Polyethylene Makers Seeking Margin Recovery

30 April 2001 00:00  [Source: ICB Americas]

By Robert Brown

Polyethylene producers are still struggling to restore margins following the unprecedented rise in the cost of natural gas. Despite some success in raising prices, higher feedstock costs are outpacing the industry's ability to recover margins. Producers are seeking for May 1 the remaining 3 cents from March's 6 cent announced price increase, but downward ethylene pricing and sluggish polyethylene demand is making any pricing gain uncertain.

Rising feedstock costs have been the critical issue for polyethylene producers. In January, natural gas briefly hit $10, more than five times its average cost. Prices have since come down but are still well above what North American producers are used to paying. "We are looking at natural gas in the $5.50 range, which is more than double what it has been over the last five years," says Dale Speiss, vice-president of sales and marketing for Nova Chemicals Corporation.

Since so much of the North American ethylene and polyethylene business is based on natural gas, up to 70 percent by some estimates, producers were forced to pay the inflated prices or step out of the market. "When natural gas ran up, we had to pay those higher prices for the feedstock and our inability to pass those price increases on quickly really impacted the industry's bottom line," says Bob Buesinger, sales manager of polyethylene at Chevron-Phillips Chemical Company LP.

Producers first launched a 5-cent increase for February 1, which was almost universally accepted. With the price increase looming, buyers entered the market in January in advance of the increase, driving sales volumes above average for the month, despite the record gas prices, according to Howard Rappaport, director of polyolefins for Houston-based Chemical Market Associates Inc. (CMAI). "February demand was modest, as it usually is," he adds.

In March, many producers anticipated a return to traditional demand levels as that month usually sees a seasonal increase in demand. "We had hoped to see a seasonal pickup in demand," says Norm Phillips, senior vice-president of polymers for Equistar Chemicals LP. "We saw a little bit, but not the typical seasonal rebound."

Reflecting the weaker than expected demand was a halving of the industry's second price increase announcement, which originally called for 6 cents on March 1. Producers pushed 3 cents off into a temporary voluntary allowance (TVA). It is expected that the industry will now push to gain the final three cents on May 1.

However, it looks as though they will face some stiff opposition as buyers point to stagnant demand and ethylene prices that are beginning to slide. "That's a powerful combination," says Mr. Rappaport. "Demand is pretty soft right now," notes Mr. Phillips.

The downturn in demand can be traced to the economic slowdown, which has impacted many of the polyethylene producers customers. Sustained high natural gas costs have also reduced export opportunities. "Export opportunities are not there for North American producers because they are still one of the higher cost regions for polyethylene production," says Mr. Rappaport.

On the ethylene side, prices have fallen about a penny per pound during the last two months. On the surface this may look like good news for polyethylene producers, but customers are also aware of any price fluctuations in ethylene and will look for similar reductions in polyethylene. "The next few months should be pretty interesting," notes a producer. "We are looking to have a few months to restore profitability to the business; our feedstock costs are slipping, so naturally our customers want to know when their prices will go down."

Also impacting polyethylene producers, especially the integrated producers, is the return of some profit margin to the ethylene business, notes CMAI's Mr. Rappaport. As the margin returns to the ethylene business, producers have cranked up their previously idled or throttled back plants. "Since there is now a little bit of margin in the ethylene business, there will be more pressure applied at integrated companies for the polyethylene side of [the] business to sell more resin to utilize ethylene internally and generate more return on that margin that now exists on ethylene," says Mr. Rappaport.

The margin pressure comes at time when new polyethylene capacity is coming on stream. In North America, new capacity includes Formosa's 250,000 tons at Point Comfort, Tex., scheduled to come on line later in the year, as well as Nova Chemical's 850 million pounds in Joffre, Alberta, Canada, which is now in the start-up phase.

Despite the gloomy picture, producers remain optimistic regarding polyethylene's fortunes for the remainder of 2001. "Our outlook for the next six months is relatively balanced," says Chevron-Phillips Mr. Buesinger. "We are looking at 2 percent growth for 2001," he adds. "Demand is not robust, but it has not totally fallen off either."

"Our outlook is more challenging than six months ago," says Mr. Phillips. "Demand is softer than we like, and there is new capacity coming on. We expect to see some improvement, more if we get some relief on hydrocarbon prices, less, if the economy goes into a full recession," he adds.

Equistar has already responded to a difficult environment. It has permanently shuttered its Port Arthur, Tex., facility. It closed its 240-million-pound high-density polyethylene (HDPE) reactor as well as its 160-million-pound low-density polyethylene (LDPE) reactor. In 1999, the company mothballed a 300-million-pound HDPE reactor at the site. All units are expected to be dismantled by the end of this year, according to Mr. Phillips. Following the closure, Equistar has annual polyolefins capacity of 6.5 billion pounds, including 3 billion pounds of HDPE and 1.5 billion pounds of LDPE.

Last week, Equistar announced it was acquiring the PowerGuard medium voltage power cable materials business of AT Plastics Inc. Also included in the deal is AT Plastics' Aqua-Link low-voltage power cable materials business and manufacturing assets in Peachtree City, Ga.

POLYPROPYLENE--Polipropileno del Caribe (Propilco) has developed a transparent, injection-stretch, blow-molded, narrow-neck 500-ml bottle in clarified polypropylene (cPP) for Bavaria, the Colombia-based producer of beer, juices and bottled water. According to Propilco, this positions cPP as a viable alternative to PET in the bottled beverage markets in the Americas and Europe.

Milliken Chemical supplied technical support as well as clarifying agent Millad 3988 to Propilco. As part of its technical support, Milliken helped define resin characteristics, such as melt flow rate, molecular weight distribution and Millad 3988 content.

Polyurethanes--The Alliance for the Polyurethane Industry has retained Ducker Research Company Inc. to conduct its biennial study of polyurethane consumption by end use application. For the first tie ever, the study will include data from Mexico, as well as the US and Canada.

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