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February 18, 2021 09:33 AM

Expect resin prices to continue to rise, but not quite as steeply

Bill Wood
Economics Editor
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    Caroline Seidel/File photo
    This story is from 2021, read 2022's outlook here.

    Every month, I take a standard sample of the data on resin prices that are published regularly in this magazine, and I use this data to calculate my Resins Price Index. This proprietary index is designed to capture the major trends in overall resin prices. It is not intended to represent the actual prices paid for any particular type of resin, but rather it is a tool I use to analyze how the price of resin is affected by the trends in other macroeconomic indicators.

    I created this index many years ago, and early in its inception the trend in the RPI exhibited a robust correlation with the trend in the price of crude oil. This was also true of the price for natural gas, which for many years moved in lockstep with the price of oil.

    But in recent years, as the U.S. substantially increased its output of both oil and gas, the supply and demand dynamics for these commodities developed to a point where the historic price correlation deteriorated. As a result, I expected the correlation between oil and resin prices to diminish as U.S. resin producers increased their capacity to take advantage of cheaper sources of domestic natural gas.

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    As of now, I still discern a strong relationship in the trends for crude oil and resin prices. As the chart shows, there is a lag of three to four months at the major turning points, but the dominant trends in both data sets still exhibit a similar pattern. In other words, if you have an idea about the direction in which crude oil prices will go in the coming months, you can reasonably expect corresponding pressure on prices.

    So as always, a fundamental question for all segments of the plastics industry is: "What is the outlook for crude oil prices in 2021?" At the present time, the latest data clearly indicates crude oil prices are well above the pre-COVID-19 levels, and they are accelerating. Not surprisingly, this rise in oil prices is also showing up in the price consumers are paying at the gas pump. Gasoline prices are now above their year-ago levels. It has been 11 months since gasoline prices last exceeded their year-ago levels.

    This illustrates an important point about how energy market prices continually seek an equilibrium between supply and demand, and I think this is also true for the resins market. I do not think U.S. demand for gasoline is higher right now than it was before the COVID-19 crisis. For instance, I do not think that the number of vehicle miles traveled is presently higher than it was last February. But the abrupt and unprecedented crash in demand last spring caused a major disruption to the entire supply chain, which has not yet recovered. So demand is not back up to pre-COVID-19 levels, but neither is supply. Thus, prices are higher than they were a year ago.

    I can envision an analogous situation in the resins markets. Total demand for plastics products has not recovered to pre-COVID-19 levels, but my RPI is already higher than it was last February and it is trending higher. I believe the disruption to the supply and demand equilibrium for resins is the major factor in the relatively sharp increase in my RPI in the second half of last year.

    My current forecast is for this trend of rising crude oil prices to continue for the foreseeable future, and the only consolation I can offer is that I think it is likely the pace of the expected increase will moderate as the year progresses. Prices will continue to rise, but they will not rise as rapidly as they have in recent months because supply growth will ramp up in an effort to catch up to demand growth and demand growth will decelerate because of higher prices.

    This outlook for crude oil prices, and subsequently resin prices, is based on the following conditions being met:

    • Global demand for energy products increases as the impact of the pandemic subsides. This is particularly true in the U.S. We are making great progress, and I have great confidence we will prevail.

    • The Biden administration makes it increasingly difficult for the domestic fossil fuel industry to produce and transport crude oil.

    • OPEC is able to follow through, in some way, on the recently announced plan to curtail production.

    • The value of the U.S. dollar vis-a-vis the currencies of our major trading partners will continue to decline gradually. The trend in the value of the dollar goes the opposite direction of the trend in oil prices.

    This last point about the value of the dollar is important not only for the energy and resins markets outlook, but also to the domestic manufacturers of plastics products who compete against foreign suppliers. The value of the U.S. dollar index hit a cyclical high point at the beginning of the COVID-19 crisis, but it has dropped by about 10 percent since last spring.

    The value of the dollar will be supported if we encounter further substantial problems with the coronavirus because the dollar is a safe haven compared with the other currencies of the world. But if the virus is contained and the economy gets back on track, as I expect, the value of the dollar should continue to decline as this year progresses.

    All of the fiscal stimuli being pumped into the economy by Congress and the Biden administration may be necessary to get the economy going again, but it will ultimately be inflationary. Demand for all types of goods and services should increase this year, and consumer and producer prices should also start to rise more quickly. It was not just the energy sector that experienced a disruption in the supply chain. The anticipation of future inflation is already getting priced into the bond market. Interest rates are increasing and the yield curve is getting steeper.

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