Plastics Industry Perspective 1st Quarter 2016

PP Imports on the Rise

by Kevin Duffy

Plastic Perspectives Graph Q1 2016Polypropylene (PP) resin manufacturers have been struggling with lower margins because the U.S. lacks a competitive cost advantage on chemicals derived from crude oil. (The U.S. has a competitive cost advantage on chemicals derived from natural gas). In 2015, U.S. PP manufacturers were successful in expanding margins through holding prices steady as the price of crude oil fell, or increasing prices.

PP imports represent a small portion of the domestic PP market. In 2015, imports were just over 400 million pounds which represented approximately 2.5% of domestic consumption. PP is primarily consumed in bulk domestically (generally received via bulk truck or railcar and stored in a silo), whereas import resin generally is shipped in bags. To make purchasing imports worthwhile, the price difference has to cover freight, duties, and debagging. With pricing spreads currently at 20 to 30 cents per pound, this more than covers the spread necessary to make imports worthwhile

Imports of PP in 2016 are forecast to increase from 25% to 100% over 2015 levels. In 2015, imports of PP already increased approximately 35% compared to 2014. However, PP exports levels were approximately five times larger than imports in 2015, accounting for approximately 12% of domestic production. With that said, exports have been falling substantially from previous highs. With export and import demand of PP moving in opposite directions, domestic producers’ margins likely will have downward pressure.

Operating rates for PP producers rose from an estimated 90% to 93% for 2015 versus 2014, which, in addition to holding and increasing prices, helped improve margins. Domestic consumption of PP increased approximately 5.5% over the same period. The level of domestic consumption will likely ultimately determine how much pressure (e.g. operating rates and prices)will be put on the PP producers margins.

PP buyers that anticipated these changes and established their import supply chain currently have a competitive advantage as they are in position to capitalize on the lowest priced PP on the market.

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.