As crude oil and ethylene feedstock prices continue to climb, polyethylene producers are seeking to tack on another 6¢/lb to their contract prices. But with limp demand for polyethylene and other plastic resins, polyethylene producers will be lucky to walk away with a 3¢/lb hike, say market watchers.

Even as demand for polyethylene cooled in the U.S. during 2007 as the economy lost steam, U.S. producers of the resin saw a bonanza of export sales to Europe, fueled largely by the steep drop in dollar against the Euro. For much of 2007, in fact, exports of polyethylene to Europe were "several hundred million pounds per month more than in previous years," according to The Plastics Exchange, a Chicago-based resin trading platform. Those sales helped domestic polyethylene makers push through higher prices and rack up healthy margins, notes Michael Greenberg, the firm's CEO.

But since the start of 2008, exports to Europe "have just not been anywhere near" those of last year, Greenberg says. But with the dollar continuing to slide, a revived strong demand for polyethylene from European buyers "will probably kick in later this year," Greenberg adds.

On the domestic front, there has been "a slight softening" in demand for polyethylene since the start of the year due to the slowing economy, says Howard Rappaport, global business director for plastics at Chemical Market Associates Inc. (CMAI) in Houston. But he notes that polyethylene, which has widely diversified uses, has not been as negatively impacted as other resins such as PVC, which is closely tied to the depressed building and construction sector.

U.S. polyethylene buyers have recently held back their purchases of the resin, says Greenberg, not only due to slackening orders from their customers, but also because they have expected the current high prices to fall back. But with crude oil at more than $100/barrel and rising monomer costs, he adds, "they may soon start buying again once they realize that prices aren't going any lower."

Over the next five years, domestic demand for polyethylene should grow by 1.5–2% annually, Rappaport predicts. In the past, he says, the resin's growth rate has paralleled that of the global GDP, about 2–3% annually. The main reason for the slower U.S. growth is that more and more finished goods made from polyethylene are being manufactured overseas, thereby slowing domestic demand for the plastic.

In the meantime, economic woes continue to mount for domestic polyethylene producers in the form of record-high rates for crude oil, natural gas, and the ethylene feedstock derived from them. This inflationary trend has reversed a temporary dip in feedstock and energy costs in the early weeks of 2008. As a result, polyethylene producers "feel they have to get their prices up," says Greenberg.

But buyers of the resin are resisting the producers' proposed 6¢/lb increase for March, he adds, because they remember the downward drift of hydrocarbon prices a few months ago, and because demand from their customers continues to be weak. (Earlier attempts by the producers to raise prices in January and February did not catch on and tags remained mostly at December 2007 levels during those months.) "Contract prices through March will probably end up anywhere between steady to December pricing, or up 3¢/lb from December," says Greenberg.

Polyethylene prices are at records and have been on the rise for the past couple of years. But things should soon get better for buyers as "we're at the tail end of the up-cycle" for polyethylene pricing. He forecasts a slight easing in prices beginning later this year and extending into 2009. "As we get into 2010 and 2011," says Rappaport, "we think polyethylene prices will trend downward as the market softens up and more [production] capacity comes online around the world."

Much of that new capacity will be in the Middle East (particularly Saudi Arabia and Iran) and the Far East (mostly in China), notes Rappaport. Over the next four to five years, 10 million metric tons of polyethylene capacity will start up in the Middle East, while another five to six million tons will come online in the Far East. Producers in these regions will sell their products globally, Rappaport continues, "and that will mean less export opportunities" for North American polyethylene producers to Europe and Asia. Manufacturers of the resin in North America will probably focus on domestic markets and exports to Latin America. Despite the overseas competition, Rappaport does not see any mass shutdowns of North American polyethylene facilities during the next few years.

Whatever price breaks may be in store for the future, the current inflationary climate is a challenge for polyethylene buyers, who have found various ways to cope with it. At Diamond Foods in Stockton, Calif. for example, procurement manager Bruce Cudd uses a vendor-managed inventory (VMI) program to minimize the costs of his flexible packaging, which uses linear low-density polyethylene. This involves putting out regular lists of the company's packaging needs to a group of pre-qualified suppliers and soliciting bids. The lists include specifications and quantities of the packaging formats that will be needed during an upcoming period. Aware in advance how much materials will be needed, the vendors then try to obtain the best prices from their own resin suppliers. For example, they usually don't need to buy resin on the (often more expensive) spot market, but can negotiate long-term, lower priced contracts. By partnering with the vendors and helping them to save money, says Cudd, "they can pass on their savings to us."