The world of resin pricing has been even crazier than usual in the past few months, as suppliers have introduced a new wrinkle - energy surcharges - and started making noise about retiring an old one - price protection.
Prices for many materials shot up in the Iraqi war buildup, and, apparently for the first time, suppliers of polyethylene and polystyrene contributed to the flurry of increases by adding 4-6 cent-per-pound surcharges to invoices. Their reasoning was that extremely high natural gas prices were driving the cost for key feedstocks sky-high.
The surcharge idea is a significant precedent that we're certain to see again. It's likely, though, that surcharges only will return on rare occasions, like wartime, rather than every winter when a cold snap causes natural gas prices to spike. After all, there were similar gas spikes in 2000 and 2001.
Although natural gas prices have dropped from nearly $20 per million Btu in late February to less than $6 today, you might guess that they will rise again next winter. Suppliers blame government policies that favor electric utilities that run on natural gas at the expense of those that use coal or nuclear power.
Suppliers also have used the mini-crisis as an opportunity to start a debate on price protection, a practice in which customers are given 30-90 days from the announced date of a resin price increase before they actually have to pay the higher price.
Doing away with price protection would make resin buyers' and sellers' lives a little simpler. But, even with recent consolidation among commodity resin suppliers, it's not likely to happen. The economy is just too soft right now. Still, suppliers themselves hold the cards, because they introduced the protection concept to big customers, then gradually applied it to smaller accounts. But abandoning the idea now would mean losing market share.
Some other notable pricing tidbits:
* Recyclers traditionally are winners when commodity virgin resin prices rise. Demand for recycled resin grows as processors look to lower-cost raw materials, and knowledgeable recyclers also know how to piggyback on virgin resin price hikes. If the plastic recycling rate perks up a bit this year, you might thank the Iraqi war.
* With the very notable exception of pipe extrusion and some special types of film and sheet, plastic processing no longer is a significant part of commodity resin producers' business portfolios. Instead of integrating forward into processing, suppliers are far more interested in integrating backward into raw materials - feedstocks definitely, and frequently natural gas or oil too. Processors will be watching the quarterly earnings reports from their suppliers to see how much pain the run-up in feedstock prices really caused. Until they see proof otherwise, processors will tend to be very skeptical.
* Our April 14 issue highlighted the growing muscle of Saudi Arabian oil company Saudi Basic Industries Corp. in plastics markets. Sabic obviously is heavily invested upstream. But processors should note that experts predict Sabic will invest downstream too, in processing industries like plastic film.
Sabic's location makes it a prime candidate to export to developing markets in Asia, the Middle East and Africa, plus Europe. Still, North American processors should pay attention, because cheap resin in Asia has fueled the boom in exports from that region in everything from electronics to film.