Demand for polystyrene is down significantly this year, as the vital construction sector for this material has withered in a slow economy. And with overcapacity bedeviling polystyrene producers, as it has for several years, buyers would normally expect lower polystyrene prices.

Not this time.

With crude oil going up like a taxi cab meter, styrene and polystyrene producers are struggling to stay afloat as benzene, their oil-derived feedstock, has escalated in price. As a result, contract and spot polystyrene prices have been on the upswing for several months, a trend analysts say should continue for the rest of the year.

The downturn in the housing and construction industry—which accounts for more than 60% of the polystyrene demand—has sent polystyrene demand down steeply in the past year. In its expandable and extruded forms, polystyrene is used in roofing, sidewalls, structural insulation panels and many other building applications. The construction market for polystyrene is down by “double figures” since last year, says Peter Feng, a styrenics analyst with Chemical Market Associates Inc. (CMAI) in Houston. Other outlets for polystyrene, such as food packaging, have been less affected by the current economic downturn, he notes.

Last year, the polystyrene industry in North America “was very oversupplied,” Feng reports. Producers of the polymer are continuing their long-term trend of taking capacity out of the market, Feng tells Purchasing, “but that’s not easy to do when your demand side is continually shrinking.” According to key polystyrene player Nova Chemicals, global capacity of solid polystyrene dropped by 8% between 2005 and 2007.

Chronic overcapacity and sagging demand have spurred consolidation in the polystyrene arena, with former competitors joining forces. The latest deal is a joint venture, announced earlier this year, between Dow Chemical and Chevron Phillips Chemical to make styrenics, including polystyrene, in North America. Last year, a similar joint venture, Ineos Nova, combined the North American styrenics businesses of Nova Chemicals and U.K.-based Ineos. Over the past year, these deals have reduced the number of polystyrene producers in North America from five to only three. (The third is France’s Total Petrochemical.)

Since the consolidations began, polystyrene pricing has shown a “fairly stable relationship” to benzene, says Paul Ricci, head of Paul Ricci Resources, a petrochemical consulting firm. Until around May, benzene prices had “not responded consistent with the rise in crude,” he adds. But that has changed, with benzene June deliveries topping $4.31/gallon. (Benzene prices had been mostly below $4 before then.) According to Ricci, there is now a “vigorous and persistent push” by polystyrene producers to recoup these higher feedstock costs.

This push has been reflected in recently announced contract increases by North American resin producers. They included a June hike of 4¢/lb for general-purpose polystyrene (GPPS), and another 3¢/lb for July. Producers of high-impact polystyrene have nominated a 10¢/lb boost, with 6¢/lb of that for June.

How successful the producers will be in implementing the full magnitude of these hikes remains to be determined, Ricci notes. Despite fewer producers in the market, polystyrene industry operating levels are only at 80%, he says, which could limit the producers’ price leverage. But according to Michael Greenberg, CEO of The Plastics Exchange, a Chicago-based plastics trading firm, polystyrene producers should obtain “some, if not all” of their nominated increases for June and July. As for supply, “this has not been an issue” for polystyrene customers in North America, Ricci says.

Dealing with costlier polystyrene is nothing new for plastics buyers. In 2004, the last time polystyrene soared in price, fabricators often switched to lower cost resins, particularly polypropylene, which offers many of the same attractive properties as polystyrene. Today, that is not an option, says Feng, “because everything is going up” in plastic resins. In fact, over the past year polypropylene has become more expensive than polystyrene. Nova Chemicals CEO Jeff Lipton told a group of investors in May that this development could “significantly help” the polystyrene industry if just a “modest” number of polypropylene users switched to polystyrene. But Feng says that polymer buyers do not casually switch back and forth between resins in a volatile price market, especially since considerable capital investments are usually required. The 2004 shifts, he adds, were based on the assumption that price differentials between polystyrene and polypropylene would be long term.

Given the higher-price environment for polystyrene and the lack of affordable substitutes, buyers of this plastic are finding ways to cope. For Michael Scott, who handles purchasing and procurement at Braeside Displays, an Antioch, Ill. manufacturer of signs and merchandising displays, the recent price increases for polystyrene have been burdensome. “I am having trouble passing on the increases,” he says, “which means I am squeezing my margins.”

Scott adds that he has offset some of the increases by negotiating larger buys and stockpiling supplies. While he acknowledges that “this is not a good long-term solution,” it will have to do for now, he adds, since commitments from distributors for holding down resin costs “are not being offered.”

At Sensus Metering Systems, a Raleigh, N.C.-based producer of water, gas and electric meters, sourcing specialist Jim DeSellems purchases seven grades of polystyrene. Of those, he says, five are commodity grades, which are bought in relatively small amounts, “so we don’t have much power to leverage a supplier, except to buy from a single supplier with whom we do the most business.” The remaining polystyrene the company buys are engineered grades, which are more expensive to begin with.

DeSellems says he has created competition in these grades by challenging new suppliers to come up with mold-to-size polystyrene with the same properties as the current resins. This will remove all in-house machining charges the company now incurs. “If you can’t take the cost out of the resin,” DeSellems advises, “take it out wherever [else] you can.”

Such economizing may soon be needed more than ever. If crude oil prices continue to shoot up this year, it will cause benzene to follow in lockstep, forecasts Feng, which will boost prices “up and down the styrenics supply chain.” One reason, he adds, is that polystyrene demand may be down anywhere from 10-13% in 2008, so polystyrene makers will be under tremendous pressure to “re-establish their margins.”