Polyethylene Declining In Wake of Weak Demand

16 July 2001 00:00  [Source: ICB Americas]

The polyethylene market faces plummeting prices and declining operating rates due to a weak domestic economy. The falloff in demand comes after an unprecedented run-up in natural gas, the main feedstock for much of the polyethylene produced in North America. Producers see little improvement, although low inventories at the convertor level may provide an uptick in demand.

Generally, what we are seeing is plentiful supply and a lack of demand, notes Bob Buesinger, sales manager of polyethylene for Chevron Phillips Chemical Company. "Sales are off 8 to 9 percent year to date, and a lot of that has to do with the economy," he says. "Demand has been pretty sluggish and July, in particular, seems to be pretty slow," adds Dan Boivin, president of olefins and polyolefins business for Nova Chemicals.

Historically, the summer months, and July and August in particular, are a slow time for the polyethylene industry. "Unfortunately, the market activity this time of year is usually slow, so if you are looking for a turnaround, you are not going to see much near-term," says Howard Rappaport, director of polyolefins for Houston-based Chemical Market Associates Inc.

Overall operating rates have dropped to the low- to mid-80s due to the combination of a traditionally slow period and poor economic conditions, according to one producer. Operating rates for low-density polyethylene are at 90 percent, while high-density checks in at 78 to 79 percent and linear low-density measures below 70 percent, according to Mr. Rappaport.

Besides a seasonal slowdown in demand, producers see the US economy as the main culprit in polyethylene's decline this year. "It's the economy; we need people to start buying," says Mr. Buesinger. "Sales of durables, things like pipe and appliances, are way off," he adds. "Since natural gas prices have moderated significantly, it is now the weakness in demand that is causing the biggest problem," notes another producer.

While acknowledging the slowing economy, Nova's Mr. Boivin says the polyethylene industry is still getting over the meteoric rise in natural gas pricing last winter, when prices shot from $2.25 per million BTU to more than $10. "There's no doubt the economy has slowed demand, but the unprecedented run-up in natural gas costs has been brutal on the industry," he says. "Nobody can survive a five times increase in raw materials, and that has been what we had to deal with."

Although natural gas pricing has receded, down close to $3, it still is greater than what North American producers are accustomed to paying. "Gas has fallen to $3.20, which is only 50 percent higher than normal, rather than being four to five times higher back in January," says Mr. Boivin.

Besides the immediate hit to the bottom line that rising natural gas costs deliver, Mr. Boivin points out that the impact goes much deeper. "The price of natural gas and crude oil change minute to minute and day to day, whereas the price of our products tends to take two to three months to change," he notes. "On the way up, we get hit with the raw material costs instantaneously, while it takes us a fair while to get the prices up. Then of course, price decreases occur with no warning or lead time at all. They are instantaneous and sometimes retroactive."

Although sales of polyethylene are off across the board, some segments have managed to hold their own, for instance, food packaging. "Both blow molded bottles and films for snack foods, those segments have held up pretty well," says Mr. Buesinger. "Blow molding demand seems to be relatively stable for now," adds another producer. "Another area that has held up for us is refuse carts, which is unusually strong," notes Mr. Boivin.

Most producers do not anticipate demand to return until at least September. "People said the same thing about March and that did not happen this year, so it will be interesting to see if there is any buying activity developing by September," notes Mr. Rappaport. However, he points out that only unusual events, such as a natural gas price spike or extended plant outages, are likely to spur demand. "Of the things that we can measure--the economy, cash costs, supply, global trade--that may impact demand, none of those are moving in a direction that will improve demand," he says.

One possible factor that could affect the polyethylene industry is the low level of inventories at the convertor level. Convertors have held off from buying anymore resin than they need in anticipation of the price falling in the future. "Inventories at the processor level seem to be quite low," notes Mr. Boivin.

This should boost demand once processors feel they have reached the bottom on pricing. "With inventories so low, we could see an uptick in volume in the second half of this year," says Mr. Buesinger.

With the hope of convertors replenishing inventories, producers have not ruled out polyethylene price increases for the second half, although they admit, any increase would most likely be driven by raw materials. "If there is a move up in feedstocks, primarily natural gas as we move into winter, we could see fourth quarter price increase attempts," says Mr. Buesinger.

"I would not be surprised to see an attempt to increase prices in late third quarter or early fourth quarter, especially if the economy stimulates a demand increase," says a producer. "Everyone is simply being hurt too bad to allow the situation to continue without some attempt to shift momentum in the other direction," he adds.

Another ray of hope for polyethylene producers may come from exports. North America has had to sit on the sidelines for much of this year due to the extraordinary rise in natural gas costs. "Because of the cost disadvantage, North America has not been competitive in the world market," notes Mr. Rappaport. "Now, if natural gas hovers around $3 per million BTU for a while and crude oil stays above $25 to $26 per barrel, North America may find itself more competitive on the world market."

Although the second half of this year may bring relief to polyethylene producers, they will have to do it in the face of significant new capacity. Formosa is bringing on 250,000 metric tons at its Point Comfort, Tex., site later this year.

In addition, Nova continues the start-up phase of its 850 million pound unit in Joffre, Alberta. "We are delighted with the progress of PE2," says Mr. Boivin. The plant, running continuously since April, is currently making its fourth grade of resin. "We started with crate and pail resin and a couple of types of film resin, and we are seeing excellent correspondence between our pilot plant and the main plant. The technology looks equal to or better than we anticipated," says Mr. Boivin.

The next polyethylene plant to come on stream in North America will be a 50-50 joint venture between Chevron Phillips and Solvay, which is slated for the fourth quarter of 2002. The companies recently selected Chevron Phillips Cedar Bayou chemical complex in Baytown, Tex., as the site for the 700 million pound high density polyethylene (HDPE) plant, which will incorporate Chevron Phillips loop slurry technology. The companies will build a second shared polyethylene facility in the 2005 to 2007 time frame at a Solvay facility.

In Europe, Basell will begin construction on a 350,000 metric ton HDPE plant in Wesseling, Germany. The new plant, which will use the latest generation of Hostalen slurry technology, is scheduled to come on stream in the fourth quarter of 2003.

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