Energy-cost hikes hit plastics, industry says

Staff -- Purchasing, 3/2/2006

Those high energy prices brought to you in part by Hurricane Katrina are driving up the costs plastics companies are incurring to make the polymers that are the basis of everything from automotive dashboards to data-storage devices.

In fact, over the past year, some resins have gone up by as much as 40%, says Bill Carteaux, president and chief executive officer of The Society of the Plastics Industry (SPI), the trade association that represents processors, machinery and equipment manufacturers and raw materials suppliers. The chief culprit: soaring natural gas prices. "Plastics-parts producers are stuck in the middle," he says. "They can't pass on the increases to their customers."

While the 2005 hurricane season aggravated the situation, energy costs have been going up steadily since 2000, Carteaux says. "They've jumped 20% between 2002 and 2004, and consequently the industry has seen a 5% drop in jobs and 1,145 facility closings," he adds.

Besides natural gas, crude-oil price hikes have hit the industry too. "The average price we paid for crude was $26 per barrel in 2002, but by 2005 it had jumped to $56 per barrel," says Roger Rumer, product manager for North America for Bayer Material Science. "Crude oil is in everything we do."

Industry-wide, there has also been a 7% decline in new capital expenditures (CAPEX) during that period, despite the fact that demand has been increasing. SPI's Carteaux says the CAPEX drop isn't hurting the industry's customers. "There was $8 billion in new capital expenditures in 2004, so there is still plenty of capacity," he says. Of course, if there were any slack in supply it would be taken up by China, which has been an increasingly active source. SPI reports that China ranks second among the top import sources for plastics products (Canada is first).

Because of currency, tax and other issues, Chinese suppliers face lower costs than their U.S. counterparts, Carteaux says. And, their U.S. customers are taking the savings to the bank.

Case in point: Aqua Leisure Products, Inc., a swimming-pool-accessories manufacturer in southeastern Massachusetts. Jim Silvia, purchasing and inventory manager, buys such polyvinyl chloride (PVC)-based finished goods as swimming rings and pool liners from sources in China. "The raw materials prices there are actually going down," he reports. He sees the drop not only in his costs for finished goods but also in regular reports on raw materials prices published by the Hong Kong Plastics Manufacturers Association, which one of his Asian suppliers sends him.

Despite that kind of competition, SPI's Carteaux says the U.S. plastics industry is strong and recovering from the 2000 recession. Demand in 2004, the most recent year for which the association has statistics, was up nearly 7%.

Responding to that demand, GE Plastics and Bayer Material Science, among others, are introducing new engineered polymers. GE is putting the final touches on a new polycarbonate they say has improved scratch resistance. It also has a new wire-coating material and Flexsan SLX, a foundation for paint-free auto body panels. Bayer's Makrolon polycarbonate resin AG2677 is replacing glass for automotive back lights and side windows.

"There is a lot of activity, particularly in nanotechnology," Carteaux says. What's needed for the industry to boom is action to bring down the cost of the natural gas that's the primary raw material for making plastics, he asserts. That action would be political, not technological. "We need political leaders to open up exploration and give us access to gas reserves in the Outer Continental Shelf," he says.

Whether that will happen during a mid-term election year remains to be seen.