Price of Plastics Jumps in 2004
General Motors Corp., Pepsi Bottling Group Inc. and Pactiv Corp. are seeing profits eroded by the surging cost of plastics that are used in such things as automobile bumpers, beverage bottles and trash bags.
The price of polyethylene, the world’s most widely used plastic, surged 57% in 2004 and is the highest in more than a decade, boosting earnings for producers such as Dow Chemical Co. and Nova Chemicals Corp.
Demand for plastic resins, a $51-billion business in the U.S., grew 8.3% in the first 10 months of 2004, the American Plastics Council estimates. New cars contain about 280 pounds of plastic, double the amount in 1988. Chemical makers are raising prices as their raw material costs surge and as growing demand exhausts spare production capacity.
“In North America, we need at least three polyethylene plants per year announced and built, in order to keep up with demand growth,” Nova Chief Executive Jeffrey Lipton said Dec. 9 in an interview in New York. “Globally, that number is 11 or 12 polyethylene plants per year, just to keep up with the growth in demand. I don’t see where those plants are going to get built.”
U.S. production of plastic resin in 2004 rose to 89% of industry capacity from 85% in 2003, the Arlington, Va.-based American Chemistry Council said. Capacity use will climb to 91% this year and 92% in 2006, the council said. Supplies are so tight that Nova, Dow and other producers are limiting how much resin customers can buy.
“We are running the plants full out,” Dow plastics spokesman Paul Oakley said Sunday. “We’re doing our best to keep up with demand.”
A growing imbalance between supply and demand has been spurred in part by increased purchases by China, Nova’s Lipton said. Producers also are raising prices to keep pace with higher costs for oil and gas, which are broken down into the chemicals used to make plastics.
Improving sales and profit helped boost Nova’s share price 62% last year, the biggest rise since the company was spun off in 1998. Shares of Dow, the world’s largest producer of polyethylene, rose 19%, while Lyondell Chemical Co., North America’s biggest producer of styrene, jumped 71%.
Detroit-based General Motors, the world’s largest carmaker, is trimming costs by using more recycled plastics under the hood, behind the instrument panel and inside the wheel wells of full-sized pickup trucks, such as the Silverado.
“We are challenging our suppliers to find good solutions using recycled materials,” Tom Hill, a spokesman for General Motors, said Jan. 7.
Calgary-based Nova, the biggest Canadian chemical maker, Midland, Mich.-based Dow, the largest U.S. chemical maker, and others continue to raise plastic prices in 2005.
The spot price of polypropylene, used in carpet fibers, snack packaging and car parts, rose 80% in a year, and polystyrene, used in plastic utensils, cups and CD cases, jumped 74%. Both resins have surpassed peak 1980s prices, according to consultants at Chemical Market Assn. Inc.
Profit margins at resin makers have yet to peak because costs for gas and oil are three to four times higher than the late 1980s, said Howard Rappaport, plastics director for Chemical Market Assn. in Houston.
Consumers aren’t being hurt as much as manufacturers. A 50% increase in polyethylene boosts the retail cost of plastic bags about 6%, Nova’s Lipton said. A similar increase in polystyrene boosts the cost of foam plastic plates 13% and cutlery by 5%, he said.
Atlanta-based Coca-Cola Enterprises Inc., the world’s largest soft-drink distributor, said its costs per case would rise as much as 5% this year because of increased spending on raw materials.
Pepsi Bottling expects $100 million in higher costs for sweeteners, aluminum and plastic this year. Aluminum and plastic are each about 20% of the company’s cost of goods sold, with sweeteners accounting for about 3%, spokesman Michael Goodwin said.
Resin supply is tight because producers shut plants and reduced spending when demand weakened in recent years. The last polyethylene plant built in the U.S. opened in Baytown, Texas, in 2002. Nova is planning to help build a polyethylene plant in Mexico by 2010, the only one proposed for North America.
Costs for resin used in bubble wrap and food packaging forced Saddle Brook, N.J.-based Sealed Air Corp. to restructure its business. Its third-quarter gross margin, the percentage of revenue remaining after subtracting the cost of goods sold, fell from 32% to 30%, the lowest in the company’s seven-year history.
