SUBSTRATES REPORT: From Resins to Finished Product - Oil, Gas, Resin, Film

Published: July 01, 2001, By Howard Rappaport, Director of Polyolefins, CMAI

The recent round of price hikes in energy coupled with a weak US economy has many people in the film and packaging industry scratching their heads looking for answers. I'm not going to be able to provide all the answers in this brief article, but I will attempt to give you some perspective on why we find ourselves in this mess, and how it affects the polyethylene and polypropylene resins (polyolefins) used in so many film, coating, and substrate applications (see Chart 1).

The ABCs of the Problem

First we have to go back to the fundamentals of chemical engineering to create a pathway to the answers. Don't worry, this won't hurt a bit!

The chemical building block for PE is a gaseous liquid called ethylene. It is produced in a process where natural gas and crude oil derivatives are superheated or “cracked” to break up the molecules into more usable components for the petrochemical and plastics manufacturing businesses. When you crack ethylene, you also end up with other by-products or co-products of the process. One of those co-products is propylene, which is used to produce PP. Propylene is also produced as a by-product of the oil refining process and can be added to gasoline to enhance the octane rating.

There's all you need to know to get started.

In North America we rely heavily on natural gas as our raw material supply for ethylene production. The rest of the world uses crude oil derivatives. As I'm sure you know, earlier this year we experienced a tremendous increase in the price of natural gas in North America. The reason for that is relatively simple, but you have to go back 10 or 15 years to appreciate it. For quite a while now, natural gas has been a low-cost, clean-burning fuel source here in North America. Over the course of the past decade or so, the use of natural gas has grown steadily. However, since the price of this fuel has stayed low, many companies in the supply end of the business did not re-invest in new capacity. Consequently, we have been running with relatively low supplies and continued high demand for quite some time now.

This situation was virtually invisible to most people, in part because we had four or five years in a row of mild winters. This kept the draw on demand low even though our stock levels were below historical norms. Enter the winter of 2000-2001. With low inventories and cold weather, prices began to skyrocket.

Also keep in mind that almost 90% of all the new electric generating plants being brought on line in North America were natural gas fired. This ties the electricity factor into the mix (sorry California). (See Chart 2.)

The Resin Picture

What does all this mean for PE and PP resin producers, and when will it turn around?

First, resin producers incurred a tremendous cost increase during this time period as the raw materials for producing resin and the energy required to operate a plant went through the roof. Of course, everyone in the manufacturing business had to deal with escalating costs as well. Consequently, efforts were made to significantly increase the prices of these resins and their related end products to recoup the increased costs.

But, and there is a big “but,” the US economy has been sluggish, and there was plenty of resin around in the market due to slack demand. This led to a “squeeze play” on plastics producers who were trying to raise prices. Just try to go into a Wal-Mart buyer with a finished-good price increase during these uncertain economic times; you aren't going to walk out of there with an order.

Couple this with the fact that there are a number of new PE and PP resin plants coming onstream over the next couple of years, and the picture doesn't look all that rosy for producers. What it does mean, however, is that PE and PP resin prices should remain in balance (under downward pressure) over the next few quarters, barring any unusual weather or energy-related events occurring in North America.

Another key issue to watch will be the tremendous buildup of foreign resin production in the Middle East and Asia. This will eventually have an effect on the North American market in the form of imported finished goods.

If our natural gas prices remain high, and the rest of the world is relying on crude oil derivatives for their resin production (or very cheap natural gas in the case of the Middle East), you can bet there will be plenty of film and packaging products available to bring into our domestic market at very competitive prices.