Hurricanes disrupt resin market, but oil may have long-term impact

The holiday season is in full swing, and while most of us already have already started our celebration of the traditional American holidays, I would like to offer one more date we should observe with some manner of festival rites.

Nov. 30 marks the official end of hurricane season for this year.

I am pretty sure that the hurricanes we experienced this past season will be remembered for a long time. It is impossible to put an economic value on the personal pain and loss caused by these catastrophic storms; nevertheless, the measurable economic impact was significant. The effects that Harvey, Irma and Maria had on the plastics industry, in particular, became clearer with the recent release of the economic data from August and September.

Consider the monthly data for U.S. industrial production of plastics materials and resin. This indicator is in the form of a seasonally adjusted index (2012=100), and it is compiled and reported by the Federal Reserve Board.

You will recall that Hurricane Harvey hit Houston in late August. According to this index, there was a sharp decline in resin production in both August and September. To be more precise, the output of resins decreased by 6 percent in August when compared with the previous year, and for September the decline was 10 percent. This pushed U.S. resin production to the lowest levels since the Great Recession; however, it came at a time when overall U.S. demand for plastics products was expanding at a rate of about 2 percent.

As one might expect when a market's supply and demand fundamentals are subjected to this kind of shock, there was an increase in the price of resin. According to my Resin Price Index, which I calculate every month using data from the Plastics News resin pricing chart, the volume-weighted average resin price increased about 10 percent when compared with its pre-storm level.

I will not go too far out on a limb with predictions about what this means for the future trends in production levels and prices. This market is susceptible to a number of unforeseeable factors, both natural and man made. However, the recent price action does offer some clues about the current state of the market, and it makes sense for compounders and processors who use these materials to take advantage of this information whenever possible.

The first thing to glean from the data is that there may still be some lingering effects from these hurricanes that will show up in subsequent data reports. Most reports indicate that resin suppliers were able to get back to normal levels of production activity pretty quickly, so we are likely past most of the disruption. But production and shipping levels for resins have probably not totally rebounded to pre-storm levels, so there may yet be some upward pressure on resin prices.

Second, the fact that resin prices have increased by about 10 percent, and in an orderly manner, when production levels unexpectedly dropped by 10 percent, indicates to me that the supply chain is healthy and still has enough slack to meet future demand. If market conditions had been tight before the storm, then a disruption to supply could have created an outsized response in the market price. But that is not what happened this time.

The chart shows that resin production dipped from the 100-line at the end of 2014 to the 90-line by the end of 2015. The fact that recent output was consistently running about 10 percent below the average levels from just a couple of years earlier indicates that supply conditions were not tight at the time the hurricanes hit.

It is worth noting that output levels were in a gradual trend upward, just above the 90-line, when the storms hit. Therefore, I expect that levels will get back up to pre-storm levels in the coming months. But it is not clear when they will rise back to the levels we saw in the period from 2012 through 2014.

As anyone who follows this market closely will tell you, the relationship between prices and production is fraught with uncertainty. One of the major determinants of output levels in recent years appears to be the price of crude oil.

My Resin Price Index hit a cyclical peak in the fourth quarter of 2014. It then dropped precipitously through all of 2015 before hitting a cyclical low-point in the first quarter of 2016. The pattern in the chart for resin prices closely corresponded with the pattern in the price for crude oil during that period. And the trend in production levels also followed this pattern.

You will recall that the global oil market was oversupplied three years ago, and the price of crude oil crashed. Crude oil prices plummeted by approximately 70 percent from late-2014 to early-2016. Resin prices reacted by falling approximately 40 percent. Resin suppliers curtailed production by about 10 percent, apparently in response to the lower prices.

As we enter 2018, the price of crude oil is currently in a small, but noticeable, trend higher. The same can be said for the trend in resin prices. It remains to be seen how long these trends will be sustained, but I do not expect them to decline from current levels. Resin output will rebound from the lows caused by the storm, but they will not likely rise too much higher than that. I do not yet have a forecast for when and where the next major hurricane will hit.