Profits of automotive and beverage industries impacted by surging plastics costs

Raw material prices have seen a dramatic rise in 2004 and stand at highest levels, triggered by escalating oil and feedstock costs. In North America, price of polyethylene surged 57%, polypropylene rose 80%, and polystyrene, surged by 74% this year alone. On one hand, petrochem makers are raising prices, and on the other hand, growing demand exhausts spare production capacity. Demand for plastic resins, a US$51 billion business in the U.S. alone, grew 8.3% in the first 10 months of 2004. To keep up with the growing demand, North America needs to announce and build at least 3 polyethylene plants pa. A growing imbalance between supply and demand has been spurred in part by increased purchases by China. Globally, at least 11 or 12 polyethylene plants pa are required just to keep up with the growth in demand. Past few years saw weak economic growth, leading to with weak polymer demand. Producers shut plants and reduced spending when demand weakened in recent years, causing tight resin supply. The last polyethylene plant was built in the U.S. in Baytown, Texas, in 2002. Nova is planning to help build a polyethylene plant in Mexico by 2010, the only one proposed for North America. Currently U.S. petrochem plants are operating at 89% capacity. Capacity use will climb to 91% this year and 92% in 2006. Supplies are so tight that Nova, Dow and other producers are limiting how much resin customers can buy and will continue to raise plastic prices in 2005. Profit margins at resin makers have yet to peak because costs for gas and oil are 3-4 times more than the late 1980s. Majors in the automotive industry as well as beverage industry are seeing profits eroded by the surging cost of plastics raw material. Plastic parts in new cars has doubled since 1988 and stands at about 280 pounds of plastic. Automakers are expected to expand their use of plastic to at least 325 pounds per vehicle in 10 years, compared with 70 pounds in 1970. Car makers are trimming costs by using more recycled plastics under the hood, behind the instrument panel and inside the wheel wells of full sized trucks. Large soft-drink makers will see an increase of 5% in costs in 2005 because of increased spending on raw materials. The world's biggest maker of clothing hangers saw higher resin costs reduce 2004 profit margins by 1.2% and may cut earnings even more this year. Applied Extrusion Technologies, the largest North American maker of PP films used in snack-food packaging, paid US$60 million more for plastic resins in 2004 than in 2003. The New Castle, Delaware-based company raised prices enough to pass only half the increase to customers such as PepsiCo Inc. and Mars Inc., Crescenzo said. Applied Extrusion filed for bankruptcy protection Dec. 1 and plans to restructure early in 2005. Germany's BASF AG has convinced General Motors to use a one- piece plastic frame for the third-row seat of the GMC Envoy sport utility vehicle, replacing a metal version that had 15 parts, required 10 additional assembly steps and weighed 50% more. BASF expects to increase U.S. sales of plastic car parts as much as 4% annually by reducing carmakers' manufacturing costs and improving vehicle fuel efficiency. Even as sales gain, higher costs have narrowed profit margins