OUTLOOK ‘07: US PE, PS prices look brighter

04 January 2007 17:30  [Source: ICIS news]

By Ron Coifman

HOUSTON (ICIS news)--Polyethylene (PE) in the US appeared poised for a price increase in early 2007, market sources said, while the polystyrene (PS) market was anticipated to remain stable.

US PE prices had incurred significant erosion during 2006, sources said, mostly due to abundant supply and soft domestic demand. The condition was changed through substantial exports, mainly to Asia.

While US demand remained soft through year-end 2006, producers and consumers were holding lean inventories going into 2007, according to participants. Although suppliers said in end-December that the market was ripe for January price increases, buyers said this week the price direction remained unclear.

The US PS sector had gradually changed direction and added stability in 2006, partially correcting long-standing volatility, according to participants. The effects of a mature market with no significant growth, excess production, and undisciplined players contributed to market volatility but were curbed in 2006, sources said.

The PS segment reduced capacity and improved inventory management during the past year. Conditions favoured implementation of price increases for PS into 2007, sources said, but the trend for January prices was elusive.

Polyethylene

Substantial PE exports to Asia, Europe, Africa and Latin America were alleviating swollen domestic stocks. Additionally, market participants indicated that producers and consumers had de-stocked toward year-end and reduced excess supply.

Eroding US PE values, together with a weaker dollar, made domestic product attractive around the globe. As a consequence, inventories were reduced by year-end, garnering support for the price increases anticipated for early 2007.

Prices for high density PE (HDPE) blow moulding were 52-55 cents/lb ($1,146.08-1,212.20/tonne) in bulk, according to global chemical market intelligence service ICIS pricing.

A 7 cents/lb price hike was nominated for 15 January. An additional 6 cents/lb increase remained on the table for 2 January after being postponed from December. It was not known whether the 2 January proposal was successfully implemented.

By February, the substantial amounts of product that were backed up due to overtaxed railcar transportation and bagging facilities would be cleared, sources predicted. Exports would be at sea, if not at destination.

Current PE market dynamics are the after-effect from the hurricane season of 2005, according to some market participants. In late 2005, PE prices rose by 32 cents/lb in anticipation of the hurricane season and later as a consequence of supply disruptions.

As processors secured material in excess of requirements due to concerns over downed plants and logistics issues on the US Gulf coast, demand gradually dropped together with prices. From December 2005 through April 2006, prices fell by 5 cents/lb per month, for a total decrease of 20 cents/lb as participants steadily de-stocked.

Several price hike initiatives in the second quarter of 2006 failed to garner market support, due to soft demand in the US and offshore.

After the 20 cents/lb drop, prices remained steady for around four months, but fell by another 9 cents/lb in October, by 5 cents/lb in November, and by 3 cents/lb in December on weak domestic demand through year-end. Fears of a repeat of the 2005 hurricanes drove additional production and a gradual build-up in stocks by both producers and buyers.

The end of the 2006 hurricane season stimulated another round of de-stocking and price decreases, in addition to the focus on exports. Furthermore, market sources indicated the industry operated at 80% of capacity during October/November to compensate for the supply build-up.

Major US PE producers include Equistar, ExxonMobil, Dow Chemical, Chevron Phillips, Formosa Plastics.

Polystyrene

The polystyrene (PS) market was steadier in early 2007 than a year ago, market participants said.

Although current off-take was considered to be soft, lean inventories should drive demand up by the first quarter of 2007, according to most industry sources. PS producers said the industry de-stocked in September/October and minimised purchases in November and December on expectations of lower prices.

The notion that both suppliers and buyers made improvements in inventory management also contributed to market sentiment. Participants said that 2006 did not see the volatility of previous years. Barring an un-predictable market-altering event, the sources expected the trend would continue into 2007.

The reduction in North American capacity during 2006 will lend support to the supply/demand balance in 2007. Dow Chemical closed its two PS trains in Sarnia, Canada, the first on 1 November and the second on 14 December.

Participants also said that Nova’s restructuring of its styrenics business would have a positive effect on the industry.

PS prices have steadily risen since May through October by 16 cents/lb. However, prices were down by 3 cents/lb in November, cancelling a 3 cents/lb October gain. PS lost another 2 cents/lb in December.

Current prices for general purpose PS were 82-86 cents/lb in bulk, according to ICIS pricing.

PS producers nominated a 3 cents/lb price increase for 1 January and an additional 4 cents/lb hike for 15 January on rising feedstock benzene prices. It was not known if the 1 January nomination was successfully implemented.

On the downside to predictions of stability, producers indicated that some factors could dampen the improved 2007 outlook.

Relatively high PS prices could reduce demand, due to potential substitution by competitive products. Some processors said they have successfully replaced PS with polyethylene (PE) or polypropylene (PP) in certain finished goods.

Resulting properties were adequate and sometimes better than those of the comparable PS product. Cheaper PE and PP alternatives became even more attractive as their prices dropped from October to December.

Legislation promoting the replacement of PS disposables with bio-degradable options such as paper and starch-based products is placing further constraints on demand.

Also, the PS market is generally considered mature, with no significant new applications in sight. Additionally, US processors noted the ongoing threat of Asian imports of finished goods.

Major US PS producers include Chevron Phillips, NOVA, Dow Chemical and Total.

By: Ron Coifman
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