Inflation Pressures Weigh on Plastics Supply Chain
Polyethylene and recycled polyethylene supply chains can’t seem to buy a break
The entire plastics supply chain is straining under the weight of higher prices. US producers polyethylene, who on the surface still enjoy outstanding margins due their advantage of making resin from ethane. That source not rise price near the rate of crude oil or its derivative naphtha. The rest of the world uses to make PE. That’s led to variable margins for integrated PE producers to look like that shown in the chart below from ICIS Analytics, .Comparing robust US high-density PE (HDPE) contract margins to those in Northeast Asia, which has been trying to crawl out of the red. It has not been profitable of late to make HDPE in Northeast Asia, although higher prices for HDPE and co-products emanating from naphtha cracking are starting to help.
The US R-PE market is not as developed as the recycled polyethylene terephthalate (R-PET aka rPET) market. One difference that has evolved with R-PE is that cost sensitivity plays an important role. R-PET has matured to the point of decoupling from virgin PET, although continued strong demand from brand owners with ambitious sustainability targets means that detachment has led to higher prices than for virgin material.
Affection of shipping freight to producer
Still, US PE producers are not singing as joyful tune as you might expect. Logistics constraints are making it difficult to export resin to regions such as Asia, South America, and Europe. ICIS analysts estimate that less than 40% of US production is being exported monthly. That number needs to be in the 40-45% range to keep US domestic PE inventories from piling up. With up to 80% of export bookings heard to be delayed, warehouses are quite full. That could lead to lower operating rates for US PE plants in the coming months if container shipping logistics don’t get better. Based on the last year’s numerous shipping issues, it’s hard to bet on that occurring.
If consumer demand remains strong, this period of strong pricing seems likely to persist in most commodity resin markets. But never forget that, historically, the cure for high prices has been high prices. With wage growth not keeping pace with inflation, consumers’ wallets will eventually not be able to support price escalation. Let’s hope that if that happens there are not severe economic consequences that hurt consumers and the plastics supply chain.