OPEC, What Have Ye Done? Plastics Outlook for Early 2017 Sees Price Rises

We recently heard from a sourcing professional at a notable mid-size manufacturing firm here in the U.S. that a run-up in China prices for certain industrial commodities has piqued their interest — if not their balance sheets.

(If you’ve been following our sister site, MetalMiner, this will come as no shock. Get up to speed on the metals side here.)

As far as some key non-metals commodities go, certain drivers will loom larger than others as 2016 comes to an end and Q1 2017 gets under way in less than two weeks. Let’s take a look at the plastics market and how natural gas relates to it.

Plastics Price Outlook

Last quarter, feedstock and ethylene costs had shot up in the U.S. due to short supply from unplanned and planned plant closures, according to Rajiv Joarder, market analyst for Mintec. Among those closures were several in China, which the country shut down literally to “clear the air” during the much ballyhooed G20 summit in Hangzhou.

At that time, Joarder predicted that even though China had shut down plants to reduce pollution temporarily, re-openings and new production would come online soon and therefore prices should have come down again.

We caught up with Joarder recently for an update, and it turns out that since plastics prices seem to live or die by one main input – crude oil prices – one game-changing event is likely driving not only the present, but also the future. Here’s what he told Spend Matters:

“Most basic plastic feedstock cost rose after OPEC and non-OPEC countries decided to cut crude oil production from 2017. There were a few small manufacturing sites which were offline in the EU, due to maintenance, but that didn’t affect the price of finished plastics as there was plenty of stock available. In Asia, after the OPEC summit, processors started to push the cost on to manufacturers in light of the crude oil price rise. But there are no market fundamentals there to support the price increase other than feedstock cost.”

Indeed, the sourcing professional we heard from has been seeing higher polypropylene prices, and he suspects his suppliers are passing on commodity price increases without adjusting labor, overhead and profit.

“So looking forward,” Joarder continued, “if crude oil-producing nations stick to the agreed output levels, then prices of basic feedstock like ethylene will in fact increase. Also, starting from February, the demand for plastic starts to rise leading up to the summer season, which will also support the higher prices.

“In addition, the U.S. dollar is appreciating against other major currencies, so it will be more expensive to import plastic and plastic feedstock from the U.S. and the extra volume will likely come from Asia, which will see their demand and thus price spike.”

Nat Gas Got to Do With It, Got to Do With It...

Many producers had been switching to natural gas to make ethylene when crude was at $100 a barrel or more, according to Paulo Moretti, a former Vantage Partners and Dow Chemical executive who’s now a principal at chemical and plastics consulting practice PM2 Consult, but last year switched back to oil.

Because the U.S. capitalized on the shale gas boom, American producers are close to rivaling the Middle East among global low-cost producers, according to IHS. And because gas has been so cheap, the supply surge of polyethylene and polypropylene could add 24 million metric tons to global supply by 2020, the firm noted in a May 2016 report.

But not so fast: natural gas prices have been rising, hitting a 2016 high this past October, as Mintec’s Verity Michie reported. Between scaled-back drilling programs (resulting in record-low active rigs), and the U.S. becoming a net natural gas exporter this year, the prevailing trend appears to continue skyward.

So based on all the above, what will the bet be for lower volatility when it comes to feedstock — oil or natural gas? That ultimately remains to be seen. (BP, for one, is not waiting around to pick: they’ve plopped down $1 billion to invest in African natural gas exploration.)

What This Means for CPOs and Other Procurement Practitioners

Regardless, analysts such as Paulo Moretti at PM2 Consult still stick to a few actionable pieces of advice for procurement executives:

  • Have at least three or four qualified suppliers
  • Ensure your existing supply contracts cover 70%–80% of consumption needs (single- or dual-supply)
  • Include language in the contract formula or index pricing to protect against big changes in the spot market

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