- Winter Storm Uri hit the Gulf Coast in the first quarter of 2021, causing widespread utility and raw material supply disruptions and industry-wide production outages.
- Most plastics production facilities resumed operations by the end of March 2021. However, the storm and subsequent hurricane season resulted in tight supply dynamics and generated pricing momentum for raw materials and finished goods.
- Following a pandemic-driven 14.6% decline in 2020, industry revenue is forecast to expand at an annualized rate of 2.6% through 2026, driven by strong housing and export markets.
- Despite a positive demand outlook, the industry faces headwinds related to environmental concerns, including global warming and volatility in the petroleum industry.
CURRENT INDUSTRY CONDITIONS: Since 2001, the Gulf Coast has seen tremendous growth in the number of petrochemical plants, which has helped the U.S. become one of the largest exporters of plastics and other petrochemical products. Relatively steady growth in consumer spending and industrial demand for plastics and resins drove growth of approximately 0.6% on an annualized basis from 2016 through 2021, according to industry research firm IBISWorld. Despite positive volume demand trends, revenues were curbed over the period by lower petrochemical prices, which in turn resulted in lower resin prices.
PANDEMIC EFFECT: The COVID-19 pandemic initially negatively affected the resin market and demand from the consumer and industrial markets, suppressing demand in China in February 2020 and throughout the rest of the world by March. In the early stages of the pandemic, there was a rapid and strong resurgence in consumer demand for resins, such as those used in packaging and hygiene products.
However, there was a more protracted and stubborn fall-off in industrial demand for resins, including those used in automotive manufacturing, construction and other types of industrial applications. Additionally, as the base price of petrochemicals dropped to historic lows in May 2020, the price of resins dropped as well. These prices are often contractually linked to petrochemical-related feedstock prices, and their drop resulted in a 14.6% decrease in 2020 industry revenues, according to IBISWorld.
WEATHER EFFECT: Despite the pandemic’s negative effects on the sector, rapid economic recovery in the second half of 2020 and throughout 2021 increased demand for plastic and resin products. Industrial production reached pre-pandemic levels with the recovery of automotive production in the fall of 2020 and positive trends in the housing market and other sectors of the economy. Production peaked in January 2021 at a rate 11.5% higher than February 2020, according to the Federal Reserve Board.
The rebound was short-lived as production collapsed following an unusually severe winter storm that hit Texas in mid-February 2021. The storm, referred to as Winter Storm Uri, caused low temperatures that affected the petrochemical industry throughout Texas, freezing wells, pipelines, petrochemical refineries and production plants. The weather brought on force majeure conditions at many plants and halted production of several key feedstocks of plastics, including polyethylene and chlorine.
These conditions immediately disrupted plastic and resin production, which dropped by over 25% in February 2021 and did not fully recover until April. Additionally, general supply chain issues have affected the sector, with logistics problems restricting exports and rail and trucking backlogs affecting domestic delivery times.
As a result, supply concerns drove up plastics prices. By the end of March 2021, polypropylene spot market prices had increased to $1.45 to $1.50 per pound from mid-January rates of $0.90 to $0.95 per pound. By early April, the spot price of most polyethylene resin grades had more than doubled, reaching as much as $1.10 per pound.
The prices for plastic resin have remained comparatively high through November 2021, according to the U.S. Bureau of Labor Statistics. The producer price index for all grades of plastic resins and materials have surpassed 2020 levels by over 50% despite weakness in the automotive sector, primarily caused by worldwide microchip production issues.
The 2021 hurricane season severely affected Texas and Louisiana. Hurricane Ida knocked approximately 60% of U.S. polyvinyl chloride production offline, and Hurricane Nicholas knocked approximately 85% of the U.S. polyethylene capacity offline, according to data provider Independent Commodity Intelligence Services. While production was back online by November 2021, the supply chain was again temporarily severely affected. According to Jason Keiswetter, president of Petoskey Plastics, raw material costs increased 150% from summer to fall 2021. Suppliers who had announced price increases before the Texas freeze have issued more in its aftermath. “My family has been doing it for 50 years,” he said. “We’ve never seen raw materials spike like this.”
In the aftermath of the hurricanes, plastics prices have eased slightly, but manufacturers continue to report higher prices and short supplies of resin-related products, according to the Institute for Supply Management’s October 2021 Manufacturing Report on Business. The material became more expensive after a tax on imported resins was reinstated in 2020. Joe Doss, president and CEO of the International Bottled Water Association noted that duties on PET from China are now set at $1.80 for each $1.00 of imported goods. Commodity-grade resin supply has improved recently, and spot prices for polyethylene and polypropylene, two of the most used resins, have slowly been declining since the late summer, according to The Plastics Exchange, a marketplace for buying and selling commodity grade resins.
INDUSTRY OUTLOOK: A strengthening U.S. dollar and tariff challenges have hindered export growth since 2016. Nevertheless, exports remain the single largest marketplace for plastic and resin products, accounting for 38.2% of U.S. industry revenue. Spurred in large part by the production and sale of ethylene because of the U.S. shale boom, exports are forecast to increase at an annualized rate of 4.2% through 2025, according to IBISWorld.
The Dow Chemical Company’s (Dow’s) recent results seem to support a positive outlook, at least in the short term. Dow reported net sales of $14.8 billion in the third quarter of 2021, up 53% from $9.7 billion in the third quarter of 2020 and up 7% from $13.9 billion in the second quarter of 2021, with increases generated across all operating segments and geographic regions.
Despite the positive outlook, IBISWorld notes industry growth could be constrained by the slowdown in Asian economic growth and increasing regulations related to environmental concerns, including carbon limits, global warming and weather impacts. Financial think tank Carbon Tracker’s 2020 report titled “The Future’s not in Plastics,” suggests opportunity for industry revenue growth may be hindered by the decline in petroleum feedstock prices and industry profitability. Additionally, the report notes the pressure to limit the use of plastics because of environmental concerns as another key factor negatively affecting the industry going forward.
ENVIRONMENTAL ISSUES: Plastic waste buildup in the world’s oceans has been a growing issue for decades and is coming to an inflection point. Federal and local governments have begun taking action by passing plastic bag ordinances, banning the use or sale of plastic bags, mandating recycling, and supporting the development and use of alternate, more biodegradable materials. Additionally, multiple companies are voluntarily shifting their packaging material content away from plastics.
Consumer and government pressure to reduce the use of plastics polluting the world’s oceans is a hard-to-quantify threat to demand. Over the last few years, the export of various types of recycled waste products from the U.S. to China has been restricted primarily because of difficult-to-recycle plastic waste embedded in the waste stream. Despite some recent easing of the restrictions on scrap metal exports to China, plastic waste export restrictions to China remain in effect as of fall 2021.
In addition to these restrictions, more jurisdictions in the U.S. are enacting or strengthening recycling mandates1, which has spurred more investment in plants configured for recycling plastics2. Despite this, mandates for the increased use of post-consumer plastics will likely increase industry costs due to the logistical challenges associated with these measures and the impurities present in the plastics waste stream.
Additionally, plastics production is a major source of carbon emission. In January 2021, the U.S. rejoined the Paris Agreement, an international treaty on climate change, and committed to a goal of a net-zero emissions economy by 2050, making this a real issue for the future of the resin industry.
There is robust growth in the use of bioplastic technology in resin production, which uses non-carbon resources like plant oils and fibers. These products are biodegradable and generate lower levels of greenhouse gasses than petroleum-based plastics. However, bioplastic is, on average, approximately 20% more expensive to produce than petroleum-based plastic.
Gordon Brothers is beginning to see bioplastic manufacturers and resins in the marketplace. Growth in this sector will begin to reduce consumption of fossil fuels by the industry and remove some of the inherent price volatility in the petroleum marketplace.
Thus, while the resin inventory category is something that should indicate a strong recovery on its surface, due care and diligence should be exercised before applying an advance rate for this type of inventory.
RESIN RECOVERIES TYPICALLY STRONG WITH EXCEPTIONS: While resin inventories typically provide a strong recovery in liquidation, lenders must keep several caveats in mind. Uncolored resins with no additives are essentially commodity-like inventories that, in proper quantities, would be readily salable in liquidation at minimal discounts off market pricing. This type of resin would need a short marketing period to sell.
Once resin is colored, however, its utility to anyone other than the intended customer diminishes precipitously. Likewise, as various additives like flow inhibitors, ultraviolet stabilizers, biocides and other products are added to resins, the end use and potential pool of buyers shrinks quickly. These resins are readily marketable, but they may only generate scrap proceeds and would be sold as secondary surplus to a formulator interested in blending the product with other resins to produce a particular product. Colored resins can typically be mixed to make darker colors but have few other color possibilities.
Apart from thermoset resin, resin scrap is commonly reprocessed and used again. Many companies stock and reprocess scrap themselves in either flake or pelletized form. The value of these products and their recovery as a percentage of cost will vary tremendously by grade, color and form. This recovery percentage would also be dependent on the costing methodology applied to these reprocessed inventory items.
Additionally, lenders should be aware resin scrap inventories may contain non-resin items such as colorants and performance additives. While resin inventory should indicate a strong recovery on its surface, lenders should exercise due care and diligence before applying an advance rate for this type of inventory.
INVENTORY COSTING AND MARK-TO-MARKET RESERVES: When a company’s inventory contains commodity-type items subject to frequent price fluctuations like resins, it is imperative to understand the company’s inventory-costing methodology.
A standard cost approach includes updating inventory costs periodically and, depending on the frequency of the update, may result in the company’s reported cost varying from the market in an inflationary or deflationary environment.
A rolling weighted cost approach utilizes an average weighted cost for each purchased item that equates to a rolling perpetual average. This methodology is useful for commodity-type items, as a company’s reported cost will remain closer in line with the market, although it will still trail market prices by a set period.
Given the volatility in the resin market, lenders should be aware of the target company’s costing methods and should consider incorporating a mark-to-market or lower-of-cost-or-market reserve. This type of reserve will adjust the cost basis to market and ensure an advance rate, based on a percentage of cost, remains relevant even in a volatile market.
1 Steve Toloken, “New Jersey Legislators Consider Recycled Content Law,” Plastic News, September 18, 2020.
2 Keren Laird, “LyondellBasell Successfully Starts Up Pilot Molecular Recycling Facility,” Plastics News, September 10, 2020
NOTE: THIS PUBLICATION IS PROVIDED FOR INFORMATIONAL MARKETING PURPOSES ONLY. THE MATERIAL CONTAINED HEREIN SHOULD NOT BE REGARDED AS ADVICE, NOR RELIED UPON TO MAKE FINANCIAL, OPERATIONAL OR OTHER DECISIONS; NOR SHOULD IT BE USED AS A SUBSTITUTE FOR AN ASSET APPRAISAL. ACTUAL RECOVERY VALUES MAY VARY FROM TRANSACTION TO TRANSACTION AND THE RECOVERY VALUES REFERENCED HEREIN ARE FOR REPRESENTATIVE TRANSACTIONS WITHOUT REGARD TO SPECIFIC KEY FACTORS. THIS MATERIAL MAY BE REDISTRIBUTED ONLY IN ITS ENTIRETY, INCLUDING NOTICE OF COPYRIGHT. ALL RIGHTS RESERVED. ©2021 GORDON BROTHERS, LLC.
REFERENCE SOURCES:U.S. BUREAU OF LABOR STATISTICS, THE PLASTICS EXCHANGE, PLASTICS NEWS, DOW, INC., IBISWORLD, THE WHITE HOUSE, BOARD OF GOVERNORS OF THE FEDERAL RESERVE, THE WALL STREET JOURNAL, SUPPLY CHAIN DIVE, INSTITUTE OF SUPPLY MANAGEMENT, U.S. SECURITIES AND EXCHANGE COMMISSION