Plastic Resin Trends
Date September 2020
- The pandemic has had a dramatic and negative impact on the resin market. The latest forecast by industry research firm IBISWorld projects a 26.1 percent decline in plastic and resin-related revenue in 2020.
- Despite the recent downturn, the industry is still forecasted to expand at an annualized rate of 4.1 percent through 2025, driven by strong housing and export markets.
- Tariff-related issues have been relatively stable over the course of 2020 but could impact the industry in the future.
- The industry trend in recent years has been driven by relatively steady growth in consumer spending and industrial demand with growth of approximately 0.9 percent on an annualized basis for 2015 through 2020. Despite positive volume demand trends, revenues were curbed by lower petrochemical prices, which have resulted in lower resin prices.
- Despite a positive demand outlook, the industry faces headwinds related to environmental concerns, the issue of global warming, and the volatility in the petroleum industry that may continue to impact the industry.
Approximate net recovery on cost
COVID-19 Impact and Current Industry Conditions: The industry trend in recent years has been driven by relatively steady growth in consumer spending and industrial demand with plastics and resins demand growth of approximately 0.9 percent on an annualized basis from 2015 through 2020. Despite positive volume demand trends, revenues have been curbed over this period by lower petrochemical prices, which have in turn resulted in lower resin prices. The impact of the coronavirus pandemic and spread of COVID-19 has had a dramatic and negative impact on the resin market, initially suppressing demand for the consumer and industrial markets in February in China and then in March and April in the rest of the world. Although there has been a rapid and strong resurgence in demand for consumer products related to resins including items such as packaging and hygiene products in the early stages of the COVID-19 pandemic, there has been a more protracted and stubborn fall off in demand in the industrial market for resins, including those used in automotive manufacturing, construction, and other types of industrial applications. In addition, as the base price of petrochemicals dropped to historic lows in May, the price of resins, which is often contractually linked to petrochemical-related feedstock prices including natural gas, ethylene, and naphtha dropped as well, which in turn had a negative impact on industry revenues. As a result of these declines, in August 2020, IBISWorld forecast that plastic and resin industry revenues would drop by 26.1 percent in 2020. Dow Inc., recognized as the largest resin producer in North America, reported in its earnings results released on July 23, 2020, that sales were down 24 percent for the quarter ended June 30, 2020, reflecting the impact of COVID-19. However, volumes were off by just 9 percent for the same period due to price declines of 14 percent versus the year ago period, primarily reflecting lower global energy prices.
Despite the clear negative impact on the sector, recent trends indicate a solid recovery is underway due to strength in housing, construction, and a recovering automotive sector. Although prices for all types of resins fell heavily in the spring following the dramatic drop in petroleum prices as well as the weak demand in many market segments, since June prices have been increasing due to the renewed demand exhibited in certain sectors. In addition, some supply constraints created by production cutbacks in the spring, as well as the recent spate of hurricanes impacting the U.S. gulf area have had a positive impact on prices. After hurricane Laura hit the Houston, Texas, area in late August, global chemicals news and market research firm Independent Commodity Intelligence Services estimated that 18 percent of U.S. polyethylene capacity was offline, along with 26 percent of polypropylene capacity, 29 percent of U.S. ethylene production, and 14 percent of polymer-grade propylene production. This created a strong price environment for plastics in September. Adding to this, demand growth, while still below prior-year levels, is currently strong. On August 14, 2020, George Knight, CEO of Hexion Inc., the second-largest resin producer in the world noted “we continue to see an impact in the third quarter from the pandemic, although our July volumes continued to improve sequentially compared to the prior month. Looking ahead, while we expect the coronavirus to negatively impact our results in the second half of 2020, we are encouraged by the resiliency of our customers in certain end markets, such as wind energy and North American residential construction.”
industry outlook: Based on a May 11, 2020, Dun and Bradstreet (D&B) First Research industry report that isolated the resin and synthetic fiber manufacturing segments of the market, the U.S. resin and synthetic fiber industry is estimated to generate $105 billion in revenues annually and accounts for about 16 percent of the global marketplace. In recent years D&B has highlighted varying segments of the market that are expected to outperform, including a report published in 2019 that projected growth in exports in some part due to the new United States-Mexico-Canada Agreement passage. Previous D&B projections forecast a 2019 to 2024 annual growth rate of 5 percent due in large part to macro-economic forecasts in place at the time. IBISWorld tracks results for the plastics and resins manufacturing industry, a slightly different subset of the industry, which, based on 2019 results, is estimated to be generating $69 billion annually. Based on an August 2020 report with the COVID-19 pandemic factored in, IBISWorld projects revenue in the industry to grow at 4.1 percent annually through 2025, based on a strong residential housing forecast, stronger industrial production, continuing strong export revenues within North America and globally, and an improvement in petroleum prices going forward. This increase is expected to be buoyed by more stable commodity prices, leading to less revenue volatility. Exports were also noted as being a key driver to this industry accounting for approximately 45 to 50 percent of revenues. A strengthening U.S. dollar and tariff challenges have hindered export growth over the last several years. Despite this, the export market remains the single largest marketplace for plastic and resin products accounting for 49.8 percent of industry revenues, spurred in large part by the production and sale of ethylene as a result of the U.S. shale boom. According to IBISWorld, exports are forecast to increase at an annualized rate of 4.7 percent through 2025.
Despite the positive outlook from noted research firms, other recent forecasts are not as strong. Growth in the export market has been driven in large part by the shale oil boom, which in the near term is certain to contract. This has and likely will continue to negatively impact the profitability of ethylene exports, which is one of the key export products in the industry. A recent report released by Carbon Tracker, titled “The Future’s not in Plastics” cites the decline in petroleum feedstock prices and industry profitability weighing down the opportunity for revenue growth in the industry and also notes the pressure to rein in the use of plastics due to environmental concerns as another key factor negatively impacting the industry going forward.
Tariff events: U.S. tariffs went into effect in 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 2” under the U.S. 301 group of tariffs. A third round of U.S. tariffs on resin and resin-based products followed in 2019 (list 3). The last rounds of tariffs (lists 4 and 4a) 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. 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 U.S. in 2017. 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. The last activity in the stalled U.S.-China trade war was the implementation of the Phase I Tariff rollbacks in February. For U.S. commodity polymers and chemicals, China’s last round of tariffs (implemented in September 2019) added 5 percent on top of existing tariff levels of 25 percent in most cases, bringing the total to 30 percent. These tariffs were applied to high-density polyethylene (HDPE), linear low-density PE (LLDPE), polypropylene (PP), ethylene vinyl acetate (EVA) copolymer, polystyrene (PS), acrylonitrile butadiene styrene (ABS) and others. The additional 5-percent tariffs were reduced to 2.5 percent as of February 14, therefore, U.S. products hit with 30-percent tariffs were reduced to 27.5 percent. 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 due to 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 be impacted; however, some producers’ products may benefit from tariffs on competing Chinese products. The outlook on the industry related to trade and tariff issues continues to be favorable to neutral.
Environmental Issues: Plastic waste buildup in the oceans has been a growing issue for decades and is coming to an inflection point causing federal and local governments to take action, passing plastic bag ordinances banning the use and/or sale of plastic bags in certain jurisdictions, mandating recycling, and supporting the development and use of alternate, more biodegradable materials. In addition, multiple companies are voluntarily shifting their packaging material content away from plastics. Consumer and government pressure to reduce the use of plastics that are choking the world’s oceans is a hard-to-quantify threat to demand for plastics. Over the last few years, the export of various types of recycled waste products from the U.S. to China has been restricted primarily due to 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 still remain in effect. In addition to these restrictions, more jurisdictions in the U.S. are enacting or strengthening recycling mandates, which has spurred more investment in plants specifically configured for recycling plastics. Despite this, mandates for the increased use of post-consumer plastics will likely increase industry costs due to the logistical challenges associate with these measures as well as the impurities present in the current plastics waste stream.
In addition, plastics production is a major source of carbon emission. While the environmental direction of the Trump administration has lessened the imminence of this threat to the industry within the U.S over the last four years, the passage and adoption of the Paris Agreement by the European Union and other countries worldwide, and the likelihood that the U.S. will be a future participant in the agreement, means that this is a real issue for the resin industry in the future.
The current growth of the use of bioplastic technology in resin production, which is resin sourced from non-carbon resources, such as plant oils and fibers, is fairly robust. These products are biodegradable and generate lower levels of greenhouse gasses as compared with petroleum-based plastics. Bioplastic is significantly more expensive to produce than petroleum-based plastic, averaging approximately 20 percent more. Gordon Brothers is beginning to see bioplastic manufacturers and resins in the market place. 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.
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.
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. ©2020 Gordon Brothers, LLC.
Reference sources: the Plastics Exchange, plastics news, dow, inc., Ibisworld, united states securities and exchange commission, first research, institute for supply management, bloomberg, independent commodity intelligence services