Price hikes on tap as market demand firms up
Tags to increase on short supply
Gordon Graf -- Purchasing, 6/2/2005
Prices of most plastic resins shot up by anywhere from 20-50% over the past year, propelled by a robust demand, tight supplies, and escalating energy and feedstock costs. While resin tags leveled off briefly during the early months of this year, they are likely to resume their upward climb by midsummer as plastics purchasers begin replenishing depleted inventories. Consumer spending in the U.S. remains strong, which should keep demand for plastics vibrant and contribute to upward price pressure as the year progresses.
SUPPLY: Cutback effects lingerProduction of plastic resins in the U.S. and Canada reached 115.1 billion lbs in 2004, an increase of 8.1% over 2003, reports the American Plastics Council (APC). By volume, says APC, the top five resins produced in 2004 were, in descending order, polypropylene, high-density polyethylene, polyvinyl chloride (PVC), linear low-density polyethylene, and thermoplastic polyesters. Other leading materials were low-density polyethylene, polystyrene, phenolics, urea and melamine, and engineering resins.
Capacity utilization for commodity resins is now hovering around 95%, estimates Frantz Price, an analyst with the market research firm Global Insight, in Waltham, Mass. The current tightness is a legacy of past capacity cutbacks between 2001 and 2003, he explains, when the plastics industry "was going through hard times." Although plastics started a major recovery in 2003, which gathered steam in 2004, little of the shuttered capacity has been restored, Price points out.
Among individual resins, polypropylene supplies are plentiful, despite forecasts earlier this year that indicated supply would be constrained by limited propylene stocks, notes Patrick Duke, vice president of polymers at Houston-based consultants DeWitt & Co. The predictions that propylene feedstocks would fall short globally have not materialized due to the toll high costs of energy and feedstocks have taken on the global economy.
Meanwhile, polystyrene is relatively balanced in North America, but is oversupplied in Europe and Asia, Duke says. As for polyethylene, producers are cutting back production "to shore up supply and demand fundamentals," Duke says. But with little new polyethylene capacity planned in North America, things could become constricted in that region, he adds. New polyethylene capacity in the Middle East, due for start-up in the next three to five years, may relieve any North American shortfall and possibly lead to an overabundance of the resin, Duke believes.
DEMAND: Temporary stallSales and captive use of plastic resins in the U.S. and Canada rose 6.9% in 2004 to 113.8 billion lbs, the highest growth rate since 1996, APC discloses. The largest market for plastic resins in 2003 was packaging, with 34% of sales, according to the APC figures. Building and construction, and consumer and institutional products tied for second place, with each accounting for 18% of plastics sales. Other important resin markets were transportation, with 6% of sales; furniture and furnishings, and electrical and electronics, each with 4%. About 11% of resins sold by North American producers in 2003 were exported.
Markets for commodity resins such as polyethylene, polypropylene, polystyrene and PVC began to cool off in the fourth quarter of 2004, Duke notes. That global pause in sales extended into March and early April of 2005, he says. (Nova Chemicals, for instance, reported a 9% drop in its polyethylene sales volumes between the fourth quarter of 2004 and the first quarter of 2005.) Behind this early 2005 slowdown, Duke explains, was the run-up in crude oil, natural gas and feedstock prices in 2004. Anticipating these trends would cause resin prices to rise, resin consumers throughout the year bought what they needed, plus excess material, Duke says. But when it became clear at the end of 2004 that plastics demand was not living up to expectations, he adds, they slowed their buying and decided to work off their excess inventories.
Meanwhile, the stratospheric crude oil rates of a few months ago have moderated somewhat. This has also caused plastics consumers to hold off purchases of resins, notes Gary Adams, president of Chemical Market Associates, the Houston-based research firm. Buyers hope, he says, that falling crude will cause more attractive pricing dynamics for plastics later in the year.
Adams believes that the slight dip in demand for plastics, which has dampened resin buying the past few months, is the down-phase of a minicycle that will soon turn around. "The fundamentals are still strong," he says of the plastics business, adding that consumers have shown no signs of decreased spending. "In PVC pipe, for example, we're starting to see a real pickup in demand, which had been soft," he says. Adams anticipates that the current de-stocking among buyers, plus a resumption of healthy growth in demand, are setting the stage for a much stronger second half of 2005 for resin producers.
PRICING: Lull will endWhile resin prices are dramatically higher than they were a year ago (see charts), tags have plateaued somewhat since the end of 2004. Most analysts attribute this to the slower demand for plastics in early 2005, which has made it harder for resin producers to pass along their surging costs. Except for this current soft patch, resin producers have had little trouble transferring their cost burdens to buyers. The reason, says Price, "is that demand [for plastics] is so strong and supplies are so tight."
The plastics industry as a whole is doing very well, comments Price. Margins in the industry have held up nicely, he says, despite skyrocketing costs. In fact, he adds, some producers have managed to advance their margins, despite the cost run-ups. Being back-integrated into petrochemicals, as many of the larger resin producers are, also helps the bottom line, Price says.
The current respite from higher resin prices is unlikely to last. For plastic resins, "right now we're near the bottom of the cycle in terms of how far prices go down, and we're at the start of a cycle when demand should begin to normalize," says Duke. Adams agrees, noting that the improved conditions he's forecasting for plastics will also boost resin prices. "Our advice to buyers is to be careful" and not wait for resin prices to dip further, says Adams, "because we see much tighter market conditions coming later in the year."
| Up | Down | Same | Index | Change from last month | |
| Polyvinyl chloride | 57% | 0% | 43% | 78.6 | Down |
| HDPE injection molding | 57% | 14% | 29% | 71.4 | Down |
| Polycarbonate | 43% | 0% | 57% | 71.4 | Down |
| Elastomers | 43% | 0% | 57% | 71.4 | Down |
| HDPE extrusion/blow molding | 25% | 0% | 75% | 62.5 | Down |
| Polyacetal | 14% | 0% | 86% | 57.1 | Down |
| Nylon | 13% | 0% | 87% | 56.3 | Down |
| LDPE | 22% | 11% | 67% | 55.6 | Down |
| Polystyrene | 18% | 9% | 73% | 54.5 | Down |
| LLDPE | 20% | 20% | 60% | 50.0 | Down |
| Polyols | 0% | 0% | 100% | 50.0 | Down |
| Isocyonates | 0% | 0% | 100% | 50.0 | Down |
| Polypropylene | 14% | 29% | 57% | 42.9 | Down |
| Polyester, thermoplastic | 0% | 14% | 86% | 42.9 | Down |
| * Above 50=rising, below 50=falling. SOURCE: PURCHASINGDATA.COM | |||||
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