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Volatile resin markets require rethinking 2022 contracts

By Jeremy Pafford on 05-Nov-2021

Negotiations on annual contracts are under way for many in the plastics supply chain, and the market conditions looming over the bargain table have rarely been as complex and vexing.

After a year of ever-increasing resin prices on the back of strong demand and the potent cocktail of supply and logistics issues, diverging market pictures have started to take shape. Look at the following current state of affairs, each of which could be used as reason for price change, and try not to get queasy on this bumpy ride:

  • Prices for commodity resins polyethylene (PE) and polypropylene (PP) have started falling in the North America, and ICIS and Chemical Data (CDI) analysts think they have a good deal more room to fall into next year.
  • The same cannot be said for resins such as polyethylene terephthalate (PET), polyvinyl chloride (PVC), polycarbonate (PC) and acrylonitrile-butadiene-styrene (ABS), where bullish market sentiment continues, or for polystyrene (PS), where the thinking is that stability at current levels could be maintained for several months.
  • The above is happening amid higher upstream crude oil prices, which historically has been an indicator of higher polymer prices since most of the world’s resins can trace their production back to the barrel. But even those in the US that come from natural gas liquids (NGLs) such as ethane and propane are facing higher prices due to their connection to natural gas, which has seen its US prices double this year.
  • Logistics continue to be challenging, with costs to move goods and lead times super-inflated, and when those challenges abate continues to be anyone’s guess. Expectations are that these conditions will continue through 2022, but then many experts figured earlier this year that
  •  the kinks in logistics would be ironed out by now.
  • Consumer demand for goods remains robust, but concerns are mounting surrounding inflation across the economy and purchasing power and consumer confidence eroding. Should the COVID-19 pandemic wane, will consumers shift their spending towards services again similar to how they shifted them towards goods during the pandemic, and if they do, what will be the effect on resin markets?

The above conditions lead to a substantial risk for those negotiating annual contracts and pricing mechanisms in the plastics supply chain for 2022, as there is considerable possibility that today’s pricing will look nothing like what these markets see by this time next year. This year’s volatility to the upside – much of it higher than production cost increases – means margin contraction possibilities abound. At the same time, consumer demand for materials in need of resin has continually surprised forecasters, and difficulties in sourcing materials from international suppliers mean greater pricing power for domestic producers and markets still very sensitive to unplanned production outages.

Neither side of the bargaining table wants to be stuck with a bad price for 2022, nor be stuck with large inventories of supply due to miscalculations on demand.

Several in the North American plastics supply chain, particularly in the brand owner space, like to benchmark to quarterly, half-year or even annual average price points, and that usually makes a lot of sense – stability in pricing and greater ease in budgeting spend. However, with so much uncertainty surrounding price direction and velocity of those price changes for 2022, implementing a more frequent mechanism for resin price changes is needed to properly capture market movements. Many contracts on large volumes of material do just that – hence why ICIS and CDI have monthly contract pricing. More plastics supply chain participants in North America need to do that, at least for 2022, and use our prices as their benchmark for those movements. It may mean a bit more time spent during the year adjusting budgets or resin sales numbers, but it will more directly represent where markets are now in what is likely to be another year of substantial volatility.

The argument rightly exists that a majority of volatility risk is towards lower resin pricing, and thus more reason for buyers to get more frequent price changes that could well be lower and lower. What benefit, therefore, would there be for sellers to agree to that? For one, should market pricing fall and take margins with it, maintaining or even growing sales volumes will take precedence, as lower pricing likely means a well-supplied market with increased competition on those sales. Offering buyers the ability to adjust prices to market movements more frequently could be done in exchange for locking in more volumes, or at least setting up the option for that. That would bring in additional business now and set up the seller for additional growth when prices go up.

Volatile resin markets require greater connection to market movements to better mitigate challenges and strike on opportunities. One key way is implement more frequent price changes until resin markets show consistent signs of normalisation, which for most does not seem likely within the next several months. Whether they normalise by then or not, ICIS and CDI analysts stand ready to help you make sense of it all.

Disclaimer: The views in this blogpost should in no shape or form be taken as actual forecasts and are my personal views only.