Plastics Markets Calm Despite Volatile Crude and Capacity Shifts

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Prices for most plastics will continue rising during the fourth quarter, thanks to surging raw material costs, capacity issues and a rebound in crude oil.

Observers are mixed on the current market state. In late August, Plastic News’ Bill Wood asserted domestic plastic production was actually down most of 2016 and will likely end the year flat. (Wood noted that brisk sales of appliances and medical supplies, as well as higher demand for plastic packaging, helped prop up overall domestic production this year, however.)

Meanwhile, Paulo Moretti, a former Vantage Partners and Dow Chemical executive who’s now a principal at chemical and plastics consulting practice PM2 Consult, tells Spend Matters that his review of more than 30 different plastics shows North American markets growing around 2.7% overall.

No one is understating the impact that crude oil prices are having on the plastics business, whose future is so closely tied to petrochemicals. Prices for ethylene, a key ingredient in many plastics, closely parallels crude pricing. Many producers had been switching to natural gas to make ethylene when crude was at $100 a barrel or more, according to Moretti, but last year switched back to oil. Even now, producers are enjoying “positive,” albeit slimmer, margins, he added.

And as supply of polyethylene and polypropylene continue to swell globally, the competitive landscape is beginning to shift because of low-cost producers here and in the Middle East and China, observes market intelligence firm IHS. The surge could add 24 million metric tons to global supply by 2020, the firm notes in a May 2016 report. Because it capitalized on the shale gas boom, American producers are close to rivaling the Middle East among global low-cost producers, the firm notes.

As Mintec’s Monika Sosnowska reported for Spend Matters last spring, rebounding crude oil prices and seasonal plant maintenance costs combined to send plastic feedstock prices up precipitously after several quarters of declines in prices for raw materials like ethylene. Since the second quarter, contract prices for ethylene and propylene have been rising, according to S&P Global Platts.

Depressed crude oil prices and overall market volatility weren’t the only factors affecting raw materials and finished goods most of 2015 and 2016, analysts say.

“Feedstock and ethylene costs have shot up in the U.S. recently due to short supply from unplanned and planned plant closures,” Mintec Market Analyst Rajiv Joarder tells Spend Matters. Among them were several in China, which the country shut down to literally “clear the air” during the much ballyhooed G20 summit in Hangzhou. But with plant reopenings and new production capacity coming online in September, Joarder believes prices will begin heading south again soon.

A Look Ahead

Joarder tells Spend Matters he believes crude oil prices will continue rising the rest of 2016, putting “an upward pressure” on finished goods plastic prices. Additional pressures could come from increased Asian imports, but overall lower seasonal demand will most likely offset any significant price increase due to higher feedstock cost, he adds. Joarder sees “factory turnarounds” in Europe near year’s end leading to increased imports from the U.S. Latin America is another potentially big U.S. plastic customer, as surging demand there is quickly outstripping capacity, according to IHS.

Joarder said industries that are likely to feel the greatest pinch from rising prices include construction, pharmaceuticals, specialty drinks and automotive. And it couldn’t come at a worse time for U.S. automakers, which are constantly chasing new types of plastics, polymers and resins to make their cars more durable and lightweight. In an August 2016 report, IHS Markit noteed that the average car made here will have 70% more plastic parts by 2020 — up to 350 kilograms worth — due mainly from mounting government pressure to make more fuel-efficient cars.

As for pricing, it’s a mixed bag. Even if ethylene and propylene prices go up a dime or so a pound, that’s still a very palatable forecast for most producers. Low and relatively stable crude prices could also encourage a new era of innovation in polyethylene and polypropylene applications, Nick Vafiadis, global business director of polyolefins and plastics, IHS Chemical, recently predicted.

For procurement executives, Moretti has some sourcing and strategic advice: “Have at least three to four qualified suppliers; ensure your existing supply contracts cover 70%–80% of consumption needs (single- or dual-supply); and include language in the contract formula or index pricing to protect against big changes in the spot market.”

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