Polyethylene prices may lose their momentum this year
By Kathryn Belyea -- Purchasing, 2/10/2000
Analysts and buyers agree that polyethylene (PE) prices will cycle down a penny or two in 2000. (Note: This runs contrary to Purchasing Magazine's recent forecast predicting a 1¢-2¢ gain in PE prices by year-end.)Underpinning the analysts' deflation forecast is a conviction that major feedstock costs (ethylene) will drop as oil prices decline (Purchasing is less sure that oil prices will come down.) Analysts note also that increased PE production from new facilities will help ensure that supplies remain loose.
The PE deflation forecast would represent a trend reversal from 1999, when the market saw four increases according to cost analysts at Chem Systems in Tarrytown, N.Y. As a buyer for a Florida custom sheet extrusion company puts it, "Last year was brutal for polyethylene price increases."
The 1999 price hikes were the result of force majeures at Mobil and Equistar, along with a rash of other problems causing outages at other facilities. According to Robert Bauman of Chem Systems, there were ten production outages all told last year.
Tightening supplies and rising feedstock costs caused prices to spike, with buyers clamoring for deliveries in the face of impending shortages. To ensure supply flow and beat rising prices, customers began increasing inventories. In fact, Y2K buying didn't happen as some had anticipated because stockpiling persisted into third quarter 1999, Bauman says. As companies draw off their inventories, he adds, prices will come down.
"We're not sure how much build-up has occurred," Bauman explains, "but Y2K has come and gone with very few if any problems, so customers will work down their excess inventories. Prices will come down in 2000, but no one knows how far."
First sign of trouble
The trend reversal in PE prices may already be apparent in the marketplace as a December price increase was tabled until January. A resins buyer in California says availability has improved since production problems have been resolved. "Y2K buying didn't happen," he adds, "so companies produced more resin then they needed." What's more, this buyer says that, from his perspective, only three of the four price increases reported by analysts for 1999 actually went through.
New production capacity due to begin operating in second half 2000 will also add more to the supply side of the equation. Two new polyethylene facilities will come on line in Alberta (Nova and Union Carbide). "The message," says Earl Simpson, market analyst at Houston-based Pace Petrochemical Service, "is that two billion pounds of polyethylene is being added in the third quarter of next year. This will cause some slippage."
On top of the Alberta expansions, Bauman says U. S. exports will be affected negatively this year as new lldpe facilities come on line in Argentina, Europe, Asia and the Middle East.
The December 1999 report from PACE Petrochemical forecasts that HDPE will slip from 39¢/lb (contract) in first quarter 2000 to 35.5¢ by year-end. LDPE, says pace, will go from 43.5¢ to 40.0¢, and lldpe will slide from 36¢ to 30¢. (These figures tend to run lower than Purchasing's figures since they are based on the Gulf Coast market.)
Producers, however, are not as quick to forecast declining trends for prices. Rick Salvadore, VP of polyethylene business at Nova Chemicals in Moon Township, Penn., sees prices weakening a little at the beginning of the year then stabilizing through midyear. Prices could weaken in the final quarter of 2000 with a significant amount of capacity coming on stream, he adds, but if Asian and international markets rebound, this would boost exports making it easier for producers to resist downward price pressure.
Michael Klamm, president of Elenac (a new company uniting the polyethylene businesses of Shell and BASF) in Southgate, Mich., says, "The year 2000 depends on what ethylene does. Contract is now at 27¢ and seems to have reached the peak, but months ago we thought it had peaked at 26¢." These prices reflect a 10¢-11¢ boost with ethylene beginning 1999 at 16.5¢/lb. "It's a matter of supply and demand," says Klamm, "oil prices have doubled since the beginning of 1999."
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