PE Margins Shrink in Wake Of Rising Costs

02 October 2000 00:00  [Source: ICB Americas]

By Robert Brown

The polyethylene market is showing some signs of recovery following a a slower than usual summer. However, producers remain cautious because of shrinking margins from rising raw material costs and new capacity slated to come on stream later this year and in the first quarter of 2001.

Demand for polyethylene began to fall in July following almost a year of good fortune. During that time, buyers purchased polyethylene ahead of price increases leading to large convertor inventories. Starting in July, feedstocks gave the appearance, however brief, that they would soon begin to decline. That coupled with large inventories led to a significant softening in demand.

Pricing also began to falter in July. In some instances, producers saw a major correction in pricing with a 3 cent give-back enacted retroactively. "What essentially happened is the second price increase of the year was eliminated," says Howard Rappaport, director of polyolefins for Houston-based CMAI. Prices continued to decline through August and September.

Now, however, prices are again on the rise, mostly due to escalating raw material costs. For October, producers have repealed a 5 cent per pound temporary voluntary allowance (TVA) many had in place. Also, several companies have announced a 3 cent per pound increase, effective November 1. These increases are almost solely attributable to raw material costs. "The price initiatives that are out there are the result of higher feedstock costs," says Dale Spiess, senior vice-president of polyethylene sales and marketing for Nova Chemicals.

As feedstocks costs have risen, polyethylene margins have tightened over the past few months as the price of polyethylene dropped faster than ethylene. "Polyethylene has dropped at a faster rate than ethylene," says Mr. Rappaport.

Pricing and demand are expected to pick up for the remainder of the year. "Demand should pick back up in October, and with feedstocks back up and looking to stay strong for some time, the market should strengthen some," says Jeff Taylor, vice-president of Americas, polyethylene for Chevron Phillips Chemical Company LP (CPC).

The price of crude oil will play a crucial role in polyethylene's near future. "I think high oil prices will cause the chemical industry to raise prices," notes Mr. Spiess. "If that happens, we'll see people pre-buy and build inventory, and prices will remain high over the near-term."

Despite a short-term push from crude oil, polyethylene prices are expected to slump next year. CMAI expects prices to bottom out in mid-2001. "I'm still forecasting prices to trend downward unless there is a significant surge in demand," says Mr. Rappaport. "At this point, there is nothing on the horizon to indicate a big surge in demand."

The polyethylene industry will also see a rash of new capacity in the upcoming months. In North America, Union Carbide Corporation is said to be in the start-up phase on its two, new 650-million-pound reactors in Canada.

Nova Chemicals anticipates bringing on its 850-million pound plant in Alberta, Canada, by the end of the first quarter of 2001. The facility is currently on schedule and more than 90 percent complete, according to Mr. Spiess.

Solvay Polymers Inc. and CPC will build a 700-million-pound high density polyethylene (HDPE) slurry loop plant at a CPC site in Texas. The company has yet to select an exact site, but it expects startup of the plant for the fourth quarter of 2002. The two companies will each own half the plant and share its production of general-purpose blow-molding HDPE resin. The companies plant to jointly build a second facility at a Solvay site in the 2005 to 2007 timeframe.

In Europe, Elenac, a 50-50 joint venture between Shell and BASF, and now a part of the newly formed Basell [see story page 3], is bringing on a 320,000-metric-ton-per-year low density polyethylene (LDPE) plant in Aubette, France. The project is Europe's first LDPE plant in eight years. It will make the company Europe's leading producer of LDPE with a capacity of roughly 1 million tons. The expansion is part of Elenac's plan to focus on LDPE and HDPE as its main engines for global growth.

Elenac will also be crowned Europe's leading HDPE producer following the opening of its 250,000-metric-ton-per-year facility in Wesseling, Germany. That unit will bring Elenac's HDPE capacity to 1.2 million tons.

The company is also expanding in Asia, where it will build three facilities at two sites in India and Iran. In Iran, in a joint venture with that country's National Petrochemical Company, Elenac will build a 300,000-ton-per-year LDPE plant at Bandar Imam. The unit is scheduled to come on stream in 2003. In India, Elenac will build a 200,000-ton-per-year LDPE plant in Bombay, along with a 250,000-ton-per-year HDPE facility. Both plants are expected to start up in 2004.

Equistar Chemicals is also targeting LDPE and HDPE for growth. The company recently launched a 70-million-pound expansion of its Morris, Ill., LDPE facility, bringing that unit's nameplate to 610 million pounds. The project is expected to be completed during the second quarter of 2001.

In addition, Equistar may also double the capacity of its LaPorte, Tex., LDPE facility to 480 million pounds. The engineering review for that project is expected to be completed shortly. Last February, the company mothballed two LDPE reactors at the site, rationalizing 60 million pounds of capacity.

While no producers are experiencing any long-term outages, two are currently offline. Last week, Nova Chemicals shut down its polyethylene reactors at its St. Clair, Ontario, facility for routine maintenance. At the same time, the company says it will perform some infrastructure modifications, which will add flexibility to the rail loading system, and the flare tip will be replaced to significantly reduce noise and smoke.

In France, production at the BP Chemicals/AtoFina site in Lavera, France, is running at half capacity following a problem with the site's cracker, which is owned by the 50-50 BP/AtoFina joint venture, Naphtachimie.

EASTMAN Chemical Company has launched a new polymer for binder fibers based on its PETG chemistry. Eastman copolyester 20110 is a new .47 inherent viscosity addition to the company's PETG family of copolyesters. Eastman says it is especially useful in binder fibers as the sole polymer of unicomponent fibers or as one of the polymers in bicomponent fibers including sheath/core, side-by-side or segmented pie structures.

For the fiber producer, the resulting lower flow characteristics allows extrusion as a fiber at lower temperatures and/or pressures, similar to the temperatures used for polypropylene.

POLYURETHANES--BASF Corporation's thermoplastic polyurethane business group has announced an average five percent increase on its thermoplastic polyurethane (TPU) elastomer resin products in North America, effective October 1.

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