Plastics Industry Perspective 1st Quarter 2015

Changing Landscape of Crude Oil

Plastic Perspectives Graph Q1 2015The U.S. now produces approximately the same amount of oil as Saudi Arabia. The increase in production from the U.S. has changed the market dynamics in the global oil economy. Historically, when global oil levels experience significant declines, the Organization of the Petroleum Exporting Countries (OPEC) lowers production to help stabilize the market. In late November 2014, OPEC decided to keep its production levels flat, citing it would simply lose market share to the U.S. This has quashed OPEC’s long standing reputation as the manipulator of global oil prices. In fracking, oil wells have significantly shorter lives and new wells need to be drilled frequently. These dynamics allow the U.S. to respond to market fluctuations quickly, making the country the new swing producer of oil.

In the short term, margins have been negatively impacted for petrochemical companies, and the competitive cost advantage in the U.S. has lessened as oil prices have fallen. Despite the negative impact lower oil is having on petrochemical companies, these same companies believe lower oil prices act like an economic stimulus and create more demand for their products. Plastic converters historically have better margins when resin prices are low.

Numerous capital projects, mostly related to ethylene and polyethylene (PE) were announced previous to the recent fall in oil prices. Based on market dynamics resulting in a cost advantage in the U.S. and a projected increase in global usage of ethylene, the projects are still moving ahead, although some likely could be delayed to access potential feedstock flexibility. Additional projects related to polypropylene (PP) are also expected. Braskem is one of the first companies to formally announce interest in PP capacity expansion, but others are expected.

In North America, PE prices fell approximately 11% in Q1, not as severely as oil prices, nor did these prices rise as oil prices increased. Late last quarter, and early this quarter there were concerns U.S. prices were becoming non competitive on export resin, as North American resins were selling at a premium to global resin prices. These concerns have been eliminated, as North American resin is currently at a discount compared to global resin prices. Global resin prices increased as oil prices increased, however, North American resin prices did not follow.

Kevin DuffyKevin Duffy is a Senior Inventory appraiser who specializes in the plastics industry. He has appraised numerous plastics-related companies in North America that are involved in distributing, compounding and manufacturing resins, films, sheets, and molds. Kevin received his B.A. in finance from Illinois State University, and passed the CPA exam in Illinois. Kevin has diverse business experience in accounting, banking, manufacturing, distribution, and retail.