FORT WORTH, TEXAS (July 21, 2:35 p.m. ET) — Converting raw materials into usable resins is a science, but pricing those resins and guesstimating what may happen in the wild world of resin markets is arguably a very fine art.
The mystery of resin pricing, especially in engineering resins, polystyrene and PVC, can be slightly demystified when one realizes that three key elements drive cost, said officials of Resin Technology Inc., at RTI's Executive Forum, held May 11-13 in Fort Worth.
The first element is real-time raw material cost; No. 2 is supply, which includes both raw materials and resins. Those segments are affected by capacity utilization, inventories, compounds, additives and recycled material, and imports. The third element is demand, which includes domestic (real vs. artificial); export market and currency valuation; and global demand growth. Raw materials make up 50-90 percent of resin cost, said Mark Kallman, client services director for engineering resins, polystyrene and PVC.
He also noted oil volatility is here to stay. It's subject to events, commodity markets, real demand and economic winds. Natural gas volatility will be muted — disconnected from oil and experiencing lower cost for the next few years as reserves grow and shale is developed. The difference in natural gas pricing is the reserves in the U.S. and shale. The U.S. now is at record storage levels.
“We are flush with natural gas and that is why we see such a difference in what crackers are using. That will be a factor in driving resin costs. [We'll] continue to see light feeds … as reserves are all tapped,” he said.
As natural gas drives resin costs for the next few years, light feeds to olefin crackers will produce more ethylene and less of everything else. Therefore, the expectation should be a lower cost to produce ethylene from natural gas until energy use catches up. That, then, will directly affect material costs for PE, PVC and PS, and will indirectly affect other resins.
Kallman said everything else will be subject to the greater volatility of oil and the impact of overseas users of heavy feeds. Asia and Europe use heavy feeds because they do not have the natural reserves that the U.S. possesses. But shale technology is being taken to Poland and areas of Asia.
When it comes to pricing, contract pricing covers the bulk of ethylene, propylene, butadiene and benzene purchases. Spot pricing, which covers the incremental additional volumes required by the market, often is a good lead indicator of contract pricing direction.
From June 2, 2010 to May 2, 2011, ethylene went from roughly 35 cents per pound to 65 cents per pound. Benzene moved from about $2.93 per gallon to $4.25.
Kallman advised to always keep a sharp eye on spot pricing, which can significantly exaggerate price movement, as additional material in a recovering economy is hard to come by.
“Producers will often minimize production to just what they have to produce,” he said.
“There are not too many reasons not to put a price increase out there, and they've gotten quite good at it.”