The price of plastic: Taking control of raw material costs

The price of plastics is volatile – not only because it depends heavily on the price of oil, but also because it’s affected by other market conditions.

For manufacturers using plastics, this can be a bottom-line headache; but, as Callum Macpherson, Head of Commodities at Investec explains, ways to hedge against price fluctuation are emerging.

Plastic is widely used in all sorts of products – whether that’s low-density formulations used for packaging or high-density plastic used for products like piping and plastic lumber.

In Europe, plastics are mainly produced from petroleum products and therefore the price of crude is one of the key factors that affect plastic costs, making it very volatile.

However, there are additional factors that can allow plastic prices to take on a life of their own, such as capacity constraints and stockpiling by users.

Plastic Chips Plastics - The price of plastic: Taking control of raw material costs - Stock Image

Over the past five years, the price of plastic has swung from £850/MT (metric tonne) to highs of more than £1300/MT. These variations have the potential to materially affect the bottom line; however, many manufacturers aren’t aware that plastic can be hedged.

It can be – and we’re seeing a lot of interest from manufacturers who use plastics and want to manage their exposure to price moves.

This article first appeared in the February issue of The Manufacturer magazine. To subscribe, please click here.

Mark Amphlett, general manager for Amtek Plastics, in Newton Abbott (Devon) commented, “We’re a processor of plastic raw material, wholly reliant on the distribution channel in the UK and Europe, and price fluctuations have become an unpleasant everyday experience for us.

“Passing on material price increases to our clients can be problematic, especially when the increases are far in excess of the standard rate of inflation. This can be difficult to explain because the price rises are not always based on an increase in the foundation of the finished raw material that we purchase.

“Our distribution channels justify high increases as, ‘due to tight supply of raw materials and order books full to capacity’, which is also hard to explain to end users. This is especially true for specialist materials – ones that are specified from a handful of European manufacturers, or even just one.

Recycled plastic polymers = Polyethylene and polypropylene are the two most common forms of plastic.
Polyethylene and polypropylene are the two most common forms of plastic.

“Taking all of these factors into account, I would welcome any options to help stabilise raw material prices. It is such a large proportion of our cost base that any assistance in removing this ‘unknown’ would be of huge benefit – not just for us, but for our industry in general.”

What’s the supply chain for plastic?

Plastic 101: crude oil is a mixture of hydrocarbons with different boiling points. A refinery uses those different boiling points to separate out the components of crude oil into useful products, including gasoline, diesel, jet fuel, fuel oil and naphtha.

Naphtha can be processed further via a process known as ‘cracking’ to produce key plastics feedstocks such as ethylene and propylene. These can then be polymerised to produce polyethylene and polypropylene – between them the two most common forms of plastic.

Other plastics, such as PET, are also formed through processing petroleum products. In addition to producing ‘virgin’ plastic from petroleum products, recycled material can also be used or blended with virgin plastic.

What drives the price of plastic – is it just oil?

Oil is a big driver, as it’s the origin of petrochemicals, at least in the way they’re produced in Europe.

However, oil is by no means the whole story. First, there are different price sensitivities in different parts of the chain. Naphtha is a liquid at room temperature and therefore relatively easy to store and transport. However, ethylene is a gas, which is more challenging.

Plastics themselves are resilient and of course solid, meaning that they can be easily stored for long periods of time in a standard warehouse.

The price of plastic: Taking control of raw material costs - Charting the price of plastics (‘polymer’ – L) and crude oil (‘olefin’ – R) products - Investec - Feb 2019

Several factors can lead to plastics price variations deviating from crude:

  • There is a finite amount of processing capacity available. This acts as a brake on production, and can keep plastic prices high when demand is strong
  • The production of plastics and their feedstocks is energy intensive, which can exacerbate the impact of changes in oil prices
  • Logistic challenges with transporting gaseous feedstocks like ethylene can make it hard to eliminate regional prices differences (European prices are much higher than US ones)
  • Since plastic is durable and easy to store, producers sometimes stock up on it when they feel that prices are low, and dip into this inventory when prices are high. This can have a dampening effect on price moves, but can also lead to plastics prices pre-empting moves in oil prices.

In practice, the two graphs shown above detail how plastic prices have moved over the past few years, with oil also included for reference.

What’s likely to happen to plastic prices in the future?

For a product based on oil, volatility is a given. However, it’s possible to take a considered view on the factors that will be relevant in the longer term.

The US shale boom has led to considerable growth in the availability of light products in the US – natural gas and petroleum gas are products that lend themselves to producing petrochemicals.

At the same time, petrochemical infrastructure is expanding and adapting to accommodate the growth in light products and natural gas. However, the US is also developing capacity to liquefy and

export natural gas and gaseous feedstocks for plastics to supply international petrochemical markets.

Looking to the demand side of the equation, while fossil fuels as sources of energy may eventually be displaced to a material extent by other forms of energy, for now, demand for oil generally looks set to continue growing.

Meanwhile, plastic demand tends to be associated with global growth and so could also be expected to continue growing.

What is hedging?

Hedging is a way of limiting your exposure to price fluctuations. If you know you’ll need 1,000 metric tonnes of plastic over the next year, you can choose to pay the ‘spot’ rate – the variable price on the day you need it – or use hedging products to fix a price for the year, so that the hedging company takes the risk instead of you.

Can I hedge plastic?

Unlike currencies and commodities like oil, financial markets for plastics are relatively new. It has historically proven difficult to hedge, largely because it’s not traded as actively as other products such as oil.

That’s a problem for manufacturers who need to control input prices. Using oil products like naphtha, or even crude itself, as a proxy hedge has often been disappointing in the past, because as explained above, the prices of oil and plastic can diverge.

Recently though, the markets for end products like plastic have become more liquid, and are no longer solely the domain of large petrochemical companies. In practice, that means that there’s more of a market for plastics and banks and financial institutions can offer hedging products – taking on the risks associated with price rises – more easily than before.

Thanks to the emergence of these new alternative products, manufacturers can now hedge plastics in the same way that they’d hedge a currency or another commodity, to manage risk.

Lots of these companies work in industries where they can’t pass on price rises – for example, where a contract sets a fixed price, or there are high levels of competition in the market – and are pleasantly surprised that these new products exist.