Polypropylene Makers Try Again To Improve Their Profit Margins

16 March 1998 00:00  [Source: ICB Americas]

Encouraged by soaring demand, some US polypropylene makers are reviving the 3-cent February 1 price increase that had not been enforced even though it garnered some industry support. However, others in the industry warn that customers will not be more inviting to price escalation on April 1 than they had been two months earlier.

So far, Montell Polyolefins and Union Carbide Corporation have restated their 3-cent-per-pound initiatives for April 1. Epsilon Products Company is said to be doing the same.

Other companies like Fina Oil & Chemical Co., Huntsman Polypropylene Corporation, Solvay Polymers Inc. and Exxon Chemical Company, that had February 1 increases, are wavering on whether they will inform customers of a new increase recast for April 1.

All agree that demand for PP has been high, making it one of the plastics industry's fastest growing resins. In 1997, PP sales and captive use

grew by 7.9 percent over the year before, hitting 13.1 billion pounds, according to the Society of the Plastics Industry. Meanwhile, production increased by 11 percent, hitting 13.3 billion pounds by years end.

The market has been tight for several months, says John Abokhair, Fina's PP product manager, adding that it will continue to tighten through the third quarter. "Material is not as readily available as it was months ago," he contends.

Desite the tightness, the industry is still looking for a way out of the quagmire of low margins it has been treading in since third quarter 1997.

In September, the spread between polypropylene injection homopolymer and polymers-grade propylene was 12.6 cents on a PP price of 33.5 cents per pound, according to DeWitt & Co. In October, the spread dipped to a low of 11.5 cents with homopolymer at 31 cents.

At the time, the industry was still sluggish from the string of new capacities that ended with Exxon's June startup of a 550-million-pound line in Baytown, Tex. Sources say PP makers were vigorously competing for position since the beginning of 1997 in anticipation of that line. When the Exxon facility started up, it facilitated further erosion, they say.

According to DeWitt, injection homopolymer has stayed at about 31 cents per pound since October, while the delta over propylene increased to 14.7 cents, a figure still unacceptable to producers.

"Utilization rates and margins don't match. Historically, margins have been higher at present utilization rates," says DeWitt analyst Pat Duke. "It's time to bring some sanity back to margins. The increase is one of the few chances to get some margin relief. Right now, margins are not comfortable for suppliers."

According to Fina's Mr. Abokhair, PP plants are running at a healthy 92 percent utilization throughout the industry. In 1996, utilization had been 98 percent, but dropped partly because of high inventory levels. He adds that rates are likely to increase to 94 percent this year.

Matt Launikitis, Union Carbide's business manager for polypropylene, agrees that margins and utilization rates are not matching. "Spreads should be several cents higher," he says.

But there are some naysayers in the industry who maintain that producers are still competing for market position and eroding prices. "Margins are not favorable at all--nobody is making any money," one says. "Nobody is willing to sacrifice to get a price increase."

"Overall, the market is changing to support the increase but it's not there yet. A lot of the basic dynamics you need to support a price increase aren't there," he warns.

There may be trouble ahead as well, says Mr. Duke. He expects 2.1 billion pounds of new US capacity to come on stream by the end of 2000 and 2.2 billion to come on in 2001. When the new capacity hits, the industry may behave like it did when Exxon's new capacity was coming on. "The industry will be pretty chaotic in 1999 and 2000," he says.

Projects include Fina's 550-million-pound expansion at LaPorte, Tex., slated for later this year and Amoco Corporation's 550-million-pound expansion at Chocolate Bayou, Tex., in 1999.

Newcomer Arco Products Company will have a 440-million-pound unit on stream in 1999 and a 550-million-pound facility at Freeport, Tex., running by 2000 will mark Dow Chemical Company's entry into US PP production.

Assuming 7 percent annual sales growth and on-time plant startups, Mr. Abokhair at Fina expects utilization to dip below 90 percent in 1999.

Exxon's North American polypropylene market manager, Malcolm Kaus, says 8 percent growth will support capacity increases. "One to three lines per year will be absorbed smoothly," he says. Mr. Kaus expects 8 percent growth to continue through 2000.

NYLON RESINS--E.I. du Pont de Nemours & Co. will increase prices of its Zytel and Minlon nylon engineering resins by 6 percent in North America, effective April 15.

The company says demand for nylon 6 and nylon 6/6 resins grew 6 to 8 percent in 1997 and is expected to continue at that rate through 2000. Meanwhile, markets for the nylon 6/6 intermediate, adipic acid, and the nylon 6 feed, caprolactam, are extremely tight, DuPont adds.

The company says it requires the upward movement for reinvestment in nylon intermediates capacity.

CARBON FIBER--Toray Industries Inc. has completed a capacity expansion for polyacrylonitrile-based carbon fiber at its Ehime, Japan, facility. The move adds 1,800 metric tons of capacity and gave the plant a 4,700-ton nameplate. The expansion was originally scheduled to come onstream in July 1998.

TITANIUM DIOXIDE--Kerr-Mc-Gee Corporation has signed an agreement to sell its forest products operations. "The transaction is another step in the company's strategy to focus on its growing worldwide oil and gas exploration and production and titanium dioxide pigment operations," says Luke R. Corbett, chairman and CEO. The forest products division operates six plants in the US.

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