Plastics Industry Perspective 4th Quarter 2014

Impact of Falling Oil Prices on North American Resins

Plastic Perspectives Graph Q4 2014Brent crude oil prices fell from a high of $115 a barrel in the middle of June 2014 to an annual low of $55 on December 31, the lowest level since May 2009. Global resin prices follow oil prices tied to high-cost regions like Europe, which utilize naptha as the primary feedstock for cracking. The U.S. and Middle East are low-cost regions, which utilize ethane derived from natural gas as a primary feedstock for cracking ethylene. Natural gas prices have remained relatively flat during the recent fall in oil prices. Lower oil prices reduce the margins and competitive advantage North American resin producers have over high-cost regions like Europe. Although the competitive cost advantage has shrunk, it is still cheaper to manufacture ethylene-based resins in North America compared to most places in the world.

Significant North American investments surrounding natural gas have been announced. The current slide in oil prices will certainly delay and potentially cancel some of those projects.

On the flip side, consumers of resins will likely benefit from lower oil prices. Chairman & CEO Jon Rich of Berry Plastics, a large consumer of resin and stated ,“Historically, Berry’s operating margins have moved inversely to oil price movements.” When resin prices are high, users of resin often have trouble passing along all of the material cost increases. Conversely, when resin prices are low users of resin generally do not have to pass all of the benefit back to the customer.

North American resin producers have not implemented price reductions in line with global resin prices. This is partially tied to now-resolved supply issues with ethylene feedstock and partially tied to an apprehension to give up some profits. This premium in North American resin will likely be closed in the near future, which will further help North American users of resin. If the North American premium is not resolved, resin producers will almost certainly lose some export sales to the Middle East, which would also damage the profitability of North American resin producers through lost demand.

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.