OUTLOOK ’09: N American plastics markets face oversupply

31 December 2008 15:42  [Source: ICIS news]

By David Barry

HOUSTON (ICIS news)--After a bruising fourth quarter of falling prices and demand, North American polyolefins producers will enter 2009 desperately needing to repair margins.

Their success in doing so may depend on how effectively they can rationalise their output to match a weak global economic scenario.

The fourth quarter market moves were unprecedented: Polyethylene (PE) dropped by an average of 48 cents/lb ($1,058/tonne, €751/tonne) to 40-43 cents/lb DEL (delivered) in December, according to global chemical markets intelligence service  ICIS pricing.

 

Domestic polypropylene (PP) prices fell by 66 cents/lb on average with injection-grade homopolymer ending the year at 34-37 cents/lb DEL.

“We will see a decrease in December,” a buyer predicted. “But probably January is the end of that - maybe a flat month, but not a large decrease.”

Producers have issued January price hike nominations of 5-6 cents/lb for PP and 7 cents/lb for PE, but buyers and traders do not expect prices to rush back from the bottom.

“The market is not going to turn on economic demand or feedstock cost push,” a polyolefins broker said, which means that producers must continue pushing down output and maintaining low inventories to get a grip on pricing.

“It will be interesting to see how everyone adjusts their production rate,” a polyolefins producer said. “I think production rates - how to adjust to match demand - will be the main topic for 2009-2010.”

Chemical majors like Dow Chemical and INEOS have already begun addressing the supply/demand issue by announcing plans to close older, less profitable plants.

INEOS said it will close two 30-year-old PP bulk phase units in La Porte, Texas, in early 2009. The two lines have a total capacity of approximately 520m lb/year (236,000 tonnes/year) of homopolymer and random copolymer capacity. Equistar, a subsidiary of LyondellBasell, and Flint Hill Resources have also announced plans to close small PP and PE assets with high cost structures.

Dow has yet to announce any specific North American polyolefins assets targeted for closure.

“It doesn’t matter which plants they shut, it matters that they show to everyone that producers recognise the need to regulate capacity,” a producer said.

PP and PE buyers agreed that the announced plant closures and line shutdowns could help tighten the markets in 2009.

However, the closures may not be enough to balance new capacity coming online in the Middle East and elsewhere.

“The biggest deal for North America is sitting down in Mexico,” a PP buyer said, referring to the 350,000 tonne/year expansion at Indelpro’s Altamira site. “If that comes onto the market at full rates it will make North America more sloppy,” the source added.

North American producers will be further challenged by new Middle East capacity expected online in the second quarter of 2009, sources said.

In the near term, the polyolefins industry has lowered operating rates to the mid- and low-70s in November and December, and that has helped trim excess inventory. Also, customers sense that prices are near the bottom, and that has spurred a rush to snatch up bargains.

“Our business is too good to be true, but will it disappear in January?” a producer remarked in early December.

In January, producers expect converters to resume normal purchasing patterns after destocking during the fourth quarter. This widespread destocking phenomenon caused fourth quarter sales to look worse than the economic fundamentals, but the true effect of the economic slowdown will become apparent in January and February, the producer said.

Resin demand in the durable goods sector, including automotive and appliance makers, is taking the biggest hit in this recession, with demand cutbacks of up to 30-40%.

Consumer goods and food-related plastics will be probably slow down by 10-20% at the most, a producer estimated.

($1 = €0.71)

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By: David Barry
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