C&EN: COVER STORY - POLYETHYLENE HITS BOTTOM OF CYCLE

ALEXANDER H. TULLO, C&EN NORTHEAST NEWS BUREAU

Though nearly all indicators say the U.S. economy is only in a slowdown, 2001 will likely be known as a recession year in the polyethylene industry. And it isn't just poor demand that's hitting the industry; polyethylene has also been plagued by high raw material costs and the bottom of its own business cycle.


	GOING UP Formosa Plastics is starting a 550 million-lb polyethylene unit in Point Comfort, Texas. FORMOSA PLASTICS PHOTO


	"The problem was that the sudden downturn in demand wasn't very well forecast by anybody in the second half of 2000; neither was the escalation of natural gas prices over the winter."

Intuition might dictate that polyethylene--used in products like milk jugs, shopping bags, and trash-can liners--wouldn't be sensitive to economic changes. "Everybody thought polyethylene was recession-proof because it is in applications people use all the time," says Pat Duke, a consultant with DeWitt & Co.

But the data say otherwise. According to the American Plastics Council, sales and captive use of polyethylene in the U.S. declined by 8.3% year-to-date through June from the same period a year ago. The high-density polyethylene (HDPE) segment fell the fastest, dropping 8.8% over the period. Linear low-density polyethylene (LLDPE) declined only 5.8%, and low-density polyethylene (LDPE) decreased 10.4%.

Some subsegments fared a lot worse. For example, demand for polyethylene pipe used as a conduit for telecommunications lines and in other applications plummeted 22% through June. "Everybody was in a race to install as much pipeline capacity to put as many wires through as possible, trying to connect every house in the country," says Jeff Taylor, vice president of polyethylene for the Americas for Chevron Phillips Chemical. "That came to a grinding halt suddenly; the bubble burst as the economy started slowing down."

In addition, polyethylene had to weather one of the worst-ever spikes in feedstock pricing. During 2000, the price of natural gas--on which ethane feedstock costs are based--quadrupled from usual levels. This put the squeeze on ethylene and polyethylene makers, whose price increase announcements lagged woefully behind.

Taylor says the decline in demand and raw material problems blindsided the polyethylene industry. "The problem was that the sudden downturn in demand wasn't very well forecast by anybody in the second half of 2000; neither was the escalation of natural gas prices over the winter," he says.

The sudden weakness shows up in the earnings for two companies particularly sensitive to the polyethylene market: Nova Chemicals and Equistar Chemical. Net income from Nova's olefins unit declined from $147 million in the first half of 2000 to $39 million this year. Equistar's polymers segment posted a loss before taxes of $84 million in the first half of 2001, compared with a loss of $29 million a year ago.

NATURAL GAS PRICES returned to normal in the first and second quarters, despite fears that they would be chronically higher than normal in 2001 and 2002, but uncertainty still prevails. "You have to assume that there's at least the potential for feedstocks to swing a little bit more dramatically than they have in the past because of the situation that presented itself through the first quarter," says Bob Beil, Dow Chemical's commercial vice president for North America.

The polyethylene industry isn't out of the woods yet for other reasons as well. It still has to work through major polyethylene projects coming onstream in North America from Dow, Nova, and Formosa Plastics. Plant operating rates in the polyethylene industry, according to most experts, are already down to the low 80% range. "The balance of 2001 and 2002 is not a pretty picture from an operating rate standpoint," Duke says.

Moreover, Nova, Formosa, and the BASF-Atofina joint venture have also completed new ethylene crackers. Last fall, Nova and Union Carbide--now Dow--started up the largest ethane-based ethylene cracker in the world, a 2.8 billion-lb-per-year unit in Joffre, Alberta. The partners built two polyethylene plants downstream from the cracker. Carbide came on-line with a 1.4 billion-lb plant in the first quarter of 2001. Nova started up an 850 million-lb unit in April.

Formosa brought a 1.8 billion-lb cracker onstream in Point Comfort, Texas, in July. That unit is to feed two new polyethylene units. One, completed in May, has an annual capacity of 330 million lb of high-molecular-weight HDPE, a product used in trash-can liners and the so-called "tee-shirt" bags--the shopping bags used in grocery stores.

THE OTHER ONE, due to go onstream in the fourth quarter, is a 550 million-lb line based on slurry-loop process HDPE technology licensed from Chevron Phillips. "This new unit will allow us to get into blow molding and pipe, which are new markets for us," says Paul Huang, vice president and general manager of Formosa's polyethylene division.

Companies have also been taking capacity off the market. For example, Equistar shut 400 million lb of capacity in the first quarter at its Port Arthur, Texas, complex, where in 1999 it also shuttered 300 million lb of capacity.

The only major capacity expansion in the offing is a Solvay-Chevron Phillips joint venture: a 700 million-lb HDPE plant slated for the end of 2002 in Baytown, Texas. Engineering work for the unit is already completed, and construction is set to begin soon. The joint venture plans another HDPE venture at a Solvay site in North America some time after. Meanwhile, Solvay will combine its HDPE businesses in North America and Europe into two joint ventures with BP.

Producers say all the capacity will be absorbed, given time. "When you make an investment, you look at it over a long-term basis," Huang says. "Our new plant will be there for the next 20 to 30 years."

Beil agrees. "It's a business that usually grows at about two times GDP off a tremendously large base," he says. "Though it is difficult now, at what many say is the trough of the cycle, in the long term all those plants are needed."

Beil sees other bright spots as well, particularly in the area of single-site and metallocene catalyst-based resins, which, he says, are growing despite the poor market climate. "They are outperforming the market as a whole as they continue to find applications in the food and specialty packaging area," he notes.

Taylor shares similar observations. "Our metallocene business is progressing well," he says. "It is the highest growth part of the market."

Chevron Phillips' metallocene-based resins were originally brought to the market by Phillips in 1998, and Taylor says the Chevron merger has been a windfall for the business. "The Chevron business was stronger on the flexible side with LLDPE and LDPE. It has created opportunities for our metallocenes," he says.

Dow also notes benefits from its Union Carbide merger, albeit in more conventional product lines. Beil says the Carbide polyethylene business makes Dow a major player in HDPE, an area where it lagged previously, and in ethylene vinyl acetate copolymer LDPE, used in the wire and cable market.

PRODUCERS SAY more deals will likely shape the polyethylene industry in the coming years, even though three major deals--Dow-Carbide, Chevron-Phillips, and Exxon-Mobil--have already shrunk six players into three. "I would expect more consolidation to happen in the future," Huang says. "To have more than 10 producers in the market is still too fragile," he adds.

As far as current market conditions go, producers think they will change soon. "Demand for polyethylene will rise through the remainder of 2001 and continue into 2002," says Dale Spiess, Nova's senior vice president of polyethylene sales and marketing. "The rate of increase will depend on the general recovery in consumer and industrial demand for our customers' products."

Beil is even more hopeful, noting that if the situation is worse than normal now, it stands to reason it will get better than normal pretty soon. "This is a cyclical industry, and we're clearly operating in the trough of the business cycle," he says. "Over time, we'll pull out of this thing."