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.