What's driving the resin market, and where are prices heading?

One thing I know with certainty due to my lifelong study of economics: Assumptions can be dangerous, especially when they pertain to the marketplace. I am sure everybody in business will agree.

I think of this every time I look at a chart of resin prices and try to forecast the most probable direction for the near- to medium-term. Volatility in resin prices is a well-known risk for the plastics industry, so it receives a lot of attention. Nevertheless, it is still not easy to forecast.

My current outlook calls for resin prices to come in flat to down through the first few months of this year and then climb gradually higher in the second half. This forecast is based on expectations of a gradual rise in overall global economic activity in 2020, which will push the price for commodities such as crude oil and natural gas higher.

To facilitate my analysis, I created the Resin Price Index. This is a weighted index I calculate every month from the price data published in the back pages of this magazine. It includes the largest resins categories by volume and, roughly speaking, it is the combined average price per pound of these resins. This index is not intended to reflect the actual price any given resins buyer paid each month for their materials, but rather it is an attempt to capture the significant trends in the market over time.

As the chart illustrates, the trend in resin prices (blue line, left scale) has been relatively stable and at a low level for the past four years. Prices have not quite dipped to where they were at the bottom of the last recession, but this month's reading is not too far from that level. Since 2016, the Resin Price Index has stayed in a comfortable range between 70-85. I call this range "comfortable" because at these levels, most processors are able to maintain healthy profit margins.

These stable market conditions are a contrast from the trend in resin prices during the first six years of the recent economic recovery. Coming out of the Great Recession, demand for resins ramped up steadily, and so did the price. Then in 2015, the bottom fell out. Resin prices plummeted 40 percent.

What is particularly interesting to me about this sharp decline is that output of plastics products continued to climb steadily throughout 2015 and beyond. Production of plastics products hit its most recent cyclical peak at the end of 2017 and has since backed off a bit. But even after last year's period of consolidation, the present-day U.S. demand for resin is substantially higher than it was at the end of 2014 when the Resin Price Index hit its peak. However, resin prices still remain about 40 percent lower.

Classically trained economists will tell you market prices are ultimately determined by supply and demand. So, if demand for resin was rising and prices plummeted anyway, the most likely explanation is supply increased at a much faster rate than demand did.

Data measuring the U.S. production of resin during this time indicate resin production did not rise during the four years from 2015 to 2018. In fact, output was mostly steady to down. In other words, demand was higher while supply was steady. So why did resin prices drop down so low? Were U.S. processors importing large amounts of cheap resin, or is there some other explanation?

The answer is partly on the top chart. This graph indicates the historical trend in the price of resin has been dependent on the trends in supply and demand of crude oil and not on supply and demand of resin. The U.S. ramped up its production of crude oil in the past 10 years, and there was an incentive for resin suppliers to invest in facilities that were more efficient. This allowed them to meet the rise in resin demand with cheaper resin.

But that is not quite the whole answer. For the past four or five years, the trend in resin prices has started to look increasingly like the trend in natural gas prices. U.S. production of natural gas also jumped substantially in the past decade. Resin suppliers anticipated this increase and adjusted their processes accordingly.

So, does this mean the natural gas market will now drive resin prices? It seems likely, but a mere five years of data is not really enough for me to abandon the crude oil chart completely as I make my resin price forecasts. But natural gas trends are certainly a big part of my analysis.

And here is where my self-reminder about assumptions comes into play. Natural gas is abundant and totally produced in this country, so it would be easy to assume that the future price trends for natural gas and plastic resins will not be subject to all of the geopolitical uncertainties and global market vicissitudes that affect the price of crude oil.

But if you have ever studied the natural gas market, you know its price volatility can get downright terrifying. The chart shows a few minor price spikes in the past few years, but it does not show the true historical volatility in the data. Not even close. A spike in oil prices could still send natural gas prices skyrocketing.

The U.S. plastics industry will benefit in the long run from this conversion over to natural gas as the predominant raw material for resins production. And while much of the risk in resin markets has shifted, you should not assume all of the risks to your business stemming from higher resin prices has been eliminated.