Prices of propylene and polypropylene have been following crude oil prices upward in the past few months, but a slowing demand for plastics has kept price increases to a minimum. Putting the brakes on polypropylene price hikes, say industry observers, is a slowing U.S. economy, which has depressed demand for polypropylene in two of its key end-use sectors: automotive and consumer/appliances. Export demand for U.S.-made polypropylene is also down sharply from last year, while supplies of polypropylene are tight but adequate.

The anemic demand for polypropylene has made it hard for producers of the resin to improve their margins in the wake of increased costs for their propylene monomer. For the past 18 months, polypropylene prices “have been moving pretty much in tandem with propylene,” says Mike Smith, an analyst with DeWitt & Co. in Houston. During this time, he notes, polypropylene producers have only been able to raise their selling prices slightly above their own increased propylene costs, he notes, so polypropylene margins have been squeezed.

Propylene prices continue their rise, but not by much. As oil soared from less than $100/barrel to $110 in the first quarter, spot propylene prices were up a modest 2¢/lb during the same period, after moving down briefly in February. Producers of polymer-grade propylene nominated a 5¢/lb increase in March contracts, which was termed unrealistic at the time by The Plastics Exchange, a polymer trading company. However the company now expects to see some level of increase in contract prices.

Polypropylene spot prices in March rose 1.5-2¢/lb, while producers announced contract price increases of 3¢/lb. Some, if not all, of that increase may be implemented, says The Plastics Exchange, because polypropylene’s “supply/demand dynamics have been tight.”

That tightness has been caused by several recent events. About 1 billion lbs. of U.S. polypropylene capacity were shut down permanently at the end of 2007 by major producers Dow Chemical and Ineos. Other polypropylene plants were taken offline for turnaround during the early months of 2008. Operating rates in the U.S. during that period were a relatively snug 87% or so, estimates Bob Dennett, an analyst at Houston-based Chemical Market Associates Inc. (CMAI). And that figure, he says, includes the capacity that was down for turnaround. Still, there are no critical shortages of polypropylene. “For the most part, if you’re a buyer, you can get the material you want,” says Dennett.

Inventories of polypropylene at U.S. producers, which had been rising, have been “in check” since the end of 2007, says Smith. The reason for the plateau in inventories is not only a decline in sales of polypropylene, but less production. Domestic production of the resin fell to 1.48 billion lbs in December, off 7.5% from the same month a year earlier, according to the American Chemistry Council. And in the first few months of 2008, producers “have maintained reduced resin-production rates,” says The Plastics Exchange.

While there is no new capacity for polypropylene on the drawing boards in the U.S., there are plenty of projects in various stages of planning and construction overseas. Most of this expansion is located in the Middle East, India and China. Many of the new units, which are slated to start up in the next few years, will be much larger than those in the U.S., with capacities between 500,000 to a million tons/year.

The biggest effect of the overseas expansions on U.S. producers of polypropylene will be reduced export markets for U.S. producers, notes Dennett. The reason, he explains, is that favorable feedstock economics in the Middle East will make polypropylene from that region cheaper than North American product for many buyers around the world. As a result, much of the new Middle East polypropylene is likely to end up in Asia, which has traditionally been a market for the U.S.-produced resin. The Middle East material may also go to Europe, another common destination for the U.S. resin. Even the U.S. itself, along with Latin America, are possible markets for the new Middle East resin, says Dennett. Dennett believes, however, that the U.S. resin producers should be able to hold their own on their home turf, and even compete successfully in Latin America.

One barrier to sales of foreign-produced polypropylene in the U.S. is the reluctance of large U.S. plastics converters to buy resin in the bags and super-sacks used by most overseas producers. Instead, they prefer delivery in railcars. (Customers in Europe and Asia, by contrast, usually have no objections to the bagged product.) One purchasing manager at an East Coast plastics fabricator complains that “there is no way to purchase bulk [polypropylene] product from overseas sources.” Buying the resin in individually packaged bags, she says, “adds too much to the overall cost of the product.” Of course, it is always possible to transfer imported resin from bags to railcars, but that operation also runs up the delivered costs of the material. One industry observer, for instance, estimates that it costs around $100/ton to transfer the contents of a shipment of 25-kg bags of polypropylene into railcars.

Keeping costs in check is essential these days as rates for polypropylene and other resins continue to rise, while demand for downstream products remains slack. The same purchasing manager who avoids bagged polypropylene says she also economizes by buying larger amounts of wide-spec polypropylene and blending it with the standard resin used by the company, with no sacrifices in quality. This has saved 3-5% overall on costs for the resin, she estimates.

Such economizing may be needed for the next few months. A “fresh round” of polypropylene price increase announcements for April contracts is likely, predicts The Plastics Exchange, mostly due to rising monomer costs. But according to Dennett, propylene feedstock costs should begin to moderate as the year unfolds, which will exert downward pressure on polypropylene. Furthermore, the new overseas polypropylene expansions should begin to put a crimp on U.S. producers’ export sales by late this year. And that, Dennett believes, could mean lower prices for polypropylene as U.S. producers try to find a domestic outlet for the resin they used to export.