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 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.