Plastics Industry Perspective 2nd Quarter 2016

China driving changing market dynamics

by Kevin Duffy

China has increased production of plastic resin which has resulted in declining import levels. China’s production of polypropylene (PP) resin is up approximately 38% in 2016 compared to 2014. Conversely, China’s exports of PP resin are down an estimated 28% over the same period. According to industry analysts, China is working toward becoming more selfsufficient
with the goal to be 93% and 62% self-sustaining for propylene and ethylene based chemicals, respectively, by 2020.

The reduction of China’s import activity is forcing exporters to search for new markets. Northeast Asia and Middle East
export volumes of PP resin fell 10% and 38%, respectively on the year. At the same time imports of PP into the U.S. have
tripled from Northeast Asia, Middle East, and Latin America.

Domestically, the outlook in short term for the PP market is bleak, as inventory levels have risen due to companies stocking
materials in anticipation of price increases tied to rising oil prices. The U.S. market is experiencing significant downward
pressure on PP prices with high inventory levels, softening demand, and increased competition from foreign suppliers.

In the long term, PP producers will face additional challenges as foreign suppliers will likely continue to increase pricing
pressure in what is already a challenging market in the U.S.

For polyethylene (PE), declining import demand is negatively impacting PE resin producers in the U.S. as well. A significant number of ethylene based U.S. investments have been announced, with a known end result of the various investments
that the U.S. will have to increase exports because domestic demand is not expected to meet the future domestic
supply levels. With China reducing imports, there are already countries that will be looking for new customers. The
U.S. suppliers will likely be bringing its excess supply into a highly competitive market. The drop in oil prices already have
caused companies to reevaluate and delay their projects. The changing demand drivers are likely to cause additional
reconsideration of the ethylene based chemical investments.

The net result is that resin producers will likely have to change their operating strategies. For years if a company was the most efficient, it would be the most profitable. While efficiency and cost advantages will always play significant roles in operations, they will likely not remain the most influential factor. To compete in a more price competitive environment, resin
producers will need to provide value propositions not solely based on the price and value of the product. Location, regional
specific knowledge, research and development capabilities, among other business initiatives will likely all become determinants
of profitability. Further, providing customers with added value outside of the product will make the strategy of cutting
employment to reduce operating cost difficult. If China succeeds at becoming more selfsufficient, it will certainly have a
large impact on the North American resin businesses.

 

 

Kevin DuffyKevin Duffy is a Senior Valuation Director who specializes in the plastics industry. He has valued 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.