Welcome to another edition of TDL Plastics State of the Market for Late June 2008.
Times are interesting once again. Prices are up, oil has stayed over $130, and natural gas has been in the $12-$13 per pound range for a while, so as you all are well aware, prices are up pretty significantly. We don’t see it going down anytime soon. And now, for the news:
Something interesting we want you to keep in mind about the globalization movement in our business. The mass exodus to the Far East has slowed down from what it was just a few years ago. Part of the reason is 10% inflation and 10% wage increases lead to business costs going up 20% last year in China alone. This is coupled with another important consideration, the cost of transportation. The cost of moving a container from China to inland on the East Coast of the US has gone from $3,000 a few years ago to about $8,000 today. This is a pretty significant jump in price, and is really cutting into profits. Many of our customers have quit looking outward for molding needs, and have shifted their gazes more inward to try to find good molding at a reasonable price here at home. We think that this is going to continue as long as oil stays pegged at these kinds of levels. The only thing that we may see push the price of ocean freight down is the new vessels being built currently that should hit the water late 2009 or early 2010.
Speaking of the price of oil, we are a full month into the 2008 hurricane season. It seems like every time a pump jack in Nigeria goes offline or a higher up in the Saudi Royal family gets a cold, the price of oil jumps. Imagine what would happen if a Katrina or Rita slipped into the northwestern Gulf of Mexico this year, and beat up a few platforms and some refining capacity on land. Last time it happened, there was not a problem with oil supply worldwide, just a refining and distribution problem in the US. We are not sure what the current supply issues would do to the price when coupled with a post-Rita type scenario. Keep your eyes south and your fingers crossed we don’t have to go through that one again.
On the back of last month’s report about keeping an eye on Southeast Asian countries cutting their fuel subsidies to their residents, India announced on June 4th that they were going to increase the domestic price for motor fuels. On June 19th, China announced a price increase on fuel amounting to about $.41 per gallon on gasoline and diesel fuel. This should bring their cost per gallon to consumers up to around $3.42 per gallon, which is still forcing the government to subsidize some of the fuel cost. This along with recent price increases in Malaysia, Indonesia, Taiwan, Sri Lanka and Thailand should lower worldwide demand, and hopefully bring about some lower pricing.
Benzene prices earlier this month were up to $4.31 per gallon, which is up $.39 from the average of $3.92 per pound in May. This is almost 10%. While there has been a bit of a slide in the second half of the month to about $4.05 per gallon, it is still up, and this is going to continue to put upward pressure on the pricing of all styrenics based materials. Subscription service ICISpricing.com is even reporting that benzene may climb as high as $5.00 per gallon in the very near future. While benzene demand is down a bit, this predicted jump over what is a current record high would unleash the Kracken of all price increase letters on styrene based products.
Butadiene is going to be the interesting flavor of the month. This is the impact modifier used in a lot of plastics such as ABS and HIPS. Right now, butadiene is being produced worldwide at levels far below demand, and this is creating some major problems. There are two main factors causing this shortage. First, most of the US producers have been cracking the lightest feedstock, ethane, to produce ethylene, which produces much less butadiene as a byproduct than the heavier feedstocks, such as naphtha or fuel oil, and this is causing a major shortage domestically. Second, the Chinese government has decided that it needs gasoline and diesel more than it needs butadiene right now. Because of this change, it is now up about $300 a metric ton almost overnight. This is in addition to the $340 per metric ton this year, for a total of about $.29 per pound in Asia. It appears that the current contract price for butadiene is around $.85-$.90 per pound, and it looks like about another $.10 per pound increase for July and August. We think this has a real chance at sticking because reports say that there has been some interest in the spot market at prices in the $1.30 per pound range. There is a shortage for butadiene right now, with Asian producers even trying to spot buy materials here in the US, which is drying up the supply here domestically. This trend should continue through most of the summer months.
We talked a bit last month about the devaluation of the US Dollar and how it relates to the cost of oil. A back up to that story is a quote by an ex Federal Reserve economist David King from a recent Wall Street Journal article’ “The collapse of the dollar exchange rate, alone, explains at least half of the increase in the pump price for gas over the past five years.” Of course you could translate this to the price of oil and natural gas, and it would follow up what we have been saying. We should see some easing of prices as the US dollar becomes stronger. When it does, not only will oil prices come down, thus feedstock costs, but the US material will look more expensive for the export community, and more resin will be available for consumers in the US market. This will be a good thing, since we believe that the US market will continue to grow over the next few years as more plastics programs stay here.
Dow came out on June 24th with an across the board increase in its products by as much as 25%. This is above and beyond the 20% that it did on May 28th of this year. What we are seeing is a new way major integrated chemical companies are raising prices. Instead of doing their increases division by division, they are going for it all in one shot. We are thinking is that someone got tired of writing all of those individual letters, and complained to the right person. In addition, Dow is putting in place a surcharge of $300 on all truckloads and $600 on all railcar shipments as of August 1st.
Another huge molder, Progressive Moulded Products Ltd., declared bankruptcy on June 20th. This is going to affect all of its plants, and leave a lot of its suppliers out to dry. While not as large as some of the other automotive molders who have had problems, this is going to be a big blow to the industry. They have 10 plants in Canada and 2 here in the US, and mold mostly for the Big 3 automakers. They were on track to have sales of over half a billion US dollars, but were too much in debt, and the slow down in the US auto market caught up with them. We expect this to send more ripples through an already shaky sector of our industry.
Commodity Materials
LyondellBasell APO is going up a whopping $.10 per pound on many of their olefin grades on July 1st. This includes Adsyl®, Adflex®, Hifax®, Hostacom®, Softell®, Supol®, and certain Pro-Fax® grades.
Dow has a July 1st increase of $.12 per pound on all of its wire and cable grades.
Polyethylene: AT Plastics is up $.08 on all LDPE and EVA grades on July 15th. Most other major producers are going up $.07 July 1st as well. We have seen anywhere between $.04 and $.07 per pound stick for June, and we anticipate it to continue up. PE production rates are running near capacity because of a very, very strong export demand, which is actually larger currently than supply. The spot market has been somewhat devoid of good material offers because the Asians and Europeans are taking almost anything with open arms. We don’t know if the July increases are going to stick based off of the current cost of ethane monomer. There may be a split of the increase between July and August, but only time will tell. The holiday weekend in the beginning of the month will lead to a slow start, and this may help depress prices as producers see their inventory increase, if only just a bit, the first week of the month.
Polypropylene: To lead the charge upward, Formosa Plastics Corporation has announced a Force Majeure on all of its Formolene Polypropylene Products. They are stating that they will only be able to supply 15% of their demand for June and July. This also allows them to get out of their pricing contracts which were locked in at lower prices. Sunoco is going up a whopping $.08 per pound on July 1st on all grades of their PP. We think that this is going to continue industry wide for the short term. We expect pricing for all grades of PP to settle out $.04 to $.06 per pound higher for July.
Polystyrene: INEOS is up $.10 per pound on their ZYLAR® grades on July 1st. Chevron Phillips is up $.06 per pound for K-Resin® for July 1st. American Styrenics revised their 5/22 increase up to $.05 per pound for GPPS and $.06 per pound for HIPS. Butadiene shortages are really hurting the high impact side of things and prices continue to march upward. We have seen an increase of $.16 per pound in our HIPS pricing over the past 45 days. We do think that this pricing is not done heading up for the next month or two, so buy heavy now, we don’t think it is going down anytime soon.
Engineering Resins:
INEOS ABS is up $.16 per pound on all Lustran® ABS and SAN, Centrex® ASA, AES, and ASA/PC, and Triax® ABS/Nylon material as of July 1st.
PolyOne Specialty Engineered Materials is going up $.12 on Syncure®, $.08 on Firecon®, $.16 on Nymax®, $.20 on Bergamid®, $.20 on Edgetek®, $.20 on Stat-Tech®, $.20 on LubriOne®, $.50 on Gravi-Tech® and $.25 on Therma-Tech® on July 1st.
ABS: Along with the domestic price increases that we have seen, the Asian producers have been going up, way up. With benzene and butadiene both up, they are pretty much charging what they want. We have seen the price of imported ABS go up about $.10 to $.15 per pound this past month alone, and we expect this to continue for the next month or two. Buy now, buy heavy, don’t cry when we told you to and you didn’t listen.
Polycarbonate: Like everything else, it is going up. We expect instead of the $.08-$.09 that everyone has announced, we think that it should settle out only $.04 to $.05 per pound. We think that while prices march up, PC is one of the only materials that we think won’t go up like the rest on a percentage basis.
Nylon: DuPont is going up $.20 per pound on July 1st on Zytel®, Minlon®, Elvamide®, Pipelon® and Flexible PA. They also have a $.10 per pound increase on the way for Zytel® HTN grades.
Acetal: DuPont Delrin® is up $.10 per pound on July 1st.
SMMA: INEOS is up $.06 per pound on July 1st on their NAS®.
Polyurethane: Dow has announced a June 15th increase of $.25 per pound increase on its Pellethane® 2103, 2104, 2354, 2355, and 2363 series, and a huge $1.00 per pound increase on Isoplast®. If you are running an Isoplast, and there is any way to run a wide spec product, please let us know. We may be able to save you a ton of money, especially in light of this ridiculous amount of increase. Bayer has backed this up with an $.18 per pound on all Texin® and Desmopan® grades on July 15th. Huntsman is up between $.15 and $.25 per pound on all of their grades of TPU. If you are currently running one of these materials, and need a lower cost alternative, please let us know. We have access to a prime, certified imported ether and ester based TPU at much lower pricing (around $1.00 per pound less) than what is domestically available. Please let us know if you have an interest, and we can get you some pricing for your current needs.
PVC: Georgia Gulf has a June 1st increase of $.05 and a new July 1st $.03 for all grades of flexible PVC due to an escalation in plasticizer pricing. PolyOne Vinyl Group is up $.05 per pound on their Geon Rigid and Flexible PVC materials for July 1st.
Flexible Materials: GLS has come out with a $.10 per pound increase on the Dynaflex® D, Kraton® D and a few grades of Versaflex® for July 1st. Also on this is a $.06 per pound for Kraton® G Polymers and $.20 per pound for Kraton® G Compounds. We think that this, like all the other increases out there, is a sign of what is happening all over the flexible industry, and not limited to GLS. DuPont is up $.10 per pound on Hytrel®on July 1st as well. We expect these prices to stick, and pricing pressures to continue to edge upward for the near term.
PBT: DuPont is up $.10 per pound on July 1st on all grades of Crastin®.
LCP: DuPont is up $.15 per pound on all grades of Zenite® LCP.
PET: DuPont is up $.10 per pound on Thermx® high-performance polyester products. They are not the only ones. Price increases for PET have been $.05 for April, $.04 for May, $.03 for June, and now $.07 to $.09 for July. Not all of these increases have stuck, but we think that in the short term, the increase for July is going to be up quite a bit.
In short, buy now. We think that the prices are going to go up, stay up, and may go up further. We don’t see a slide in material pricing till the dollar strengthens or the global economy slides a bit. These reports have been too long lately because of all of the increases we have had to announce, and we are ready for it to stop as much as you are.
