Plastics Industry Perspective 3rd Quarter 2014

PE Prices Continue to Rise. Demand Destruction Possible.

By Kevin Duffy

Polyethylene (PE) prices have increased 25% since the end of 2012. PE resin has been going through a period of unprecedented price stability with only 4 changes in price since April 2013. The downside for purchasers is that all price changes have been increases. The price stability and only having price increases has hurt resin converters who often are able to increase prices tied to resin indices. There is generally a timing lag between price fluctuations and the ability to pass through costs to the customer. In the past, prices would fluctuate and the company would have periods where they could have higher than normal margins due to the timing float. With prices only going up, these converters have only experienced negative timing lag for nearly two years now. Some converters have attempted to increase prices based on internal conversion cost increases opposed to material price increases. The majority of these attempts have been reported to be unsuccessful. Some larger converters are voicing frustration with the price increases and feel there is limited rational to the increases. Customers of these large converters are questioning their own product decisions and potentially looking for alternatives in other materials like other resins, paper, glass and tin, which have all experienced significantly less price inflation over the same time period.

Nova is one are the larger PE manufacturers in North America and has admitted to reluctantly following the most recent price increase. Nova is one of many companies making investments to capitalize on a cost advantage coming from low cost shale gas obtained from North American fracking. Total PE supply capacity could increase by 45% by 2020. Nova was reluctant to participate in the most recent price increase because they are concerned the recent trends of price increases could create some demand destruction as end customers look to alternatives for their products.

The increase in PE supply coming to North America is not anticipated to be followed by large price decreases as global prices follow the highest cost region and there is expected to be enough export demand to account for the increased production capacity. An unanticipated change in the demand of PE, like significant demand destruction, could obviously change some of these dynamics.

Frustration from converters comes from the fact that they hear of a North American cost advantage, but have not been able to take advantage of it. In September PE prices in North America increased while crude oil prices, which generally drive global PE markets, have been declining. The disconnect is driven by local supply issues of Ethylene due to some unanticipated outages. Although, the impact is likely short term, the recent price increase only adds to the trend of increases for PE.

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.