Pricing power unlikely to return to resin producers until 2013

Massive amounts of new capacity hitting the market at a time when demand for basic plastics and chemicals actually contracted on a year-over-year basis likely mean that pricing power will not return to resin producers until 2013, as per Gary Adams, CMAI, in his keynote address to the SPE 2010 International Polyolefins Conference as reported in plasticstoday. While the economy and plastics demand, began to recover last summer, the market has yet to return to its most recent high point reached in Q3-2008. The current cycle is not symmetrical, with the bottom expected to last longer than the top resulting in a slow, steady recovery, unlike before. Tim Taylor, Chevron Phillips Chemical, acknowledged in a presentation that in the short term, the industry indeed faces a tough environment. Since 2000, Taylor said his company's polyolefin inventories have been reduced by 32%, while its hopper car fleet has been cut 18%. Producers and converters of polyethylene and polypropylene have been forced to deal with massive investments in new plants for both materials coming in the Middle East and China. Although there have been some delays, with many relating to logistical issues versus the broader economy, those investments mostly continue apace. Over the next 18-24 months, Adams says he and CMAI see a "significant surplus in the market" fed by that new production capacity, with 25 million excess tons hitting the market. "[The surplus material] is going somewhere," Adams said. "It's going to Europe; it's going to China; some may come here." Rather than pellets, however, Adams said the surplus plastic is likely to hit America's shores in the form of finished and semifinished goods. Stateside, Adams said the increasing availability in the U.S. of natural gas from oil shale deposits has partially insulated the domestic market from some of the offshore pressure. "Shale gas could not have come at a better time for the North American petrochemical industry," Adams said, noting that while crude will hover around US$70/bbl in North America before an uptick likely to start in 2011, natural gas is staying around US$4-5/mln Btus. North American production that is at a 35 year high has helped push prices down from the most recent peak that came amidst the twin hurricanes of Rita and Katrina, when natural gas topped US$14/mln Btu. In Europe and Asia, ethylene production, and subsequently polyethylene production, utilizes crude-oil-derived naphtha versus the ethane applied in the U.S. Shannon Schneider, Nexant, told the conference, her company is forecasting 5% demand growth for polypropylene globally from 2010-2020, with 3% demand growth in low-density polyethylene over that same time frame. High-density polyethylene is forecast to see 5.3% average annual growth over the next decade, driven in part by some substitution of PP by HDPE for injection molded applications. Linear low-density PE, which grew by 6% on average from 2000-2009, is expected to expand as well, with South American supply of the material forecast to increase by 12.5% by 2020, opening a new front in the coming polyolefin export wars. "Latin America is well positioned to sell into North America," Schneider said.