Some fear exodus from polypropylene, as price rises 17 cents per pound

By Frank Esposito | PLASTICS NEWS STAFF

Posted January 20, 2011

AKRON, OHIO (Jan. 20, 3:55 p.m. ET) — The 17-cent-per-pound price increase set for Jan. 1 has taken hold in the North American polypropylene market.

Regional PP makers have cited tightness in supplies of propylene monomer feedstock as a reason for the massive increase. PP prices in the region now are up an average of 23 cents per pound since June 1 — including a 2-cent price dip recorded in late 2010 — according to the Plastics News resin pricing chart.

As expected, the extreme price environment isn’t sitting well with players throughout the market, including PP maker Pinnacle Polymers LLC. The Ridgefield, Conn.-based firm is a net buyer of propylene monomer used at its 1 billion pound-per-year capacity PP plant in Garyville, La.

“We are at risk of destroying American manufacturing demand for polypropylene in a permanent fashion,” Pinnacle officials said in a Jan. 13 news release.

Pinnacle CEO Jerry Theys expanded his firm’s position in a Jan. 20 phone interview, saying that current PP demand “is dead” and that his firm “hasn’t seen a decent order in the last four weeks.”

Theys added that non-integrated PP makers such as Pinnacle have no choice but to pass on increases in the price of propylene.

“When supply and demand changes and there’s an adjustment in pricing, that’s a free market,” he said. “But when there are only a handful of buyers, it’s not an open market, because there aren’t enough people involved. As a result, [propylene] feedstocks are priced crazily.”

The January hike is the third double-digit price increase to hit the North American PP field in less than three years. These frantic moves have made an impact on PP buyers throughout the region.

“If you’re a big box retailer, why would you stock a [PP] product you’re not making any margin on?” Theys asked. “And if you’re a smaller converter, how do you eat that price?”

His comments were echoed by a PP buyer in the U.S. Midwest, who said that “the whole [PP] industry needs to be concerned” about the 17-cent increase.

Big price hikes “aren’t driven by the resin makers — it’s the upstream olefins guys who want to profit as much as they can,” he said. “But they’ve got money in the ground in the form of their polypropylene plants, and now they’ve got a lot of customers at the edge of going back to paper or PET or polyethylene — anything that’s less volatile than polypropylene.”

And even though the prior two double-digit PP price hikes were followed by double-digit drops in the next month or two, the Midwestern buyer said that someone in his position can’t gamble on that happening again, and must try to pass the increases on to his customers.

“You can’t wait and see, because that 17 is going to hit you on all your purchases,” he said. “And no one has that kind of inventory to stop buying [PP] and wait it out.”

At Pinnacle, Theys said he has not seen any major customer switch out of PP yet, but he knows that a number are considering such a move. Other market sources said that some makers of ice cream containers already have switched back to waxboard and some fast food chains have switched back to paper cups for large beverages.

“Year over year, you’re going to have reduced demand,” Theys said. “You’re going to have [processors] going out of business or buying less polypropylene.”

Officials with PP makers LyondellBasell Industries AF SCA and Dow Chemical Co. declined to comment on the January increase. At consulting firm Chemical Market Associates Inc. in Houston, PP market analyst Esteban Sagel said the situation currently facing the North American PP market “could happen again in the next 10-12 months.”

“It’s a short-term issue, but it’s probably going to happen many more times as long as we’re short on propylene in North America,” he said. “We’re slowly eroding demand for polypropylene in a way that may become more permanent.”

The main culprits for the January move, according to Sagel, were unplanned outages that affected almost 20 percent of regional propylene supplies. This provided leverage for the increase, even though about 70 percent of North American PP makers are integrated with their own propylene.

But longer-term, continued use of natural gas-based ethane as a petrochemical feedstock will play a major role in continued propylene tightness. Ethane produces less propylene per unit than crude oil-based naphtha does, but suppliers won’t switch back to higher-priced crude just to aid the propylene market. Continued discoveries and drilling for North America’s natural gas resources are another vote in favor of ethane – and against propylene and PP.

Sagel agreed that price increases could be making PP less competitive vs. other plastics. PP now has the second-highest cost per cubic inch among major plastics, trailing only ABS, he said. For much of its history, PP had the lowest cost in that area, allowing it to replace other materials.

North American PP demand grew almost 10 percent in the first 11 months of 2010, according to the American Chemistry Council in Washington. Even so, a drop of almost 45 percent in export sales reduced total market growth to 2 percent. Growth in the domestic PP market was led by sales into sheet (up almost 18 percent) and injection molded caps and closures (up almost 19 percent).

SOURCE: PLASTIC NEWS

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