20 January 2003 00:00 [Source: ICB Americas]The polyethylene market is under considerable pressure because of the run-up in energy costs over the past two months. Although producers remain confident of the market's long-term strength, they are scrambling to raise prices and are concerned that protracted high energy costs could crimp margins and slow demand growth.
Producers have nominated price increases of 11 cents per pound-5 cents for January and another 6 cents for February-but the terms of those increases vary widely from company to company, and analysts decline to speculate on the likelihood of implementation.
"The run-up in energy prices in December is having a serious impact on the market, putting tremendous pressure on suppliers and, by extension, the market as a whole," says Ken Mounger, vice president and general manager of the polyolefins division at Formosa Plastics Corp. USA. "With the uncertainty of the Middle East situation, energy prices will remain highly volatile, and that is a cause for great concern."
Bob Beil, North American commercial vice president of Dow Chemical Company's polyolefins and elastomers business group, notes that both crude oil and natural gas prices remain at very high levels with no relief anticipated in the immediate future. "Coupled with the fact that this is happening after a period of severe margin compression, the current situation has become acute and is unsustainable," he cautions.
Dow is raising its polyethylene prices by removing a 5 cent-per-pound temporary voluntary allowance (TVA) as of January 15 and launching a 6 cent increase effective February 1. Formosa Plastics has announced an across-the-board increase of 5 cents per pound, effective January 1, to be followed by an across-the-board increase of 6 cents, effective February 1.
An analyst calls the polyethylene market "lousy" and "difficult to gauge" and warns that producers are trying to raise prices in the face of weak demand. "It's difficult to tell how much of the increases will go through," he says. "Producers are asking 11 cents over the next three months, but those increases are all over the board in terms of timing and format. For January, some producers are announcing a straight increase, which would invoke price protection clauses. Other producers are attempting to push through increases that they announced last year but postponed through TVAs."
A longer-term concern is that protracted high energy costs may weaken the economy and undermine earlier projections of strong demand growth in 2003. "The key issue is how well the economy performs," the analyst says. "Natural gas has gone over $5 per million Btus, and oil has stayed above $30 per barrel. Natural gas now appears likely to stay higher than we initially forecasted. That could mean a rise in ethylene prices throughout 2003. If polyethylene goes up to cover feedstock costs, that could weaken its demand."
Producers still expect 2003 to be a solid year. They note that polyethylene demand rebounded in 2002 and energy costs are projected to ease once the tensions in the Middle East abate and the political situation in Venezuela stabilizes.
"While we anticipate that feedstock volatility will continue to impact pricing and margins, an overall increase in polyethylene demand in 2002 makes us optimistic for 2003," says Mr. Beil. "Dow's North American polyolefins business group anticipates polyethylene growth in North America to range between 4 and 5 percent. Global demand growth should be moderately higher."
Formosa's Mr. Mounger expects the market for linear low-density polyethylene (LLDPE) to improve because capacity was taken off line and no new expansions are expected. He calls high-density polyethylene (HDPE) "another story" and warns of "continued problems" because new capacity is expected in 2003. "While we expect demand to increase modestly in both markets, HDPE utilization rates will remain under 90 percent because of excess capacity," he says. "Longer term, we expect a better supply/demand balance in HDPE, but not until very late in 2003 at the earliest and more likely into 2004."
Last year was rough, he says. "Excess capacity and slack demand continued to be a problem. That, coupled with volatile energy costs, combined to make for difficult times that were not for the faint of heart." Over the next two to three years, he expects annual growth to be around 4 to 6 percent for both LLDPE and HDPE.
Patrick W. Duke, vice president, polymers, at DeWitt & Co., Houston, projects 5 to 6 percent growth for domestic polyethylene demand in 2003. He considers 2002 a reasonably healthy year for polyethylene given the weak overall economy. Domestic consumption grew 3.5 percent, and total demand rose 5.6 percent, led by strong exports.
In 2002, pricing firmed through October, but margins peaked in July and turned flat to negative by the end of the year. "Aggressive destocking by producers in November through mid-December came to an abrupt stop as a one-time event disrupted best laid plans and forecasts," Mr. Duke says. "[One] of the various feedstock cost-push issues was the spike in crude oil driven by political unrest in Venezuela that led to a run-up in naphtha. The natural gas price moved up seasonally and in sympathy with crude oil but is well below the previous one-time event in December 2000 through February 2001, when the natural gas price reached $10 per million Btus."
Last month, ExxonMobil Chemical commercialized two new grades of Exceed metallocene-based linear low-density polyethylene. Ken Glover, the company's global polyethylene marketing manager, says the company "continues to grow its Exceed grade slate" and "demonstrate our long-term commitment to metallocene technology."
Mr. Mounger states that the HDPE plant that Formosa Plastics brought on line last March at its complex in Point Comfort, Tex., became fully operational after a brief start-up phase. "The plant is using the Chevron-Phillips loop-slurry process," he says. "Quality is extremely high, and that is giving us a strong position in the marketplace."
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