The Energy Outlook

Busard started by reviewing energy costs, which are a major factor in resin prices. Prices are likely to remain stable for the foreseeable future, he said, unless there is political upheaval that will cause crude oil prices to rise.

Busard noted that as the ratio of crude oil prices to natural gas prices rises above seven to eight times, North American-based petrochemicals and derivatives become favored over those from Asia, Europe and South America. A ratio or more than 15 is extremely favorable, he said.

This is a major shift, and its hard to believe that North America is the cheapest place to make items from polyethylene today, Busard commented. No one expected that five years ago.

He noted that several companies built a lot of plants in Asia and Saudi Arabia because they expected they would need polymers in those regions. Now, they have excess capacity and not enough customers.

This situation is likely to remain the case for a long time, Busard said, unless there is a major disruption in shale gas production. He added that North Americas natural gas supply has increased dramatically since 2007 as a result of shale gas drilling. Most of these shale reserves are wet, containing high volumes of liquids (ethane, propane, butane) that are valued at a premium for their heating value and used for petrochemical production.

The Resin Challenge

Busard outlined resin pricing and supply trends for the next 18 months, focusing on two materials typically used in containers: high density polyethylene (HDPE) and polyethylene terephthalate (PET). Both HDPE and PET are extremely versatile bottle manufacturing materials that have high recyclability potential, Busard said. And they can be used in multiple production platforms. The choice of material depends on the application, taking into account physical property requirements and customer look and feel requirements.

Published indexes for HDPE show that from July 2012 to July 2013, prices went up by U.S. $0.14 per pound, Busard reported. And it increased a further U.S. $0.09 per pound by July 2014. This amounts to a 37 percent increase in 24 months. He forecast further price increases through 2015 with no relief until new HDPE capacity comes on line in late 2016.

Busard cited several factors for the rising prices. First, there is a shortage of resin in the market. Chevron, a major supplier of polyethylene, is on force majeure, he said, and other suppliers are allocating shipments or are simply short of inventory. In addition, Exxon has had major problems producing ethylene recently. As a result, over the past 24 months, the HDPE market has been forced to work through multiple ethylene and polyethylene supply disruptions.

At the time of his presentation, Busard indicated that Dows supply problems were clearing up and that Chevron expected to be operating at full capacity sometime in the fourth quarter. So we are looking at another several months of less than full supply.

Busard noted three other factors responsible for continuing high prices. First, producers are operating at high utilization rates. In North America, operating rates are between 90 and 95 percent, he said. Operating rates are about 80 percent in Europe and between 85 and 90 percent in the Middle East. So any little disruption can play havoc in the industry.

Second, suppliers are maintaining tight control on inventories, and there is little or no surplus in the supply chain. Finally, the cost of HDPE is high in all regions except North America, so importing material provides no price relief.

PET has shown much more volatility in the past 24 months, said Busard. July 2012 to July 2013 saw a U.S. $0.13 per pound or 16 percent increase. Then, prices fell so that by July 2014, prices were up by U.S. $0.087 per pound. He forecast that by the end of 2015, PET prices would be U.S. $0.03 per pound lower than in July 2014.

Reviewing global PET capacity vs. demand, Busard said, Global PET operating capacity is anemic and is likely to stay at about 60 to 65 percent through 2018. This means all producers will be looking to export PET out of their regions to avoid plant utilizations in the 40 percent range.

The vast majority of the worlds excess PET capacity is in Asia, where current capacity is roughly 9.5 million metric tons per year vs. domestic demand of 4.7 million metric tons. Most of this excess capacity is slated for export to the West. However, Busard commented, Improved economics, increasing capacity and aggressive antidumping actions in some of the target markets saw Asias net exports decline from over 2.2 million metric tons in 2009 to less than 2.1 million metric tons in 2010.

Asias cost structure was also a contributing factor. Increased prices for terephthalic acid (PTA) – a polyethylene building block – relative to other regions and rapidly escalating ocean freight costs contributed to a weakening export position.

Further aggravating the situation, in August, BP, a major North American PTA supplier declared force majeure on supply due to a fire in one of its plants. Customers are on 40 percent allocation, Busard said, and neither the duration of force majeure nor the full effects on PET supply from major producers are fully known at this time.

For the sake of completeness, Busard added a brief review of polypropylene prices, which have also been extremely volatile. Between July 2012 and July 2013, prices rose by as much as U.S. $0.29 per pound (a 40 percent swing). In July 2014, prices were U.S. $0.065 per pound higher than in July 2012. He forecast that polypropylene prices would be about U.S. $0.11 per pound higher than today by the end of 2015.

Innovate or Die

Busard commented that to stay relevant, plastic materials need to improve continuously to ensure their users stay competitive and have an advantage over other packaging material options. The industry needs more innovation because it seems resin innovations have been slower developing than most would like, he said.

Giving a converters perspective on the innovations with these two materials, he noted that PET has seen innovations in catalysts, fast reheat cycles, water grade resins and heat set resins.

He said that innovations with HDPE have been less impressive and include some specification tweaks, some processing improvements, bimodal materials for some applications and better logistics. However, some HDPE resins available today are essentially the same as 30 years ago.

Busard said, We need more, such as lighter weight materials, faster cycle times, barriers and lower cost to compete with other materials.

The Recycling Challenge

Busard noted that the use of HDPE in bottles has shrunk significantly since 2007. This is mainly due to whats known as compaction in detergents, where suppliers have dramatically reduced the amount of water in their formulations, allowing them to use smaller containers. He then reviewed global recycling rates for HDPE and PET.

Rates for HDPE have grown, and rates for PET are about the same as for HDPE. Also, despite increased recycling by consumers, less usable material is being yielded because more brands include contaminants that do not separate easily from PET, including barriers, label substrates and colorants. This makes recovery of clean, recyclable material very difficult.

A new entrant in the resins industry is polyethylene furanoate (PEF), a 100 percent biobased PET that is meant to compete with regular PET. One of its stated advantages is that its feedstock does not deplete material such as corn from the food chain. The biggest question is: Can it be recycled with PET, or will it require a separate collection stream? Busard said. We havent seen enough of it to know.

Another new entry is certified renewable polyolefin that is intended to compete with HDPE. I havent seen the economics on this material yet, said Busard, but I understand it will be significantly more expensive than HDPE.

Container contamination is another challenge for recycling. A few causes of contamination include sleeve labels that prevent sorting by near infrared scanners, bleeding ink on labels, degradability additives and sinking labels. Sinking labels are full-wrap labels that separate from the container pieces during a hot caustic water wash, and then sink to the bottom along with the PET pieces, making them difficult to separate. Floating labels, in contrast, float to the top of the tank.

Busard concluded, A lot of good work is being done to accent plastics excellent properties and their recyclability. In particular, he highlighted an initiative of the National Association for PET Container Resources (Napcor) that has the objective to increase recycling and develop additional sustainable markets for non-clear PET containers.

This project is important to the packaging industry because PET is one of the most preferred materials for packaging, he said, and non-clear PET containers are recyclable.

Joe Beeton contributed to this article.