Newsbook

TREAD carefully on your carpets. Hoard those squeezy bottles in your kitchen cupboards. Buy that model aeroplane you always promised yourself today, not tomorrow. The price of polypropylene, a versatile polymer, is soaring. It increased by 22% in January alone—and has risen by 133% over the past two years.

The price run-up is a headache for many companies. Some have shifted into other products: according to Plastics News some American fast-food chains are switching back to paper cups for fizzy drinks. Some makers of polypropylene products have been able to pass the price increases along to their customers: Angela Luther of AET Films, which makes plastic consumer-goods packaging, says that many of its customers have indexed contracts and have seen their prices rise as a result. Others have just had to swallow the extra cost. Dea Kelly of Shaw Industries Group, a flooring firm, says that intense competition has prevented it from passing on the hike in polypropylene costs. Carpetright, a British retailer, blamed rising polypropylene costs, among other things, for the drop in profits it reported earlier this month.

As for most commodities, the “China effect” is part of the story. In emerging Asia and the Middle East, demand for polypropylene reflects increasing consumption of goods (which either incorporate polypropylene, or are packaged in it) and rising car ownership.

But there is another, more subtle effect. Esteban Sagel of Chemical Market Associates, a Houston-based consultancy, says that higher polypropylene prices also reflect the rise in the oil price relative to natural gas, especially in North America. In the past the polymer’s price moved fairly tightly with that of oil but that relationship has broken down recently (see chart). Polypropylene is derived from propylene, which is in turn a by-product of a specific way of producing ethylene, a particularly useful hydrocarbon. A decade ago most ethylene in North America was made using naphtha, an oil derivative: it is this process that has propylene as its by-product. However, in the past few years, dearer oil—thanks in part to China’s energy-hungry growth—and the emergence of new sources of gas, such as American shale-gas deposits, have made it attractive to produce ethylene using a natural-gas derivative called ethane. The trouble is that the ethane route to making ethylene produces virtually no propylene.

Higher oil prices have also suppressed demand for petrol (gasoline). Motorists are seeking more fuel-efficient vehicles, and making greater use of biofuels such as ethanol. James Yong of Macquarie Bank says that this has led to declining American gasoline output from oil refineries since 2005. That too means less propylene, since it is also a by-product of petrol production.

Technologies do exist to manufacture propylene as an end in itself, rather than as a by-product. However, Mr Yong explains, building a tailor-made propylene plant, including getting the necessary environmental permits, can take up to four years and might cost of the order of $500m-$1 billion. So there seems little immediate prospect of fresh supplies coming on to the market to ease prices. The unreliable relationship between oil and propylene prices means that oil derivatives are not much help in protecting against rising prices for the plastic. Macquarie has seen a sharp increase in demand from big companies for bespoke hedging products for polypropylene and propylene. For those who have no protection from soaring prices, this plastic is no longer so fantastic.

Read on: A plan to recycle old PET plastic bottles into construction materials (Dec 2010)