At first glance, everyday life and commodity resin pricing have little in common. One involves brushing your teeth and loading the dishwasher. The other involves making sure your breakfast with Sales Rep A is over before Sales Rep B pulls into the parking lot for lunch.
But a closer look shows that in both cases, things don't always go as planned. Take the much-ballyhooed 2003 move by North American resin makers to eliminate price protection. Price protection was one of those things that people said didn't really exist — like Bigfoot and sugar-free Oreos — but it did. And once the little buyers got wind that the big buyers had 30-day protection, they wanted it, too. So then the big guys got 60 and in some cases 90.
That practice was tolerated until prices for natural gas started rising so fast that resin makers were really getting squeezed. So price protection had to go. Nova Chemicals Corp. Chief Executive Officer Jeff Lipton even made a dramatic speech at a major petrochemical conference saying good riddance to the practice.
At the time, it was thought that the move would make resin prices — known for their peaks and valleys — less volatile, which would be a good thing for everyone involved.
Now let's see what actually happened, using Plastics News' price histories for common grades of high density polyethylene, polypropylene and PVC:
* HDPE, eight price increases in 13 months between August '03 and September '04. Total increase: 25 cents per pound.
* PP, 14 increases in 18 months between September '03 and March '05. Total increase: 36 cents per pound.
* PVC, nine increases in 16 months between October '03 and February '05. Total increase: 17 cents per pound.
It's unclear how the switch did anything to soothe the already-jagged nerves of purchasing department execs.
To be fair, natural gas continued to rise at unprecedented rates, keeping pressure on resin makers. But the ability of many processors to pass increases on to customers didn't change with the demise of price protection. That led to a bloodbath in housewares and automotive, with many processors going out of business.
Processors have complained that during that period — which doesn't even include market chaos caused by 2005 hurricanes — resin makers made little effort to work with them. Resin makers counter that their hands were tied. If they were paying more for natural gas that month, their customers had to pay more for resin.
Another consequence is that financial investors have been spooked. Those thinking of investing in the plastics market are reluctant to do so amid such turbulence. Their caution has deprived the North American plastics sector of capital that may have solidified or consolidated some of its segments. It's also prevented plastics firms' valuations from rising in line with those of other industries.
Although resin makers thought they'd slain a dragon by banishing price protection three years ago, processors now know there's a new beast in town.
Esposito is a Plastics News staff reporter who covers pricing and materials suppliers.