Iran War Fuels Uncertainty in Resin, Feedstock Price

The ongoing Middle East conflict is driving volatility in oil prices, impacting global supply chains. It also has the potential to impact feedstock and resin prices. Phillip Karig, managing director at Mathelin Bay Associates LLC, explains the primary factors driving domestic resin and feedstock prices. The situation underscores the importance of monitoring crude oil prices and feedstock plant conditions for future market trends.

The plastics industry, deeply intertwined with oil and gas markets, is facing significant challenges as geopolitical tensions in the Middle East disrupt energy markets. The closure of the Strait of Hormuz has sent ripples through global supply chains, affecting commodities like plastics and fertilizers, which are essential to the global economy and food production.

While the immediate impact has been felt in oil and gas supplies and pricing, the ripple effects are beginning to threaten supply chains for commodities like plastics and fertilizers — key pillars of the global economy and food production.

Brent crude futures, the international benchmark, dropped by 5%, settling at $99.30 per barrel. Similarly, US West Texas Intermediate futures fell by 5.1%, reaching $87.63 per barrel.

“In terms of the latest on the conflict, investors were trading headlines once again, with oil prices clearly moving on the back of different reports,” Jim Reid, head of global macro research at Deutsche Bank, wrote today, according to MarketWatch. “The news helped take some of the risk premia out of oil markets.”

The plastics supply chain could be collateral damage in the Iran war. However, there are several key factors driving resin price fluctuations, according to Phillip Karig, managing director at Mathelin Bay Associates LLC, a resin consulting service based in St. Louis, MO. “These factors continue to drive resin prices in the current market, just at a faster pace as the situation in the Middle East continues to evolve,” he told PlasticsToday.

Karig highlighted that resin prices are strongly influenced by raw material costs, which are primarily crude oil- or natural gas-based feedstocks, and resin production capacity utilization. In the US, resin prices tend to soften when capacity utilization falls below 90%, while exceeding this threshold creates a sellers’ market.

Export dynamics and domestic capacity utilization

Karig noted that resin imports and exports play a critical role in shaping domestic capacity utilization. “Enough resin imports into the US can effectively lower the effect of domestic capacity utilization. Conversely, enough exports of resin from the US can largely offset weak levels of domestic demand for resins,” he explained.

Polyethylene, a major resin produced in the US, benefits from lower-cost natural gas feedstocks compared to crude oil. “In the case of polyethylene, domestic resin producers have traditionally taken advantage of the large arbitrage opportunity afforded them by consistently exporting over 50% of domestic polyethylene capacity to keep the US polyethylene market much tighter than it would otherwise be,” Karig said.

The increased demand for polyethylene exports has pushed capacity utilization above 90%, nearing sold-out conditions at some resin plants.

Global supply chain disruptions

As the Middle East conflict continues, its impact on petrochemical feedstocks and resin availability is becoming evident. Karig explained, “The increased price of crude oil has a general inflationary effect on many resin markets, either directly where feedstocks used to produce resins are crude oil-based, which is the case in most areas outside North America, or somewhat less directly in the US, where many resins produced with lower-cost natural gas feedstocks are in greater demand in export markets.”

Resin prices are rising across categories, including polyethylene, polypropylene, and PVC. Outside the US, crude oil-based feedstocks directly affect resin prices, while in the US, natural gas feedstocks play a more nuanced role.

“Polypropylene is more dependent on crude oil-based feedstocks, though this dependence has been reduced in the last few years through the development of technologies that can produce polypropylene feedstocks directly from propane found in natural gas liquids,” Karig noted.

As the conflict in the Middle East nears the one-month mark, Karig noted its impact on the global supply chain for petrochemical feedstocks has been stranded or reduced resin availability surrounding the Gulf and, more importantly, shortages of feedstocks or resin in traditional Middle East export markets such as Asia and Europe.

Barriers to resin shifts

Despite rising resin prices, Karig observed limited shifts in resin demand due to several factors. “Many resins for some plastics processors are suitable for use only with specific physical performance characteristics, which vary between and among resin types and grades,” he explained.

Other barriers include the necessity for third-party certifications, tooling optimized for specific resin properties, limited technical resources for testing, and lengthy customer approval processes.

“There are also other barriers to shifting resins, such as limited internal technical resources to test and implement changes, as well as the necessity for sometimes lengthy end-use customer approvals to move forward,” Karig pointed out.

Karig noted that past disruptions, such as the Texas winter freeze, resolved relatively quickly once the source of the issue was addressed. “Unless the current crisis in the Middle East lingers on for a long period of time, there is unlikely to be very little in the way of major resin shifts,” he said.

Resin producers benefit from price spikes

Domestic resin producers are largely protected from feedstock price spikes due to their vertical integration into natural gas- or crude oil-based feedstocks. Karig explained, “Resin producers actually stand to gain a lot from resin price spikes by attempting to quickly pass along large resin price increases to their buyers that are well above the feedstock cost increases that they are seeing.”

While US-based resin plants can mitigate overseas shortages through exports, this is often insufficient to prevent force majeure declarations in local markets.

“Resin buyers, at least to this point, are seeing mainly price spikes rather than supply shortages — with the exception of some spot resin buyers that are not able to fully cover parts of their resin requirements,” Karig added. Contract buyers are more secure but face sales controls limiting their ability to source additional resin volumes.

Karig also noted that US-based resin plants can make up some of the overseas shortages through ocean shipments to their plants in Asia and Europe, but this is often not enough to prevent their overseas plants from having to declare force majeure in their local markets.

Financial hedging and market outlook

Karig noted that while financial hedges can protect resin buyers from price increases, current hedge prices are prohibitively high. “The current prices of these hedges are so high that they will only be profitable under extremely dire market conditions,” he said.

In the short term, resin availability is tightening as future volumes are directed to export facilities.

Looking ahead, Karig emphasized the importance of monitoring crude oil prices and feedstock plant conditions. “Since financial markets are forward-looking, the price of oil should quickly trend downward toward its recent state of global oversupply once hostilities look like they are winding down, and resin prices will generally move downward with oil prices,” he said.

However, the physical state of feedstock and resin plants in the Middle East remains a concern. “If many plants require reconstruction that could take long periods of time, some resin prices will move down more slowly in relation to falling oil prices,” Karig concluded.

Broader economic impact

The key indicators to watch include supply-demand balances and capacity utilizations for resin and feedstock plants, tracked by chemical industry information services, Karig noted.

On a broader scale, the economic impact of the war with Iran reverberates beyond the price of resin and feedstock. As diesel prices climb, it could lead to an increase in shipping costs, and could result in everything from packaging to electronics, appliances, and automobiles becoming more expensive. These price spikes could impact a number of key end markets for plastics processors.

Michigan State University professor and food economist David Ortega told CBS News any price increases likely won’t happen overnight.

“There’s a significant lag,” he told the news outlet, “and it’s something that we could be feeling the effects of for many months, if not the better part of this year and into next year.”