P.1 

OAR Box 1872 

Prepped by Keeia Richards 

Document Number: 

26) 11-1-75 

Docket Number: 

A-90-19 

Printed 11/26/2008 8:51:50 AM Sheet 26 of 204 
A-90-19 

i 

Ready for the 

rebound 

|«v>Vull-l-75 

I

t seems the commodity plastic 

industry can never get its capacil 

balancing act quite right. Follov 

ing two of its best-ever years in 1967 an 

iffaa.'a rush of wm mu.i.:iiy Luupic 

with insufficient demand have push'e 

the_sector_back into a gown cycle, an 

m Rav

e tumbled back" lo 1984 

lev 

ajgins n 

vels~ ' 

So ho w bad has it really become? Tl 

dramatic period of stock liquidation \ 

convertors in early 1989, which temp« 

rarily stifled demand and put prio 

into a tailspin, is now over. Produce 

have tuned operating rates to better su 

demand, and a new balance point h; 

been reached. Yes, the situation is ba 

but it is not expected to get much worse 

The industry can now settle down 

four or so years of relative stabilil 

during which poor margins will lin 

investment in new capacity. But pol 

mers demand continues to grow, ai 

eventually the market will tighten, 

shortage of material will drive \ 

prices—and, hence, profitability—ai 

history will repeat itself once again. 

One common explanation for tl 

cause of this latest downturn is tl 

sudden withdrawal of China from t] 

market toward the end of 1988. cv 

a collapse in export prices that back< 

up through the system. But although t 

China move was undoubtedly a txiggthe slide was still an inevitable outcoi of overbuilding. 

"Polyolefin demand in 1987 and 19 

was very strong—orwasit?"asksRob« 

Bauman, consultant at Chem Systei 

(Tarrytown, NY). "In retrospect, t 

statement should be, polyolefin set 

were very strong." He contends that 11 

concept is crucial in understand! 

consumption trends and their effect 

future profitability for the plastics 

dustry. As th

e market nears a balance 1 

tween effective capacity and demai 

as it did in 1988, customers can 

longer get immediate delivery of w 

they order, and prices start to ri 

Consumers start buying more than tl 

need in anticipation of higher prices 

next month, and inventory builds 

along the end-use chain. 

Sometimes, fabricators will order 

more material and then sell it at a hig 

price; the problem for producers 

distinguish which sales constitute "n 

demand. With the myriad end uses 

plastic materials, true demand is a m 

riously difficult number to obtain, 

sales figures are often the best hard 1 

available. 

"During this period a window of 

portunity opens. Faced with strong, r. 
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SPECIAL REPORT 

-"ty plastics 

^et its capacity 

e right. Follow: 

'ears in 1987 ana* 

apacity covipleVj 

ind have pushed 

down cycle, and 

d back to 193$ 

dly become? The 

:k liquidation by 

9, which tempoand put prices 

over. Producers 

ates to better suit 

alance point has 

situation is bad; 

get much worse. 

)w settle down to 

elative stability. 

argins will limit 

pacity. But polyles to grow, and 

t will tighten. A 

will drive up 

•rofitability—and 

elf once again. J 

tlanation for the 

downturn is the 

f China from the 

i of 1988, causing 

•rices that backed 

.But although the 

Dubtedly a trigger. 

levitable outcome 

din 1987and1988 

as it?" asks Robert 

at Chem Systems 

n retrospect, the 

. polyolefin sola 

contends that this 

n understanding 

md their effect on 

•iT the plastics in-

•Jt v. • 

ars a balance becity and demand, 

rustomers can no 

delivery of what 

ces start to rise-; 

ng more than they 

f higher prices the. 

•entory builds «P 

ain. # 9 

itors will order ye* 

msellitatahigher 

or producers * £ 

es constitute "real f 

vriad end uses V* 

>demandisanoto--

;ber to obtain. J»». 

•the best hard da» 

)d a window ofop;. 

•dwimstiong,pl0\ 

liable cash flow, many companies 

Uiickly plan and approve new capacity 

^aSs d on projections of sales and not 

ictual demand," says Bauman. Thus, a 

large amount of new capacity is announced, with start-up dates usually 

iritiiin two years of each other, and 

overcapacity is projected. 

But once there is a trigger to push the 

jnarket off its peak and into a decline, 

converters begin to liquidate their intentories, this time in anticipation of 

jowt?r prices. As sales fall off dramaticall\, producers' inventory begins to 

build, forcing a cutback in operating 

•ates, and a general sense of disarray 

prevails in the market as it did this year. 

With a decline in profitability, the 

pumper of new plant announcemelils 

hasjallen from a flood to a trickle. Almost 

all announced additions are expected to 

come on stream, but producers may try 

to deal with oversupply problems by 

delaying facilities, or replacing older, 

'Plasties can 

help solve the 

dilemma of solid 

waste disposal' 

less profitable units as new ones start 

up. 

"The result of new capacity is that we 

will undoubtedly see some closures," 

wys William Kuhlke, vice president at 

consultants De Witt & Co. (Houston). 

"Pre ~:ts will be lean generally but could 

be nonexistent for some higher-cost 

units, and it will prompt producers to 

make capacity cuts when they see the 

red ink." 

Overcapacity remains the biggest 

Problem the industry will have to deal 

*ith during the next few years. Though 

fais will keep profitability at a low ebb 

^ojjgh~tKe" early i-jijus^ underlying 

demand lor plastics is strong^dJld siilrPo^-ng, arid there is no sign of an~y 

•t?Veisai uTthat trend, fleS'pTfe'environfreHaTpTgSiJsll'a agaiiu.1 plasties use" 

BuTin thy L'a5<! Uf the current down 

tycle, economic indicators remain good; 

^ least, there is no sign of a recession 

J^t Even if plastics " demand" based on 

'scent sales figures looks pretty poor, 

^d-use demand is still holding up well, 

*Bd that, combined with completion of 

^e i: ventory correction, should see the 

market stabilize 

in 1990. 

With the inventory correction now over, 

producers and 

convenors have 

brought stock 

levels back to 

acceptable conditions, and plastics 

demand has recovered to normality since October. Despite the 

usual year-end For plastics producer., 

slowdown in sales, fabricators expect to 

be ordering normal quantities during 

the first-quarter of next year. 

In fact, many observers see 1990 as 

being an especially strong year for plastics demand. Substitution for wood, glass 

and other materials, which tends 10 Stop 

wtT en prices are moving up, will irTcrease in the current sorter market. Keal 

demand for the coming year is projected 

by many observers to exceed that of 

banner years 1987 and 1988. 

But with the return to a buyers' market, sellers will have to change marketing emphasis. Whereas last year commodity resins were fully sold, current 

oversupply is prompting more competition among producers. "They must 

switch back to the traditional situation, 

where quality and customer relationships are critically important," Bauman 

observes. 

The lower profitability of commodity polymers is expected to prompt plastics producers to seek technology improvements and to increase research 

and development. Innovations in process technology will be sought to ensure lowest possible production costs, 

as will the development of specialty 

resin grades aimed at higher-value 

niche markets. 

In addition to replacement of traditional materials, many of the specialty grades can replace engineering 

polymers, particularly where applications have been overspecified. One 

example would be new ultra-high 

impact PS grades, which are replacing acrylonitrile butadiene styrene 

and polycarbonate in appliance and 

automotive applications. 

Meanwhile, the commodity polymers also continue to be substituted 

for each other, mainly on price 

grounds. High-density PE and injection-grade PP tend to replace each 

other in many basic consumer goods 

applications, depending on which is 

cheaper, while there is increasing 

the outlook is Improved. 

substitution by either product for costlier PS in the packaging area. 

In addition, work is moving forward 

on technology development. Novel engineering polymers and elastomers 

formed from the copolymerization 

commodity comonomers should find 

some entirely new markets. Leading in 

this field are Himont [Wilmington, DE), 

with its Catalloy technology, and 

Exxon's (Darien, CT) Exxpol catalyst 

system. 

Although commodity resin prices are 

not prSfgiJUjd tu move up this year 

margins should begin to improve, especially for noninfegrated producers. 

While plastics tabs are starting to bottom out, monomer prices are still falling 

steeply, and observers feel that numbers will continue to be driven down 

during the coming year. 

Benzene and styrene prices have been 

buoyecTby recent supply problems, fiut 

the general trend for monomer labtTi.s 

down. Ethylene and propylene prices 

arestHTtallingand'aTelikelvtotakeafiig 

hit at the end of 1991 and the beginning 

December 20/27. 1989/Chemicalwssk 19 
SPECIAL REPORT 

CHEMIC AL WEEK: BUYERSV 

I'GUIDEtdeliveVsSualified'saies • 

Heads and orders at an incredibly^ 

y nexpensive, s cost** Each •.-.yearfc 

^hundreds of millions of dollars off 

* business are generated through; 

*- Y \ '•^.•.tV*-si*- \,^-^.j. -***-^--*--^ . " <£•&"•' '•••«* 

of 1992 when new monomer capacity 

startscoming on-lirieT 

Polymers have taken the brunt of 

price cuts, and monomer tabs are now 

under pressure. Polymer producers say 

they will have to rein production unless 

monomer prices fall. ty~\ 

In the case of polyethylene (PE), the 

market is currently showing a strong 

short-term recovery due to the recent 

explosion at Phillips 66 (Bartlesville, 

OK) facility at Pasadena, TX. The blast 

took out some 18% of high-density PE 

capacity, and the tightening effect has 

allowed producers to levy a 3 ct-5 ct/lb 

increase this month. 

According to Phillip Townsend, 

president of Phillip Townsend Associ-J 

ates (Houston). PE demand has recovered in earnest. Deliveries gradually*) 

run down. But orders picked up sharply 

in October and are projected to remain 

healthy in the first-quarter 1990 (see 

chart, p. 22). 

Although PE producers say more 

price increases could be in store, tabs 

may well dip again later this year. A 

return to oversupply is in the cards, 1 

with amajor slug of new capacity due on 

stream next year that will more than" 

compensate theToss"bf Phillips's capac-. 

ity (see table, p. 19} and keep prices 

under pressure. 

"In the short run, supply/demand 

balances will dictate prices for polyethylene ," says Greg Bedel, director of marketing for polyolefins at Quantum 

Chemical (New York). "However, there's 

no way that demand will increase suffj 

ciently to offset all the new capacity du 

on stream in the U.S. next year." 

William Joyce, president of Unio 

Carbide's (Danbury, CT) polyolefins d: 

vision, cautions against rushing new ft 

cilities on stream. "It would be helpfi 

to the market if producers think aboi 

timing very carefully when phasing i 

new units. With the prospect of ove 

supply, it would also be wise to coi 

sider closing obsolete capacity." 

C Relatively little polypropylene (Pl 

capacity is due on stream in the IL' 

during 1990. although De Witt's Kuhll 

points out that a total of 26 new F 

facilities are due on elsewhere in tl 

world. That will cause a major redu 

tion in U.S. export opportunities for P 

^ in earnest. Deliveries graduallyw the most export-oriented polymer in tl 

declined during 1989, relative to one ' lU.S. with up to 20% of output plact 

year ago, while consumer stocks were overseas. 

Short-term, PP export markets a 

showing" some recovery. ~

J

 Ihe inve 

tory situation has been corrected, a 

PP export prices have come up," not 

Tom Longmire. vice president a 

general manager of the polymers « 

partment at Amoco (Chicago). "We 1 

lieve there was real growth in the i 

mestic market this year, and we thin 

will be stronger in 1990." 

Ken Dowd, director of marketing 

Himont USA (Wilmington. DE). sha 

that bullish outlook. "Demand is strc 

and we have already seen price increi 

in export markets," he says. "Prod 

tion rates are high. and one could sp. 

late that as \ye go into 1990 the situa' 

should enable some increases on 

20 Chemicalweek/December 20/27.1989