The supply of product in the plastics and chemicals industry is primarily determined by the size and availability of manufacturing capacity. New capacity is typically added in large increments. It generally requires significant amounts of capital and lead time of three to five years for construction completion. Demand is driven by economic growth and is related to both Gross Domestic Product (GDP) and Industrial Production (IP). Market demand for polyethylene and polystyrene has typically grown at one to two times GDP depending on the region of the world. Sustained industry operating rates in excess of 90% in polyethylene and 92% in styrene monomer represent typical inflection points at which margins in NOVA Chemicals’ Olefins/Polyolefins and Styrenics businesses begin to expand.

Figure 1. NCX Net Income (Loss) vs. United States GDP and IP.


During industry downturns, chemical manufacturers are reluctant to add production capacity. In North America, Europe and Latin America, relatively little new capacity has been added in recent years and demand is absorbing excess capacity. Globally, new capacity is being added in the Middle East and Asia to meet the growing demand for petrochemicals and plastics from developing nations such as China and India, as well as other Southeast Asian countries and South America. The supply/demand balance, however, is expected to remain tight as the Chinese and Indian economies continue to register near double-digit plastics and chemical demand growth rates. In addition, plastics and chemical construction projects are experiencing delays and, in some cases, cancellations due to increasing construction and engineering costs. In North America, comparatively, little polyethylene or styrene monomer capacity has been added in the last several years, and there have been no announcements of new plant construction going forward. As a result, assuming GDP growth rates of approximately 3% as forecast by Global Insight, operating rates are expected to reach and maintain peak levels in polyethylene and styrene monomer in 2006 - 2008.

Figure 2. Polyethylene Growth by Region (1) (2006–2008)

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