INDUSTRY & BUSINESS
Plastics makers hopeful after '67 slump Although production is up about 5% over last year, producers expect an annual growth rate of 15% by midsummer Producers of the three big-volume plastics—polyethylene, polystyrene, and polyvinyl chloride—are still juggling their marketing plans in an attempt to recover from last year's production and pricing setbacks. Latest Tariff Commission figures indicate that producers have climbed back to no more than a 5% production growth rate for these plastics in the first quarter of 1968 over the same period last year. Producers are reporting modest additional 2 to 3 % gains so far this quarter. But still seeing unlimited growth potentials, plastics producers expect to fully restore the historical 15% annual production growth rates for the three top plastics by sometime in midsummer. As they resume these handsome production growth rates, by which some producers measure their success, others are realistically facing two problems which are eroding their once attractive returns on investment. The near-term problem is that of overcapacity and price cutting which wracks the low-density polyethylene and polyvinyl chloride businesses. Both segments of the plastics industry are burdened with 25 to 30% overcapacity and are operating at about 70% production capacity. Marketing managers at Dow, Du Pont, and Union Carbide don't expect demand to catch up with supply until about 1971. Moreover, price cutting has been drastic. Both resins—first-quality, generalpurpose molding grades—are trading far below list prices: low-density polyethylene as low as 8 1 / 2 cents a pound (list price is 12 cents), and polyvinyl chloride at 9 V 2 cents a pound (list price is 15 cents). One leading producer comments to C&EN: "At these prices, we'd earn more money with an investment in government bonds!" The long-term problem is that the corporate megalomania to be integrated from oil refinery to consumer product is rapidly increasing the number of petrochemical and, therefore, plastics competitors. Oil companies continue to establish plastics divisions to integrate forward for profits in the consumer markets. Chemical companies are integrating back to gain the raw material advantages of crude oil feedstocks. The result: The petrochemical giants which emerge with 28 C&EN JUNE 17, 1968
Enjay's T. Curry Jones Just to enter a market
access to worldwide feedstocks and markets may price the less integrated monomer and polymer producers out of business. Last year's sudden decline of production growth awakened many producers to these near- and long-term problems. For 10 years, producers of the three top plastics sailed with the wind enjoying uninterrupted annual production growth rates averaging 15%. But 1967 output of high-density polyethylene grew only 10% over the 1966 level to 1.072 billion pounds. Similarly, low-density polyethylene output grew only 2 % to 2.689 billion pounds. Polystyrene output dropped 1.3% to 1.583 billion pounds, and polyvinyl chloride output dropped 4.5% to 2.084 billion pounds. The first-quarter 1968 Tariff Commission figures specifically indicate that low-density polyethylene production is up only 5.5% compared to its 1963-66 average annual growth rate of 13.5%. High-density polyethylene production is up 20%, about equal to its previous growth rate of 20.7%. Polystyrene production is down 1%, compared to its previous growth rate of 14.3%. Polyvinyl chloride production is up 5%, compared to its previous growth rate of 15.7%. Even with the additional gains made to mid-June, producers' recovery
seems to be lagging in view of the strengthening plastics demand. April housing starts set a four-year record. May auto production was 22% more than the May level last year. Consumer spending, and thus sales of a myriad of plastic items, is high. With such strong demands for plastics, what's holding up healthier production growths? For polystyrene, leading producers tell C&EN that they're gradually resuming optimum production levels only as fast as they work off the inventories which they amassed last year. Indeed, sales for the first quarter are 14% ahead of year-earlier levels, according to Tarin Commission figures. Supply-demand balance is tightening, and last month's one-cent price increase to 1 4 1 / 2 cents a pound for general-purpose resin is holding, says Union Carbide's W. Ed Ballard, market manager for polystyrene. Producers expect to be running on beam at a 14% production growth rate shortly. For low-density polyethylene and polyvinyl chloride, producers answer that they're cautious about stepping up their production in face of the oversupply and price cutting. Furthermore, newcomers are bringing on stream additional capacities which they had planned when the supplydemand situation was more favorable for expanding capacity. Enjay Chemical and Chemplex, for example, are both starting up their first low-density polyethylene plants this month. So, while the entire group of low-density polyethylene producers hopes to restore its historical growth rate by midsummer, the individual producers probably won't fully restore their own growth rates until supply and demand balance in about 1971. Consequently, producers of lowdensity polyethylene and polyvinyl chloride face a capacity-production dilemma which will suppress their earnings for several years. On the one hand, producing at 70% capacity at present prices yields virtually no return on investment, but it does limit supply and stabilize prices. On the other hand, producing at an optimum of 90% capacity at present prices only adds to the oversupply and intensifies price cutting. Chemical companies have little choice but to edge back into
C&EN computer projects upswing in plastics production Production (Millions of pounds) I
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1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 • • • • CAEN computer prelection and industry estimates
optimum production by continuing to juggle prices, operating rates, and inventories. In doing so, however, some producers feel others might cheat and simply run their plants all out. They would only be cheating themselves, however, by prolonging the supplydemand imbalance and by further destroying the pricing structures they need to finance future growth. The whole dilemma, suggests one leading plastics producer, should alert others to a responsibility they must learn to occasionally assume—that of restraining production to support stronger selling prices. After all, the company says, in the more mature steel and paper industries where overcapacity is very common, plant managers voluntarily hold back production to maintain market prices. They even publish their weekly operating rates as a guideline to others in their industry in scheduling their production. As long as the free-for-all continues among the plastics producers to overproduce and undersell, prices and profits will deteriorate. In the case of polyvinyl chloride, for example, Union Carbide's Gordon Bigelow, product manager for vinyls, tells C&EN: "With prices at lows of 9 1 / 2 cents a pound, producers are actually losing money. We need to return to a price of about 12 cents a pound to get a 10% return on investment—considering a 100 million pound-a-year homopoly-
mer suspension plant running at optimum capacity. And producers need at least this much return on investment to finance further plant construction, research and development, and technical service." During recent years, chemical companies' plastics operations have been contributing less and less to profits than to total sales. For example, Dow Chemical—one of the few companies to detail profits distribution in its annual report—shows that in 1967 plastics and packaging accounted for 32.1% of corporate sales but only 19.8% of profits before taxes. The situation is equally critical at other companies, especially those which produce the big-volume lowprofit plastics. Sales of plastics as a per cent of total sales at such companies: Celanese, 9%; Koppers, 11%; Monsanto, 23.7%; Stauffer, 12%; and Union Carbide, 14%. To improve their earnings in plastics, chemical companies are moving quickly in strengthening their positions in petrochemical feedstocks. For example, Dow Chemical, the world's largest merchant producer of vinyl chloride, is engineering a giant naphtha cracker in the Netherlands to produce 400,000 tons of ethylene a year from low-cost foreign feedstocks. PPG Industries is continuing studies on a proposed $100 million petrochemical complex—a joint venture with Commonwealth Oil Refining Co.—in Puerto
OVERSUPPLY, Workmen hoist fractionating column into place at Chemplex's new Clinton, Iowa, polyethylene plant. New capacity such as this is adding to the oversuppply problem
Rico (with a tax holiday of about 15 years) to produce ethylene, chlorine, and vinyl chloride, among others. The oil companies which already enjoy access to feedstocks are entering the contest. Chemplex, a joint venture of Skelly Oil and American Can, started operating its plants in Clinton, Iowa, this month to produce 50 million pounds of high-density polyethylene and 100 million pounds of low-density polyethylene. The company's marketing vice president Wayne Albright says, "We're not going to creep into this business. All our people are plastics specialists, and we aim to be mean and lean." Enjay Chemical next month will start up its low-density polyethylene plant, rated at 200 million pounds a year, in Baton Rouge, La. By year's end, the company plans to be operating at 50% capacity. En jay's T. Curry Jones, marketing manager of the plastics division, says, "To ensure a good return on investment, a company can't destroy the pricing structure just to enter a market." He points out that while Enjay has been building its plant, based on Rexall's high-pressure process, it has been selling Rexall's low-density polyethylene resin to gain experience in the market place. JUNE 17, 1968 C&EN 29
