Plastics Industry Perspective
1st Quarter 2015
Changing Landscape of Crude Oil
The 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 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.