Plastic Resin Trends
Date September 2019
- One year after U.S. tariffs went into effect on over $200 billion worth of Chinese imports, including many categories of resins and plastics, pricing on some key resins as of September 2019 has come down as much as 25% over the same period in 2018
- A strengthening U.S. dollar and tariff challenges have hindered export growth, which is anticipated to have increased at an annualized rate of just 0.7% for the five years ending in 2019
Approximate net recovery on cost
By The Numbers
Escalating tariffs: U.S. tariffs went into effect in late August 2018 on approximately $16 billion worth of Chinese products, including over $4 billion of chemicals and plastics materials. This group is commonly referred to as “list two” under the U.S. 301 group of tariffs. A third round of U.S. tariffs on resin and resin-based products followed in May 2019 (list three). The most recent rounds of tariffs (lists four and four(a)) have impacted categories like oleoresins, resinoids, and gum resins used in the manufacture of various types of adhesive putty and cement as well as some types of food coloring. Initially, the U.S. imposition of tariffs was intended to counter China’s practice of requiring U.S. companies to turn over intellectual property as a condition for gaining access to the world’s second-largest economy. China has since retaliated with $110 billion of its own tariffs on U.S. polyethylene resin and finished products in three rounds, demonstrating the will to protect its own interests and economic growth. Based on information from commodity market analyst S&P Global Platts, the petrochemical-heavy second and third rounds of the Chinese tariffs came just as the U.S. chemical industry was beginning its first wave of more than $200 billion of new and planned infrastructure investments.
U.S. tariffs on resin raw materials and finished goods (e.g. buttons, resin cements, and adhesives) from lists two, three and four, range from 15 to 30 percent depending on product type. Per the American Chemical Council, China imported 11 percent (representing $3.2 billion) of the plastic resins made in the United States in 2017. Despite ongoing bilateral discussions over what is now viewed as a full-fledged trade war, it remains an open question as to when (or if) these tariffs will ever be reversed. The Plastics Industry Association has been a vocal opponent of proposals to impose tariffs on plastic products, materials, and machinery for affected manufacturers.
To the extent that the increased cost of goods from import tariffs were not passed along to the end user, this would put pressure on manufacturers’ gross margins, which could negatively affect appraised values. As of early September 2019, pricing on some key resins including HDPE blow-mold and injection, LLDPE injection, and LDPE injection has come down from approximately 18 to 24 percent over the same period in 2018. This being said, most resins consumed by U.S. plastics manufacturers are produced domestically, as the U.S. is a low-cost producer of resin because of favorable natural gas prices. Most imported resins do not come from China. As a result, the ongoing trade war will likely not impact resin producers from a supply chain perspective. Finished products may end up being impacted; however, some producers’ customers’ products may end up benefiting from tariffs on competing Chinese products. The outlook on the industry related to trade and tariff issues remains favorable to neutral at this time.
Moderate demand increase, bioplastics on the horizon: Plastic resin, made from petrochemical and natural gas feedstocks, is the primary component of plastic. Consequently, the cost of manufacturing plastics fluctuates in accordance with oil and gas prices. Crude oil pricing is expected to decline at an annualized rate of 0.2 percent through 2024, while the world price of natural gas is expected to increase. Demand from key downstream buying markets is forecasted to increase, and plastic and resin manufacturers are expected to pass on most of these additional costs to customers.
Given the push toward resource conservation through manufacturing efficiency and the quest for greener alternatives to petroleum-based materials, it is anticipated that many companies will likely invest more resources into integration with regard to innovation and efficiency in the production process and toward seeking alternatives to fossil fuel-based plastics. Alternatives include bioplastics derived from sources like vegetable oil and cornstarch. However, production costs for bioplastics average approximately 20 percent higher than for petroleum-based plastic, which will likely impact pricing and gross margin rates for those companies adopting them.
Resin recoveries typically strong with exceptions: While resin inventories typically provide a strong recovery in liquidation, lenders must keep in mind several caveats. Uncolored resins, with no additives, are essentially commodity-like inventories that, in proper quantities, would be readily salable in liquidation at very low levels of discount off market. 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 such as flow inhibitors, UV stabilizers, biocides, and other products are added to resins, the end-use and potential pool of buyers shrinks quickly. Resins such as these are readily marketable, but they may only generate scrap proceeds and would be sold as secondary surplus product 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 little other color possibilities.
With the exception of 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. In addition, as with resin, lenders should be aware that resin scrap inventories may contain non-resin items such as colorants, performance additives or other non-resin components. 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.
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, can 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 that an advance rate based on a percentage of cost remains relevant even in a volatile market.