Podcast Summary
Plastics market price swing: From record highs to 2-year lows: The plastics market, influenced by oil prices and industry capacity, experienced a significant price drop from record highs to 2-year lows. Investors can navigate these market fluctuations with local insights and global expertise from firms like Principal Asset Management.
The plastics market, an essential yet often overlooked aspect of global supply chains and inflation, experienced a significant price swing from record highs to 2-year lows. This shift can be attributed to various factors, including oil prices and capacity issues in the plastic industry. Principal Asset Management, with its 360-degree perspective, can help investors navigate these market fluctuations by identifying compelling opportunities through local insights and global expertise. Warren Russell, a commodity strategist at Bank of America, will provide further insights into the plastics market and the current state of "nurdles" in an upcoming interview on Odd Lots podcast. Stay tuned to learn more.
Plastics derived from petroleum and serve various purposes: Plastics, made from light ends of hydrocarbon chains, have diverse uses from packaging to automotive parts. Oil refining produces plastics and feedstocks for the petrochemical industry.
Plastics play a significant role in petroleum consumption beyond traditional uses like cars and jet fuel. Plastics are derived from the light ends of hydrocarbon chains, which are extracted and separated from oil and natural gas. The most commonly used plastics are polyethylene (PE) and polypropylene (PP), with various forms such as high density PE (HDPE), low density PE (LDPE), linear low density PE, and PP. Other types of plastics include PET (polyethylene terephthalate), PVC (polyvinyl chloride), and polystyrene. Each plastic type serves specific purposes, from packaging like water bottles to automotive parts and white glove items. The production of these plastics comes from both raw materials extracted from wells and refined streams like naphtha. The refining process also produces feedstocks for the petrochemical industry, such as ethane, propane, and butane. The capacity and spare capacity for producing these plastics can impact the price disconnects between oil and plastic markets.
Plastic Industry Price Surge in 2021: Weather Disruptions and Consumer Spending: Extreme weather events and government stimulus led to supply chain disruptions and increased demand, causing historic plastic price increases. Maintaining inventory levels and supply chain resilience are crucial.
The plastic industry experienced unprecedented price increases in 2021 due to a perfect storm of supply chain disruptions and surging demand. The U.S. plastic sector, in particular, was hit hard by extreme weather events, including hurricanes and the deep freeze, which took down production facilities and caused significant delays. At the same time, the government's stimulus efforts led to increased consumer spending on plastic goods, further straining supply. The resulting market tightness and lack of incremental supply pushed plastic prices to levels typically seen with oil over $100 a barrel. The impacts of these disruptions were felt in various industries, including insulation for homes, and it took several months for the US market to start normalizing. Additionally, the end consumer and companies found themselves in a "just in case" inventory situation, leading to a disregard for price and buying at all costs. The unfortunate consequence was that this occurred when supplies were limited, exacerbating the price increases. The situation highlighted the importance of maintaining adequate inventory levels and the vulnerability of just-in-time supply chains to external shocks.
Persistent price variation in the plastic market: The plastic market's regionalized nature and lack of fungibility make it challenging to capitalize on arbitrage opportunities due to wide price variation and unique market complexities.
The plastic market, unlike oil, does not have a global standard for pricing due to its regionalized nature and lack of fungibility. This results in persistent wide variation in prices and makes arbitrage opportunities more difficult to capitalize on. Factors such as freight congestion and the inability to easily transport and trade plastic pellets add complexity to the market. Despite this, opportunities for arbitrage do exist, but they are more challenging to execute due to the market's overcapacity and the unique characteristics of the plastic industry. Investors and businesses looking to capitalize on these opportunities should stay informed about regional pricing trends and the specific dynamics of the plastic market.
Unexpected high demand for plastics in 2020-21, market normalizing with economic downturn expectations: Market normalizing with economic downturn expectations, European prices high but easier to move volumes, capacity growth robust but potential decreased demand may lead to capacity rationalization, plastic packaging input costs contributing to inflation
The global economic situation in 2020 and 2021 led to unexpected high demand for plastics like polyethylene and polypropylene. However, with economic expectations of a downturn in 2023 and decongestion in the global supply chain, the market is starting to normalize. European prices are still high, but the ability to procure containers and decongested ports are making it easier to move volumes. Looking ahead, capacity growth for both polyethylene and polypropylene remains robust, but potential decreased demand could lead to the need for capacity rationalization. Additionally, plastic packaging, a significant input cost for many goods, can contribute to inflation, especially for low-value items. In 2019, there were concerns about overcapacity and potential gluts due to underinvestment and underbuilding during the Great Financial Crisis and the pandemic. Now, the market is facing a potential reversal of that trend.
Plastics industry faces economic challenges and decreasing demand due to waste concerns and shift towards sustainable alternatives: The plastics industry must adapt to decreasing demand by focusing on sustainable alternatives, such as bioplastics, and reducing the use of single-use plastics
The plastics industry, particularly in Asia, is facing economic challenges due to oversupply and low margins. With increasing global concerns about plastic waste and the push towards reducing plastic use, there is a risk that demand for new refining capacity may decrease. Currently, only a small percentage of plastics come from recycled materials, and there are challenges to recycling certain types of plastic. The shift towards bioplastics, which are still a small percentage of the market, is one potential solution. However, the industry will need to adapt to these changes and find new ways to produce and use plastics sustainably. Additionally, it's important to note that not all plastics are equal when it comes to recycling and biodegradability. The focus should be on reducing the use of single-use plastics and finding alternatives, such as bioplastics or reusable materials.
Transition to closed-loop plastic recycling system: Prices, China's reopening, and individual actions impact the plastics market. Closed-loop recycling requires investment and proper disposal.
The transition towards a closed-loop plastic recycling system, where it's economically viable to collect and recycle plastic, is a work in progress and will require significant investment. The price of plastic, which is influenced by oil prices, has fluctuated between $1,000 and $2,000 per ton in recent years. China's reopening could impact the plastics market in various ways, including increased domestic consumption, changes in exports, and potential capacity ramps up in factories. However, the exact impact is uncertain and depends on several moving factors. Ultimately, individual actions, such as properly disposing of plastic waste and ensuring it can be recycled, and industry investments in recycling infrastructure, will be crucial in addressing the plastic waste issue.
Impact of consumer behavior and regulations on plastics industry: Consumer behavior shifts and environmental regulations may limit plastics industry growth, but significant reductions could be challenging due to their widespread use and affordability. Monitoring industry margins could indicate economic recovery progress.
The demand for plastics, particularly in the wake of the pandemic, may not bounce back as strongly as expected due to changes in consumer behavior. The speaker also mentioned concerns about capacity growth and potential margin contraction. Additionally, environmental regulations and ESG concerns could impact the industry's growth in the long term, but significant reductions may be difficult given the widespread use of plastics and their affordability. The speaker suggested that monitoring plastics industry margins could be a leading indicator for the overall economic recovery. Finally, the speaker acknowledged the challenges of reducing plastic use given its ubiquity and low cost.
Plastics Industry Ecosystem and Disruptions: Major players in the plastics industry include chemical companies and specialized processors. Disruptions like the Texas freeze and excess capacity could impact consumer goods inflation and economic growth. Addressing human behavior and building recycling capacity are crucial for a closed loop supply chain.
The plastics industry is a complex ecosystem with various players involved, from upstream refining and production of raw materials to downstream processing and manufacturing of final products. Major chemical companies like DuPont, Dow, and Adnoc are significant players in this industry. Additionally, there are specialized companies that focus on the molding and processing of plastics into various forms. The disruption in the industry due to events like the Texas freeze and the potential for excess plastic capacity could impact consumer goods inflation and serve as an early indicator of economic growth. The conversation also highlighted the importance of addressing human behavior and building recycling capacity to create a closed loop in the plastics supply chain.
Shifting focus in energy industry towards petrochemical refining: Profitability of energy companies' shift towards petrochemical refining uncertain if everyone does it at once, while plastic recycling's financial viability is also a concern
The energy industry is facing existential questions as more oil producers shift towards petrochemical refining to diversify their businesses. However, the profitability of this approach remains uncertain if everyone does it at the same time. Another topic discussed was the skepticism surrounding plastic recycling, with Greenpeace raising concerns in October. Despite the recyclability of plastic cups, the financial viability of recycling and reusing them is an open question. Overall, the podcast touched upon the challenges and uncertainties facing various industries, from energy to recycling.
