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Resin Prices Impact Material Handling

May 1, 2005
With no near-term supply increase and growing Chinese demand for resin, the long-range outlook does not bode well for users of plastic containers and plastic pallets.

"In trying to see the long-term consequences of the kind of material price increases we've seen in the past year," says Orr, "I can only think of the fable describing the consequences of killing off the goose that lays the golden eggs."

He explains that if the manufacturers of resin continue to increase prices as dramatically as they have been, end-users of the converters' products will seek alternatives to plastic. Then the converters will seek alternatives to gain customers. Or the scenario might be reversed with converters first seeking alternatives to plastic resin to hold onto their customer base.

In either case, the demand will decline and resin manufacturers, currently running at 90+ percent capacity, will find themselves without customers.

Before you think Orr is just whining about basic supply-and-demand economics,-think again. He's a tough leader in a tough industry. The just released financial report for Myers Industries (manufacturer of Akro-Mils storage products and Buckhorn plastic pallets and containers) shows the company had record-setting sales, up 27 percent from a year ago. Material handling products were up 14 percent. The bad news is that net income for the company decreased 12 percent and the culprit, as Orr and others claim, is material costs.

Orr is not alone. Other manufacturers of material handling products echo his sentiments. Hartson Poland of PDQ Plastics (Bayonne, N.J.) says the result of the price increases has been to take out any profit margin. "We're operating on thinto-zero margins at this point."

How did we arrive at this juncture?
"If you look at our [financial] results the last couple years," says Orr, "you can see from 2002-03 we had reasonable returns and paid lower prices for polyethylene resin. Last year at this time, the lid came off and we could not figure out how the cost could climb as fast as it did."

Orr says the resin price has gone up more than 50 percent in less than a year and when a company is buying 350 million pounds a year, it doesn't take long for that to turn into real money.

Poland takes it down to the pallet level.

"We make a pallet that weighs 60 pounds," he explains. "If we add the 17-cents per pound increase I've seen in just the past six months, per pallet, our customers won't care how good the pallet is, they'll start looking for another way to handle loads."

In the U.S. about 70 percent of polymers are "cracked" in reactors using natural gas. Hydrocarbons are heated in the presence of a catalyst and larger molecules are broken into smaller ones. The process coverts natural gas or crude oil components into monomers such as ethylene, propylene, butane and styrene.

For resin converters, even the standard run-up in prices as winter approached did not account for the price increases after winter passed and demand for natural gas dropped. In Europe and other places, polymers are created using crude oil so while gasoline prices continued to climb, prices for plastic resins in Europe naturally followed that rise.

In 2004 a lot was happening, most of which converters had no control over. "Here at Myers, and with my competitors, too, we do everything we can to lower our production costs and work toward best practices," says Orr. However, no matter how lean a company's manufacturing processes are, when demand for the basic material you require soars, as it did in the Far East, particularly China, there's not much you can do.

"A year ago demand in the Far East was going up at about two percent or three percent," says Orr. "Now it's rising at a rate approaching five percent."

Late last summer and early fall, China was gearing up for the huge orders for products requiring plastic that were pouring into its country prior to the worldwide holiday shopping binge. This fueled China's demand for resin.

How converters operate in the U.S. has also exacerbated the price escalation. The law of supply and demand impacts the price. And so does some basic material handling. Resin manufacturers that make the product in Houston, for example, need only ship it 50 miles to the coast to load it into ships destined for China. That means they get their empty railcars back the same day.

U.S. converters, in contrast, might hold a railcar for 15 days, plus the travel time to get resin to their factories. In any returnable container scheme, regardless of container size, more turns of the container means a better ROI.

A review of news releases from five major resin producers shows a continuing litany of price increases on virtually all polymers over the past year. The reasons for the price increases are almost always the same, and consistent from manufacturer to manufacturer: rising costs to them of raw material, energy and transportation.

"We expect the PO [propylene oxide] to grow at four percent in 2005," says Earl Shipp, global vice president for Dow Oxides & Glycols, Dow (Midland, Mich.). "Based on industry sources, Dow expects global PO demand to remain strong, resulting in a tighter supply/demand ratio."

Shipp says current global industry demand for PO is approximately 14 billion pounds per year and, again, based on industry sources, overall industry production capacity is about 15 billion pounds.

"With the current state of high propylene costs," says Shipp, PO producers likely will produce just enough to meet demand and maintain minimum inventory levels, meaning supply for PO will remain tight. This could create short-term supply/demand challenges in the event of unforeseen problems."

Dow is the world's largest single producer of propylene oxide with four billion pounds of capacity. In response to why not increase capacity, Shipp says, "In 2004 Dow increased the capacity of its Stade, Germany plant to 1.3 billion pounds per year, a more than seven percent increase."

Given the regulations and permit requirements in this country, it could take almost three years before a company even starts to build the factory. Since October 2004, Dow has increased the price of PO 25 cents per pound. Shipp says he expects energy and raw material costs will remain at their historical highs and will continue putting pressure on pricing throughout 2005.

Global Insight (Boston), a political and market analysis firm, says, "With domestic operating rates, demand and input costs for both resins and feedstocks all expected to remain on the rise, we see U.S. plastic resins prices gaining additional ground. Conceivably, energy prices could ease and drag feedstock costs down. Should this happen, however, we believe resins would fight tooth and nail to protect their pricing leverage."

Where does this take, or leave, the material handling industry? Orr says, at first, his customers reacted to price increases for pallets and containers with disbelief. "When they started hearing the same story from all the manufacturers, they began to believe it," says Orr.

Of course, believing it and doing anything about it are two different things. Manufacturers such as Buckhorn are often locked into long-term contracts. If they sell products through printed catalogs they have to remain at that price until the next catalog is printed, which can be 12 months away.

"We had a certain amount of sympathy from our customers," says Poland. "They graciously accepted [price increases] because they knew what was happening at the gas pump. Still, they won't go for the kind of price increase I'd have to make to cover our costs."

Orr has a broader concern than what the escalating prices might do to his company. He says Myers Industries, because of its diversification, can absorb some of the punishment that smaller converters cannot. "There are a lot of small, specialty companies, going under because they can't keep up with the resin price increases," says Orr. "Whereas in the past these companies might have looked like attractive investments to larger companies, we're now hesitant to make acquisitions. That means lost jobs."

What's the alternative?
Orr hesitates only slightly when asked if there are alternatives to the current formulas that create pallets and containers. "The last thing we, and any other manufacturer, wants to do is compromise the quality of the product," he says. "We could do things like change the formulation of the mix, then add steel rods to the pallet to give it the same strength, but that would increase the cost with a different material—so no one wins."

Plastic is recyclable and the chance to add more regrind to the formula is also a possibility. "We're staying away from that choice for now," says Poland. "We've always sold our product based on quality with high-performance standards. Regrind would change that."

Are there any winners?
There appears to be increasing interest in specialty pallets such as those made from aluminum, says Doug Christians, general manager, Rhino Aluminum Pallets (Detroit Lakes, Minn.). "At the recently held SouthPack show there was a lot of talk of resin prices and people [who use returnable pallets] are beginning to look at aluminum. I think people are out shopping these days because of the increasing resin prices."

Any talk of finding alternatives, however, supports Orr's theory that if the resin manufacturers continue the unprecedented price increases, the entire plastics industry could suffer long-term consequences.

End users do not necessarily win if they opt for alternatives to plastic. Tests have shown the best performing container for global, returnable container programs is the plastic, knockdown container. Regardless of all the positive environmental benefits from returnable container programs, the dealmaker has really always been about money. The story of plastic containers has always been the number of turns the user gets for his investment, compared with-fill in the material blank. Only recently have major users, such as the automotive industry, grasped the financial importance of reusable pallets and containers and begun treating them like an asset, not a cost of doing business.

Will domestic resin manufacturers add capacity to meet the demand for plastic and thus drop the price? Not likely. Along with the regulatory and economic barriers to increasing capacity, there is the business decision of not wanting to get caught with too much capacity if, or when, the economy cools.

This information, compiled by Plastics News (Akron, Ohio) are U.S. market price estimates in cents per pound for prime resin, unfilled, natural color. The "change date" line along the bottom of the chart represents magazine issue dates when Plastics News published a change in its weekly price chart, as well as the week when the file was updated. Plastic News' published prices indicate when it became aware of and confirmed with North American buyers and suppliers that prices actually changed in the market.

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