the highest volume PE grade produced in the U.S., average about 45¢/lb on the spot market, and about a penny/lb more for contracts. Buyers expect prices to begin to slide during the third and fourth quarters of this year, and average about 43¢/lb and 42¢/lb for contracts and spot tags, respectively, by the end of the year.

Buyers responding to our survey forecast additional price slippage in the first half of next year. By the end of second quarter 2001, buyers and analysts alike expect prices to be at the bottom of the price trough, averaging about 42¢/lb for contracts and about 40¢/lb on the spot market.

pace estimates current spot-market pricing for high-density polyethylene (no grade specifications) at about 47¢/lb. Gulf Coast contract prices average between 41¢/lb and 43¢/lb.

Production appears to be steady. pace reports annual production demand of hdpe at about 3.58 billion lb for second quarter 2000. Production is expected to decrease slightly by this time next year to about 3.57 billion lb. Operating rates are currently in the mid- to high-90s percent range, but are forecast to decrease in the fourth quarter to the low 90s.

Film-grade hdpe prices also are set to fall, say buyers. Prices saw a dramatic run-up during the fourth quarter of last year, and the early months of 2000. Buyers reported contract prices at about 51¢/lb during the third quarter of 1999, which rose to 54.3¢/lb on average during fourth quarter 1999, and then jumped to about 57¢/lb on average in the first quarter of this year. Spot market prices saw similar increases, from about 50¢/lb on average for the third quarter of last year, to about 53¢/lb for fourth quarter 1999, and then to about 56¢/lb during the first quarter of 2000.

Current prices average about 57¢/lb for both contracts and spot tags, and analysts believe that these prices are at a peak, and will soon begin to fall. Buyers agree with this premise, forecasting prices of 54¢/lb for contracts and spot tags during the third quarter. Then, buyers see prices falling an additional penny/lb by the end of the year.

In the first quarter of 2001, buyers see continued price softening. Contract prices will average 52¢/lb, while spot pricing will average about 51¢/lb for the first quarter of next year, say buyers. Look for further price slippage by this time next year, as film-grade hdpe supplies become plentiful, forcing producers to become more aggressive with their pricing.

Injection-molding-grade hdpe prices average about 45¢/lb for spot tags, and about 46¢/lb for contracts. Like the other grades of hdpe, buyers predict some downward price movement for injection-molding material. Buyers expect third-quarter-2000 prices to average about 44¢/lb for contracts and about 43¢/lb on the spot market. Prices will continue to soften by about a penny/lb during the fourth quarter, averaging about 43¢/lb and 42¢/lb for contracts and spot tags by year-end. Expect prices to stabilize in the first quarter of next year and then continue to slide. Buyers place prices at 42¢/lb for contracts and about 40¢/lb for spot tags for the second quarter of next year.

Low-density polyethylene (LDPE)

Growth prospects for ldpe are more modest than other polymers. Analysts predict annual growth this year to be in the 1%-2% range. There are several reasons for this:

The market for ldpe is a very mature market. No new ldpe capacity is scheduled to come on-line in the near future. All the new capacity is going into lldpe, hdpe and specialties, such as metallocene technologies. ldpe operating rates are at high levels (in the mid-90s, according to pace), and tend to stay there. As a result, demand is usually more modest, and the relationship between supply and demand is more balanced.

Also, some of the ldpe resin plants are getting older and are being shut down by some of the smaller producers. At the same time, producers who have newer plants are debottlenecking their operations. There's some degree of what cmai's Rappaport calls "capacity creep" in the ldpe marketplace. Rappaport explains this to mean that some new capacity is coming on line as a result of these debottlenecking projects, but it is largely offset by the number of older plants that are being shut down.

Another reason for the modest growth in ldpe is that most ldpe material goes into film applications (about 60%). "Most of the new extrusion lines in operation are lldpe capable, and the majority of the new equipment is being used for lldpe film applications," says Rappaport.

Buyers responding to Purchasing's monthly chemical pricing survey estimate current prices for ldpe extrusion-grade material at about 50¢/lb for contracts and about 48¢/lb on the spot market. Buyers expect their prices to fall slightly in the coming months, to about 48¢/lb (contracts) and 46¢/lb (spot tags). Contract prices should slide a little more in the first quarter of next year, to about 47¢/lb, say buyers.

For film-liner-grade ldpe, spot prices average 53¢/lb and contracts are flat at about a penny/lb less. Buyers see these prices falling to 51¢/lb for contracts and 50¢/lb for spot tags by the end of the year. Prices should then remain flat, according to buyers' forecasts.

According to pace data, ldpe contracts average about 47¢/lb to 48¢/lb on the Gulf Coast. Simpson believes that these prices will slide somewhat in the coming weeks as demand continues to weaken.

Production is in decline for ldpe material grades. According to pace, the current average production volume is about 1.95 billion lb. This is projected to fall to about 1.9 billion in second quarter 2001, according to pace.

Also, exports for ldpe appear to be returning back up to more normal levels since they dropped drastically with the economic crises in the Far East. pace reports current ldpe export volumes at approximately 305 million lb. By this time next year, that number is forecast to increase to 350 million lb, according to pace.

Linear low-density polyethylene (LLDPE)

In terms of demand growth, ldpe has exhibited the highest growth rates over the past several years and are expected to continue to grow at rates well above GDP. lldpe has shown the fastest growth in recent years with an annual growth rate of more than 10%.

Current pricing stands at about 48¢/lb for lldpe film-grade contracts, and spot prices average 47¢/lb, say buyers responding to our survey. Buyers expect these prices to soften somewhat by the end of the year, to about 47¢/lb (contracts) and about 46¢/lb (spot tags). But by this time next year, prices should fall to about 43¢/lb for both contracts and spot tags, say buyers.

General-purpose lldpe prices will see a similar pattern. Prices currently average about 51¢/lb for contracts and spot tags. Buyers see these prices softening to 50¢/lb for contracts and 49¢/lb on the spot market by year-end. From there, prices will continue to slide. Buyers place second quarter 2001 price estimates at about 46¢/lb for both contracts and spot tags.

Domestic production demand for lldpe was 2.22 billion lb for the second quarter of this year, according to pace. At this time next year, production demand for lldpe is projected to climb to 2.25 billion lb.

Operating rates now average in the mid-80% range. However, producers expect to cut back their operating rates to about 79% by year-end.

Exports of lldpe continue to be low in the U.S. In the first quarter, 2000, pace reported approximate lldpe exports at about four million lb. This increased to about 20 million lb during the second quarter. In the third quarter, pace predicts an export ramp-up to about 70 million lb. Then, exports will more than double to about 160 million lb for the fourth quarter.

Other market factors

Ask most buyers, analysts and suppliers what factors will affect PE pricing in the next six months, and invariably, answers center on the expectation of additional supply. But there are many other factors contributing to the downward price forecasts for ethylene and polyethylene material grades.

One of these factors involves PE producer and converter inventories. For plastic resin converters, material inventories rose steadily during the first half of 2000. As prices increased, buyers built up their inventories because they expected to pay more for material in the months ahead. With producer inventories in decline, and with the strong demand for PE in the first half of 2000, converters were buying as much material as possible.

But in the second half of this year, analysts, including cmai's Howard Rappaport feel that this trend will reverse itself. "Converters and end users will carry less inventory, expecting prices to fall in the months ahead," Rappaport says. "As a result, producer inventories will increase, and there will be more pressure on them to move material. This will cause producers to be more aggressive with their pricing," he says.

Of course, this is welcome news for buyers. But for producers, it means that profit margins will be under greater pressure, simply because energy costs are not likely to fall at comparable rates.

Another factor affecting the markets for PE resin grades is a trend toward changing technologies. To accommodate shifting demand for PE resins, resin producers are changing their operations and investing in flexible "swing plants" designed with gas-phase and metallocene-based production capabilities. The investments in these swing plants have the greatest impact on ldpe grades, which are generally not viewed as growth materials.

cmai's Howard Rappaport says, "The added flexibility and efficiency with regard to operating costs has prompted many producers to switch to gas-phase production. These facilities have the capability to produce either lldpe or hdpe material in the same reactor, and are becoming much more prevalent in the PE industry," he says.

Metallocene catalyst-based PE, another new technology, is also making inroads into the traditional PE markets. "Metallocene PE will see high percentage growth rates, although right now it is starting from a much smaller base," says Rappaport. He attributes future growth in this type of PE resin to the newness of the technology, as well as the unique combination of physical properties that it provides. These enhanced production efficiencies include a broader processing window, shorter production cycle times, improved flow properties and potentially better warpage control. Improved physical properties include improved strength and barrier properties, temperature resistance, gloss, melt strength and bubble integrity. Essentially, the technology allows producers to better tailor their product to the specific needs of customers.

"You can't get these properties from the conventional resin production processes," Rappaport says. "Thus, metallocenes are finding their way into new and unique applications and are beginning to see strong growth rates." Sources estimate demand for metallocene catalyst-based PE in 2000 to be about six million tons.

Changing global trade patterns

According to cmai, the polyolefins industry has experienced a global transition in the last two years.

cmai predicts that world trade patterns for polyolefins, many of which have been in place for several years, will see some dramatic changes through 2004. As new PE facilities in Asia and the Middle East come on line, PE consumers in Northeast Asia will look to these players more as sources of supply.

Toward the end of 1998, demand for most grades of polyethylene and polypropylenes were following a very normal pattern, and most analysts predicted that 1999 would be a modest year in accordance with the pattern. However, due to continuing price declines of petrochemical feedstocks and downstream products such as plastic resins, global inventories of resins and finished goods were held at reduced levels. When the Asian economies began to pick up momentum by the end of 1998, ethylene inventories in North America had fallen to very low levels, accentuated by several unplanned production outages.

At the same time, according to cmai, the U.S. economy exhibited strong growth and energy costs began to creep up. As a result, petrochemical prices climbed. These factors caused 1999 to be not a period of modest growth (which was predicted), but rather as a period characterized by strong demand, inventory restocking, rising prices, and tight supply in most regions.