The global slump in crude oil prices has impacted the North American polyethylene resin market, sending prices down an average of 4 cents per pound in December.
Oil was trading near $100 per barrel in July — the level it had occupied for much of the last few years — but fell below $49 in late trading Jan. 7. Low demand and increasing supplies in the U.S. and Middle East have played a role in the slide. U.S. oil production in particular has increased as a result of hydraulic fracturing (fracking) and horizontal drilling.
This drop of more than 50 percent has sent gasoline prices plummeting and now has affected regional PE. Oil is used as a price marker in the region — since it's the main global PE feedstock — even though most North American PE is derived from natural gas.
The 4-cent December drop is the second straight monthly decline for regional PE prices, which had fallen 3 cents per pound in November. These two declines are the first seen in the regional PE field in two years, during which time prices had gone up an average of 23 cents per pound.
And more impacts of the oil drop may be felt in the coming months, according to market experts contacted recently by Plastics News.
“The recent collapse of crude oil and feedstock prices has been the catalyst for a recalibration of global resin prices,” said Nick Vafiadis, global business director of polyolefins and plastics with consulting firm IHS Chemical in Houston. “IHS expects domestic prices will continue to erode during the first couple of months of 2015.”
Regional PE makers now find themselves in a bind, according to Phil Karig, managing director with the Mathelin Bay Associates LLC consulting firm in St. Louis, because for the last several years they've been pointing to high oil prices as the justification for continued high resin prices, even as natural gas prices declined as a result of increased production of that material.
“How long low resin prices will last is very much a question of what happens with the international oil market,” he said. “The Saudis are fighting to keep their share of the international oil market and they understand that this means letting oil prices fall low enough and for long enough to cause some of the higher cost crude producers, particularly shale oil producers, to throttle back production.
“The bottom line is that, absent a change in the Saudi position on cutting their own crude oil production, oil prices are likely to find a bottom in the next three to six months and then stay relatively low,” Karig added. “Resin prices should, in tandem with oil prices, remain relatively low for a while after hitting bottom.”
Another important question which should concern resin buyers, according to Karig, is how much additional margin resin producers might gain during the current downturn.
“In the past few months as resin prices have started downward, producers have not reduced resin prices as quickly as feedstock costs have fallen,” he said. “Some of the producer margin improvement has been due to production cutbacks to keep resin inventories in check and to support ongoing producer initiatives to increase margins independent of raw materials.
“The current downward movement in resin prices has given some producers the opportunity to practice a variant of the magician's art of misdirection — by pointing to the large recent resin reductions and hoping that buyers won't notice that producers are simultaneously keeping at least a few cents of raw materials reductions for themselves.”
The primary driver in regional PE pricing for the next few months will be the cost to produce a pellet in Southeast Asia in relationship to the selling price of the pellet in North America, added Mike Burns, PE market analyst with the Resin Technology Inc. consulting firm in Fort Worth, Texas.
“Not until a floor is realized and buying activity resumes can the total amount of the North American price decreases be determined,” he said.
Burns added that if the PE price gap between North America and Southeast Asia isn't closed, North America “will lose the competitive advantage and recent gains in reshoring could be lost quickly, along with new opportunities to process plastics in North America.”
He compared the current situation to the end of 2008, when regional PE prices fell by more than 40 cents per pound. At that time, Burns said, “small buyers who didn't capture all the [downward price] movements eventually began to sell their businesses or go out of business all across North America — they were paying more than their competitors.
“If buyers don't capture all of the downward movements, they'll be at a disadvantage in North America,” he added.
Burns also explained that although oil was a factor in both the 2008 and 2014 PE price drops, PE makers in 2014 are more disciplined and have Latin America as an outlet for export sales. As a result, price drops so far haven't been as extreme as they were in 2008.
Even with oil prices dropping as low as they have in recent weeks, natural gas remains the favored feedstock for North American PE production. Natural gas is advantaged if oil is priced at more than a 6-to-1 ratio when compared to natural gas prices. As of Jan. 7, natural gas was priced at just under $3 per million British thermal units — having fallen from more than $4 just a few months ago. With oil near $49, its price remained near 16-to-1 with natural gas.