By JAMES R. HAGERTY
LOGAN TOWNSHIP, N.J. -- Heritage Bag Co., which makes
plastic trash bags around the clock at a factory here, should
be sitting pretty.
Heritage's main raw material, polyethylene, is derived from
natural gas. As the US ramps up production of gas released from
underground shale formations, output of polyethylene is
expected to soar too, creating the potential for lower
"I think it's our duty to use this gift of shale gas to
rebuild our industrial infrastructure," says Jim Morris, a
bluff Texan who serves as chief operating officer of privately
There's just one problem: Heritage and other US users of
polyethylene -- makers of plastic bags, toys, housewares and
myriad other items -- aren't benefiting yet. They may not
benefit for years and can't be sure it will fundamentally
change the economics of their businesses.
Despite the shale boom, the price of polyethylene in the US
has generally risen over the past few years. The type Heritage
uses typically costs around 75 cents/lb, up from an average of
64 cents in 2010, according to IHS, a research firm.
Polyethylene makers, such as ExxonMobil and Dow Chemical,
are enjoying lower costs because higher natural gas production
increases the supply of ethane, a component of natural gas used
to make polyethylene. Instead of passing on lower costs to
their customers, however, they are reporting fatter profit
First-half earnings before interest, tax, depreciation and
amortization in Dow's performance plastics division, which
makes polyethylene, were up 33% from a year earlier.
producers are making "insane amounts of money," Mr. Morris. He
isn't, he says.
Dow Chemical's CEO, Andrew Liveris, two years ago published
a book called "Make It in America," suggesting ways to revive
American manufacturing. Now, says Mr. Morris of Heritage, Mr.
Liveris has a chance to "put his money where his mouth is."
Mr. Morris argues that Dow and other chemical makers should
try to ensure that the shale boom will lead to more US output
of finished plastic goods, such as the trash bags made by
Heritage, rather than just more exports of polyethylene to his
In recent years, polyethylene prices have been higher in the
US than in Asia, where big chemical companies from both the
Middle East and the US battle for market share. Mr. Morris
would like a promise from Dow and other polyethylene makers
that their customers in the US won't have to pay more than
customers in other parts of the world. So far, he hasn't
received such pledges.
A Dow spokeswoman declined to comment on Mr. Morris's
suggestion but said the shale boom is "a once-in-a-lifetime
chance for the US to regain its competitiveness in
Polyethylene accounts for around 70% of the cost of making a
plastic bag; the other main costs include labor and
Heritage, based in Carrollton, Texas, has annual sales of
more than $400 million and bills itself as one of the world's
largest makers of plastic trash bags used by restaurants,
stadiums and other institutional customers. With six plants
scattered around the US, Heritage employs about 750 people.
Heritage's plant here in Logan Township, N.J., smells
faintly of melting plastic. Polyethylene pellets arrive via a
railroad line alongside the plant. The pellets are pumped
through tubes into silos and later into the factory, where they
are melted in an extruder. Blasts of air blow the molten
plastic into a bubble that resembles a giant cigar, rising 10
yards or more. The plastic solidifies into a film as it cools;
then it is shaped and sliced into trash bags.
Workers in shorts and T-shirts tuck the bags into boxes and
load pallets for shipment. The plant also provides jobs for
managers and machine-maintenance people, among
Heritage and other US users of polyethylene eventually will
get lower prices, once new production capacity is completed in
2016 and beyond, predicts Nick Vafiadis, a senior research
director at IHS.
Dow, Royal Dutch Shell and others plan to spend billions of
dollars to expand US production of petrochemicals, including
polyethylene. Mr. Vafiadis forecasts that US polyethylene
capacity will rise more than 30% by 2018 and nearly 60% by
Most of that increased production will be exported, Mr.
Vafiadis believes, but he expects US buyers like Heritage will
Mr. Morris says Heritage would like to expand its US
production capacity and increase its exports, currently small.
But that could happen only if Heritage is convinced that its
polyethylene costs will be globally competitive.
The US is already a big exporter of polyethylene and other
resins, made from oil or natural gas, but has a large trade
deficit on plastic products, such as bags and packaging film,
made out of those resins. The deficit totaled $2 billion in
this year's first half.
Heritage's Mr. Morris says imports of the types of trash
bags his company makes are fairly small. But Chinese and other
Asian companies account for around one-third of the market for
plastic shopping bags often used at grocery and other retail
stores, despite import duties imposed by the US on those
Stanley Bikulege, chief executive of Hilex Poly Co., a big
US maker of plastic shopping bags, says he believes the shale
boom will help make Hilex more competitive by holding down raw
material costs. Hilex mainly focuses on its home market but is
looking at the possibility of more exports. "Is [exporting] a
huge opportunity for us?" Mr. Bikulege says. "Probably
William Carteaux, chief executive of the Society of the
Plastics Industry, a trade group, says he sees scope for
greater US exports of products containing plastic, including
auto parts and such health-care items as blood bags and
At IHS, Mr. Vafiadis sees a "renaissance" in the US plastics
For Mr. Morris, however, it is too early to celebrate.
Before embarking on expansion plans, Heritage is waiting
for assurances on raw-material costs.
"Entrepreneurs will take risks if there's a clear path to
the payoff," he says.
Dow Jones Newswires