Supply and weak demand force prices down

By By Christopher Reilly -- Purchasing, 3/8/2001

Prices in the propylene and polymer derivatives markets are falling. And despite producers' attempts to quickly tighten supply and raise prices in the next few months, prices will continue to fall for much of the first half of this year.

Among the petrochemicals, propylene is still considered to be the most cost-effective market around. Even with skyrocketing energy costs seen in December and the first few weeks of January, propylene monomer can be made using ethane and propane feedstocks (which come from natural gas) or through a refining process (using crude oil as the feedstock). When energy costs rise and fall, the market adjusts production accordingly. This keeps pricing generally more in tune with supply and demand.

Now, with energy costs beginning to fall as warmer weather approaches, the supply/demand balance is the most significant factor affecting propylene pricing.

For the past few months, supply has leaned toward the long and demand has been weak. Through late November and all of December, demand was markedly quiet while buyers used up their inventories. And though most producers have halted production, scheduled maintenance turnarounds, or have otherwise cut back production rates, there is still an abundance of material available to buyers.

PURCHASING forecasts a gradual price slide for both propylene and polypropylene markets in 2001. Slow demand and oversupply will apply downward pressure in the coming months.

According to data based on buyers' responses to Purchasing's monthly chemical transaction price survey, already the propylene market is being affected by downward price pressure. Fourth quarter 2000 spot prices averaged 32¢/lb in the U.S., say buyers, but are forecast to fall 4¢/lb by the end of first quarter 2001. Propylene contracts will also see downward movement, though contract pricing is generally less volatile-buyers see a decrease of about a penny/lb in the first quarter.

Longer term, contract pricing will continue to slip in gradual 1¢/lb increments over the course of the year. By year-end, both contracts and spot tags will average about 23¢/lb and remain flat through the first quarter of next year.

Polymer demand, pricing weakens

As prices in the derivative markets begin to slip, producers have rushed to announce price increases for February and March of 3¢/lb each to salvage their severely weakened profit margins. But despite producer efforts, market conditions suggest no near-term end to the profit pressures.

"We're seeing a definite profitability trough in 2001 and 2002," says Steve Zinger, director of propylene studies at Chemical Market Associates Inc. (CMAI), an industrial market intelligence firm based in Houston, Texas. "We expect that propylene pricing and profitability won't begin to increase again until 2003," Zinger adds.

And though price increases are on the blocks, many buyers and other industry sources are leaning toward the opposite actually taking place in the PP markets.

According to data from Purchasing, pricing for homopolymer PP grades will also slide in 2001. Contract pricing averaged 38¢/lb for fourth quarter 2001 and slipped a bit in December and January. Buyers estimated first-quarter prices at about 37¢/lb.

Spot pricing, however, has fallen from 42¢/lb on average for third quarter 2000, to about 40¢/lb currently. Buyers expect spot pricing to erode an additional 2¢/lb in the next few months, to average about 38¢/lb for the second quarter. Some late-year price firming is possible if demand kicks in during the third quarter.

Injection-molding-grade PP has seen a more pronounced price slide. Buyers' data puts average spot pricing at about 43¢/lb and about a penny/lb more for contracts during fourth quarter 2000. Pricing should slide roughly another penny/lb for contracts through the first quarter, while spot pricing will see a decrease of about 4¢/lb as a result of excess capacity. Then, depending on how long demand remains weak, the market could see an additional price slide into the third quarter of this year. Late-year price increase announcements could show up in the market during the first quarter of next year.

"Whether the February PP price increases go through will depend on demand," says polyolefins analyst Bob Bauman at IBM ChemSystems, a chemical market analysis firm based in Tarrytown, N.Y. "Demand has been rather slow for most of January," he says.

"As soon as energy and feedstock prices drop, propylene pricing will see a downturn," Bauman says. "Conventional wisdom says that this will begin to happen by April," Though some would argue that this trend has already begun.

Another factor working against the price increase is the fact that many buyers have price protection and contracts. Some industry sources believe that it will be at least a month before even part of the price increase scheduled for February could be implemented. And with supply/demand out of balance, this may be a stretch even two or three months down the road.

"There's a lot of capacity available," says Stan Markowitz, purchasing agent at Gillette Corp., based in Boston, Mass. "This is forcing prices down."

"Also, there's a lot of speculation in the marketplace right now, mainly because there are a lot of factors at work," Markowitz continues. "But while feedstock costs have been high, pricing for PP resins has actually decreased by about 3¢-4¢/lb since the beginning of December."

Not all buyers agree. Victor O'Leary, purchasing manager at Panduit Inc., a producer of plastic communication and fiberoptic wire, based in Chicago, Ill., says that for him, prices for most grades of PP are stabilizing and should remain so for the foreseeable future.

Supply ahead of demand

A number of factors have contributed to the oversupply situation in the propylene and PP markets. CMAI 's Zinger explains: "At the end of the year there was a period of inventory de-stocking. With energy prices and feedstock prices high throughout the chain, many buyers decided to run off their inventories rather than purchase material."

"In addition, many analysts are forecasting a growth recession this year, which is fueling buyer uncertainty and further dampening demand. This has compounded the situation," Zinger says. "There's not a lot of interest in buying material right now."

In the meantime, most producers are shutting their plants down, because they're not making money on propylene or PP. According to Gillette's Markowitz, integrated producers may be able to stand losing money on PP if they're making a profit in some other areas, companies that must buy their raw materials are "taking a bath right now."

While some analysts are calling for near-term demand improvement and a possible price spike if supply tightens to critical levels, others call for more modest demand throughout 2001.

According to estimates from CMAI 's Zinger, PP demand will grow at less than 4%/yr in the U.S. in 2001, where typical growth has been close to 8%/yr for the past few years. Propylene demand growth is less optimistic-forecast below 2000 levels of about 2% to 3% annually.

And with supply long, several major capacity expansions are scheduled to bring more than three billion lb/yr of propylene material on line this year. Though producers are shutting plants down, it will take a sustained tight supply situation to cause a price spike if demand picks up.

A more likely scenario is that supply additions will continue to come on line this year, keeping supply just ahead of demand, and keeping downward pressure on propylene and derivative prices.

Among the major supply expansions is the joint venture between BASF and Fina, located in Port Arthur, Texas. This expansion is expected to add about one billion lb/yr of propylene to the U.S. market during second quarter 2001.

Also, Formosa Plastics, headquartered in Livingston, N.J., is starting up a steam cracker in Point Comfort, Texas, which will bring an additional 500 million lb/yr of propylene.

The Dow Chemical Co., Midland, Mich., is adding 440 million-lb/yr to its PP operations in Freeport, Texas.

Later this year, a joint venture of Tosco Refining with Union Carbide will bring about 770 million lb/yr of propylene capacity at its refining site in Linden, N.J.