Commodity thermoplastic margins will continue to suffer through 1994, despite relatively high operating rates and rising demand, says Abdullah S. Nojaidi, president of Sabic Marketing Ltd. Sabic Marketing acts as an international sales and marketing arm for Saudi Basic Industries Corp (Sabic, PO Box 5101, Riyadh 11422, Saudi Arabia). Sabic, a major plastics marketer, produces around 1.9m metric t of PE-HD, PE-LLD, PS, PP. Nojaidi expects plastics demand to rise roughly 1.5 times as fast as the world economy. By 1994, PE-LLD will be growing 10.5% annually, with PP growing at 6% per year. Conventional PE-LD will rise less than 1% annually.

"We may see a replay of the mid 1980's," Nojaidi explains. "The new investment construction cycle has run out of gas. Low margins have caused producers to delay or eliminate plans for new plants. When demand does finally catch up with capacity and prices start to rise, the industry will have few plants on the drawing board. The market appears sure to tighten during the second half of this decade." Today's low thermoplastic prices are deceptive, says Nojaidi. They suggest operating rates have sunk much lower than they really have. Low prices today are due more to excessive overcapacity than to any lack of demand. "If we compare today's margins with those of the 1980's we would expect to see operating rates between 65% and 70%," says Nojaidi. "Yet plastics demand has held up well, with operating rates in the range of 80%. Despite a modest decline in world plastics and chemical sales during 1991, profits at the world's largest petrochemical companies plunged 40% that year.

The present situation contrasts sharply with the late 1980's. At the time, producers worried about keeping the booming Pacific Rim supplied as it became the world's largest plastics importing region. Established producers moved to fill the void. Their exports to Asia kept domestic prices and margins strong and prompted a new wave of expansion. But, at the same time, Pacific Rim producers launched a construction spree to meet regional demand. "Many Western producers underestimated the number of new Pacific Rim plastics plants coming on-stream," says Nojaidi. New capacity, in the developed and Pacific Rim countries began to open in the early 1990's, just as the world economy slowed and fell into recession.

For producers to compete successfully in the hyper-competitive market of the 1990's they need an extra edge. Sabic and many North and South American producers have a paramount advantage, low-cost feedstock. "Producers who use ethane rather than naphtha, start with a $ 160/metric t feedstrock advantage. That gives them a tremendous advantage in the production of polyethylene and PVC," explains Nojaidi. "Companies in developed nations that do not have inexpensive hydrocarbons, traditionally integrated downstream," he continues. "This increases their profit opportunities. But, as the world chemical base continues to grow, it offers less and less protection against global competitors and superior feedstock economies." No wonder, then, that so many producers have begun to look for new technologies that allow them to differentiate their polymers. The more differentiated the product, the less sensitive its price to market fluctuations.

That trend is especially visible in polyethylene, where new technologies show signs of reshaping the business by the end of the decade. Metallocene single-site catalysts promise polyethylene specification strong enough to compete with some engineering plastics at significantly lower cost. A new variant of the Unipol process, called Unipol 11, yields PE-LLD with superior strength and flow properties.

READER SERVICE: Sabic press releases (English) "Structural changes in the plastic industry", with "Statistically Sabic": PIE-No. 36921 – Annual Report 1993: PIE-No. 36869.