What Affects Polymer Prices in Relation to Feedstocks?

There are many factors that impact polymers prices in relation to feedstocks. Everything from the feedstock or monomer base used to the process of polymerization and capital to build the manufacturing plant are all taken into consideration. In addition to the physical materials needed to create the polymer, there are also human capital and energy, operational costs, engineering, packaging, transportation and more. But the largest (though most variable) component of the cash cost is likely feedstock. So how does this affect the overall cost of the polymer?

There are several simple causes and resulting effects:

CAUSE EFFECT
Crude oil or natural gas prices rise or fall feedstock costs increase or decline
New additional capacity is added, increasing the supply of feedstock beyond market demand feedstock costs decline
Feedstock supply interruptions caused by plant maintenance or equipment failure feedstock costs increase
Demand for a polymer or feedstock increases dramatically beyond the ability of the producers to supply feedstock costs increase

 

Indirect Factors: Crude Oil and Natural Gas

Polymer feedstocks are subject to availability issues caused by supply and demand market dynamics. Historically, crude oil and natural gas have been cited as the main drivers of cost changes in polymers. While they do have a large influence on the market since almost all polymer feedstocks are derived from them, the effects they have on the market are indirect regarding overall polymer price. This is because these resources are used for manufacturing goods other than plastic polymers. When demand is high for crude oil and natural gas, and supply is short, there’s more competition for the resource and polymer prices rise; when supply is high and demand stable or low, there’s less competition and polymer prices fall.

Direct Factors: Feedstock Manufacturing Plants

Polymer and feedstock manufacturing plants are typically built on a very large scale, mainly because they are very expensive and capital intensive to build. To earn as large a return on their investment as possible within the scope of the given market dynamics, producers want to spread their cost over as much output as possible, which is why these buildings are so massive. You typically read about new feedstock or polymer plants having a capacity of hundreds of kilotons (hundreds of millions of pounds).

The addition of large amounts of new polymer and feedstock capacity as a result of implementing these large facilities can create an abundant supply that changes the supply and demand dynamic. The market becomes a high supply, stable demand dynamic, and the price of polymers typically falls. Sometimes prices stabilize at a high level because the new capacity is absorbed quickly by unusually high demand growth, but rarely do prices rise.

Direct Factors: Manufacturing Plant Operations

The polymers and feedstock industry manufacturing capacity is relatively mature, and many plants have been operating within the market for several years. In the past, those facilities have had free capacity to help supply new market growth, and helped manage any supply interruptions from plant downtime due to maintenance or equipment failure.

Since the last economic downturn though, demand has increased and many of the plants are now operating at high levels, even above 90%. When this happens, constraints in supply develop and worsen when there is any kind of operational interruption (for example, a plant goes down with a power outage). This causes shortages of polymers and feedstocks, and prices rise independent of crude oil and natural gas pricing. Many of the increases in polymer prices from 2015-2017 were caused by short supply. These shortages tend to be temporary, but can be long term depending on the overall industry capacity utilization.

Direct Factors: Open Capacity

Open capacity must be available to produce the needed products when demand for polymers and feedstocks increases significantly. If not, there will eventually be shortages of supply. This creates a situation where prices increase, sometimes dramatically, similar to the past oil shocks and related gasoline price spikes.

The shortage can be temporary or chronic. For example, one of the many producer plants malfunctions and that capacity is unavailable to the market, creating a temporary shortage until it can be brought online again. A chronic issue occurs when no additional capacity is being added by producers to relieve the supply shortages. In both scenarios, prices rise significantly. This usually results in building new capacity to relieve the shortages and prices stabilize as described above.

Direct Factors: Multiple Dynamics

Another dynamic occurs when several of the above causes are happening at the same time. For instance, crude oil and natural gas supplies can decline dramatically due to high demand while polymers and feedstock industry manufacturing capacity is constrained due to high demand. This causes shortages of products in the markets and prices rise more than they typically do.

The opposite can happen too. For example, crude oil and natural gas supplies can increase, and polymers and feedstock industry manufacturing capacity is also high. This increases competition amongst the market participants to sell enough product to keep their plants running profitably, and they causes excess supply of products in the market and prices decline more than average.

As you can see, there are many influences driving the cost of polymer feedstock up or down. Managing them is challenging, but staying aware of the market dynamics is important to maneuvering through the changing landscape to avoid any negative impacts on your business.