The magnitude of resin price increases during these months made it difficult for converters to keep pace. More than one was heard to say: “We must implement price increases to pass along these rising costs and return the business to margins that justify our continuing reinvestment.”

Although natural gas-stream users did not reduce any capacity, users of petrochemical feedstock, such as ethane (used for ethylene production) had to allow for substantial price hikes in what they were buying, and take into consideration the knock-on effect for their customers. LyondellBasell was one PE producer that reduced its output to compensate, while Canadian producer Petromont (a Dow Chemical joint venture) shut its doors completely.

“This was an indication that anyone running heavy feeds would almost certainly have had problems over the summer,” says Mike Burns, global business director/polyethylene for resin consultancy Resin Technology, Inc (RTi).

The plastics industry now seems to be in a stabilisation phase, however, and some price softening is expected from September onwards. Hurricane Gustav also appears to have taken a rather painless passage through North America, sparing energy and chemical production facilities and contributing to the falling price of crude oil.

Although a fall in monomer prices has had a knock-on effect in the polymer business, prices are still having a notable impact on manufacturers.

Looking forward, Ron Coifman, editor at US-based Townsend Polymer Services & Information, urges caution: “The downward trend could be reversed if potential unfavourable weather disrupts production, infrastructure, and/or transportation in the US Gulf Coast during the ongoing hurricane season,” he says. Hurricane Ike, for example, impacted on oil production in the US during September, but should not impact too drastically on the plastics industry, apart from perhaps delaying some continued monomer and polymer price decreases.

Polyethylene

PE prices have surged in the last 18 months as producers have desperately tried to catch up with soaring ethylene and energy costs. Significant and unprecedented increases in oil and naphtha prices have sent shockwaves through the supply chain, resulting in price hikes of an enduring nature and pushing polyolefins well and truly into four-digit price territory.

The one month forward LME price for PE showed consistent growth through June, averaging $1,679/tonne, before surging to more than $1,800/tonne in July, a market-trembling $300/tonne higher than the price during the same month in 2007.

A wide-ranging series of price increases came into effect during June and July as the cost-driven spiral showed no signs of easing. This included a €200/tonne ($282/tonne) increase by SABIC for all of its HDPE, LDPE and LLDPE products, an €80/tonne ($113/tonne) rise by Borealis, and an across-the-board hike of up to 25 per cent by Dow Chemical.

Prices remained high during July before experiencing their first significant drop of the summer during August when PE prices fell to $1,710/tonne.
PE prices should ease by the year-end, however, to reflect the recent drop in energy prices and slower global demand. Economic consultancy Global Insight expects PE prices to fall further in 2009 as projects from the Middle East and Asia begin to come on-line. This new capacity is likely to have a significant knock-on effect in North America.

“At the start of 2007, the export market in the US was strong, helped by a weak dollar and the oil price,” explains Burns of RTi. “As such, US exports are 40 per cent above 2006 levels. This has put US suppliers in a strong price position, but that will change when the Middle East and China capacity comes on-line.”

Most market watchers believe US producers will ration production to prevent inventories from becoming too burdensome.

Overall, the prices of ethylene and PE are expected to peak in the current quarter and move into a fairly prolonged period of cyclical price corrections at the beginning of next year.

Polypropylene

Like PE producers, PP makers have tried frantically to protect their margins in the face of soaring feedstock and energy costs. PP prices sky-rocketed into the mid-$1,800/tonne price bracket during August, almost $600/tonne up on the LME price for the same month in 2007.

The main reason for the surge in PP prices was the feedstock propylene (which has been higher than ethylene this year). However, high energy costs and poor supply due to steam cracker economics also contributed. Producers have subsequently tightened supply of PP to match demand, as any oversupply of polymer would have left them with insufficient pricing power to recoup rising feedstock costs.

Scott Newell, managing partner of RTi, says: “Producers have been very disciplined and successful in recouping feedstock increases while buyers have suffered, especially because the increases were large and speedily implemented. Difficulty in passing costs downstream has led to discussions with customers about the need to move away from old pricing methodologies, as these do not work in today’s volatile environment.”

Some polymer production shut-downs as well as capacity cutbacks have been necessary to help prevent an oversupply situation. LyondellBasell closed two PP plants in Canada during the second quarter as the company executed a plan to consolidate its operations, while it also suffered unplanned outages at plants in Louisiana and Texas. Formosa declared force majeure on PP supplies through July after two unplanned outages at its Point Comfort, Texas plant.

Global Insight expects global PP prices to drop by year-end in line with the precipitous drop in oil prices since July and the slowing global economy. According to the PetroChem Wire, prices for propylene monomer are dropping significantly, with September contracts having settled down $0.20/lb to $0.65/lb, the single largest one-month decline in history. The polymer had already dropped to $1,585/tonne on the LME at the start of September, thanks to better supplies of propylene, lower energy prices and poor demand.

PP prices will remain under pressure for the next couple of years as a slew of projects from the Middle East and Asia come on-line and flood the global market. Meanwhile, PP capacity in North America and Europe remains virtually stagnant.

“It will be interesting to see how producers balance new production to meet badly battered demand, which has been damaged by high resin prices,” says Michael Greenberg, CEO of the Plastics Exchange. “Some capacity has already been mothballed.”

There is not a lot of margin in the PP business, so pricing is more of a function of feedstock cost and oil/energy prices. There could be some more margin squeeze, but it will be limited.

Steven Pacitti
LME Ringsider enewsletter
Autumn 2008