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back to index backAMERItalk April,  2005

US plastic resins: Another huge headache for material buyers

In the face of skyrocketing feedstock and energy costs, US plastic resins producers increased prices 25% on average during the course of last year, with the prices of big-volume resins (polyethylene, polypropylene, polystyrene, and PVC) surging close to 50%. Robust domestic demand, combined with booming exports and tight resins supply, gave producers the leverage to sustain the hikes. Still, we believe plastic resins prices are headed for more increases this year.

Let's examine demand first. Following almost three years of poor performance, demand for US plastic resins rebounded at a robust 7% clip in 2004 in response to the strong turnaround in domestic manufacturing activity and soaring exports to Asia, particularly to China. The continued devaluation of the dollar also made US plastic resins prices more competitive overseas. Exports of polyethylene (PE)—the biggest plastic resin in terms of volume, did particularly well as US producers regained an ethylene cost advantage over their West European and Asian counterparts. Ethylene, PE's precursor material, is derived mostly from liquid natural gas in the United States. In contrast, in Europe and Asia, ethylene is made primarily from naphtha, an oil-based product. The United States had lost its competitive edge in 2001–03 when natural gas prices surged disproportionately to oil prices. In the past year, the oil/gas price ratio moved the other way.

We see plastic resins demand moderating this year, as the global economy shifts from recovery to expansion and China continues its effort to cool off its economy. Nevertheless, we still expect demand to post a respectable 3-5% growth. The implication for the plastic resins market is that the modest increase in supply that the industry is planning for 2005 will be quickly absorbed.

On the supply side, faced with overcapacity and rising raw material costs during 2000–03, US plastic resins producers shut down several plants. Currently, those producers have no plans to build new plants in the next couple of years. They intend to meet future growth in demand with modest expansions of existing facilities and the restarting of idled ones. Resins operating rates have been on the rise, reaching the low 90s in 2004, and supply is tight. As demand continues to expand this year, we expect supply to tighten further and utilization rates to approach 95%+—a critical range where production disruptions can cause supply shortages and price spikes beyond our forecast. Having said this, the Middle East and Asia are feverishly working toward expanding their resins capacity. But the bulk of the projects will not hit market before another two to three years due to political uncertainty and infrastructure problems.

Now, on to energy and feedstock costs! The prices of natural gas and crude oil have fluctuated wildly in the last three years, but on average have risen considerably. West Texas Intermediate (WTI) set a record last year at $53/barrel in October. It dropped to the $40/barrel range subsequently but posted a new record earlier this month when it jumped close to $57/barrel. Strong global demand—driven by North America and China—and limited spare capacity by both OPEC and non-OPEC producers have caused oil prices to shoot up. Worries about stability in the Middle East and production disruptions around the world have made the oil market more nervous still, adding to the pressure on prices. Our forecast assumes that oil prices will remain in the $50/barrel range this year. This scenario is not without major risks, however, and prices could move much higher, spurred by further political tensions in the Middle East, increased terrorist activity, and production disruptions.

US natural gas prices, which surged from a historical average of $2.0–3.0/mmBtu to more than $8.0/mmBtu in the spring of 2003, have moved up to $7/mmBtu in recent weeks after starting 2005 at about $6/mmBtu. With limited prospects for additional US supply, and additional domestic LNG terminals several years away, we expect US natural gas prices will hover in the $5-7 vicinity this year, with spikes likely during peak demand months. Those higher energy prices have driven feedstock costs through the roof. For example, the price of benzene, polystyrene's primary feedstock, doubled during the January–September 2004 period, topping out at an unprecedented level of $4.25/gal. It slowly retreated through January of this year, but has zoomed off to near $4/gal again. This is in stark contrast to just over two years ago when benzene cost a mere 71 cents/gal. Likewise, in the past year, ethylene prices have increased from 27.8 cents/lb to 41.5 cents/lb and propylene prices from 17 cents/lb to 44.5 cents/lb. Ethylene and propylene had bottomed out in 2001 at 21 cents/lb and 13 cents/lb, respectively. In similar fashion to plastic resins, the US demand/supply balance for feedstocks is very tight, with downstream demand strong and virtually no additional capacity on the horizon—a perfect recipe for a continued seller's market and higher prices.

In conclusion, with domestic operating rates, demand and input costs for both resins and feedstocks all expected to remain on the rise this year, we see US plastic resins prices gaining additional ground. Conceivably, energy prices could ease and drag feedstock costs down. Should this happen, however, we believe resins producers would fight tooth and nail to protect their pricing leverage.

Source: Global Insight - GAI

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