Perhaps when you listen to the news you hear "blah, blah, blah, resin price increases, blah, blah, blah." Well, after today, you may hear this bit of news a bit differently. This isn’t exactly something that you would expect to see in the mainstream news, but you will get the info here because it’s important to your ability to be aware and be prepared.
The cost of resin has been escalating dramatically since the first of this year. For those of you who don’t know, resin is a big part of your life. It’s necessary for the production of all things plastic. This includes pipes, storage bins, buckets, kitchen tools, road markings, construction supplies, general household and kitchen goods, automobile parts, toys, DVD/CDs, waxes, medical adhesives, product packaging, etc. This means that not only are these items increasing in costs but so are all of the products that are packaged in plastic such a wheat, milk, yogurt, juices, etc.
The resin price increase began about two months prior to Chinese New Year (February 14th) as China began to buy up a great deal of resin in order for them to produce their trinkets, toys, and other necessary celebration items. The rise has continued with three significant increases since the first of the year. The demand was brought about because of the Chinese New Year orders were in addition to China’s standard hefty resin purchasing for all of the kinds of items which I mentioned previously. Unfortunately, this surge in demand, combined with all of our other export demand, our own consumption and some serious production glitches have caused an imbalance between the supply and demand—resulting in some very uncomfortable price increases. In fact one key producer refers to resin now as “extremely expensive stuff”. (Yes, stuff is apparently a technical term in the world of resin production.)
The production glitches? The production of plastic products is reliant upon vital equipment known as steam crackers. Steam crackers are usually located near oil refineries. Unfortunately, there are very few steam crackers in existence in relation to refineries (500 refineries compared to only 42 steam crackers). The simplified explanation is that steam crackers take natural gas liquids and convert it to ethylene and propylene (petrochemicals) which we require in order to manufacture the resin pellets and consequently the plastic goods. The natural gas liquid is fed into the steam cracker and the cracker heats up the natural gas liquid and thus “cracks” the molecules and olefins. Once the ethylene and propylene is produced, it’s piped into a reactor and converted into resin pellets. As you may know, the oil refineries ideally need to be running 24/7 in order to put out the amount of fuel we consume at a tolerable cost. That cost is dramatically increased however, if one or more of the refineries breaks down or the operation is interrupted. The consequences are that fuel prices escalate. The same scenario holds true when it comes to any interruption in the functionality of the steam crackers. If the crackers don’t produce their maximum output, then it has an impact on the cost as a result of imbalanced supply and demand. With such a strain on existing production, the fact that many skilled maintenance workers were laid off and some plants were shut down (such as Dow Chemical Company in Midland, Michigan) as a result of the economic crisis does not bode well. Ultimately the consequences are a limited amount of resources to keep the crackers operating properly in order to attempt to keep up with demand. Whew! How’s that for a behind the scenes explanation?
Initially the price increases were taken on by the wholesalers anticipating that it was just a temporary cut of their profit margins. However, after the third increase before April of this year, many were no longer able to handle the increase cost and had to pass it along. In early February, many resin sellers were imploring buyers to buy their May orders on a set contract in order to lessen the cost impact. Due to the economic stage though, few buyers were in a position to do so. Some even felt that the manufacturers were simply crying wolf in a ploy to bring in additional cash during tough times—as that is standard in virtually any industry, right?. Many seasoned buyers were taken by surprise when the price increases continued, claiming an unprecedented problem of narrowing supplies.
To complicate matters, the U.S. has an onus to take good care of China and other nations who hold a sizeable investment of our foreign debt. China and Japan, who own 25% and 24% of all of our foreign debt respectively, interpret slow turn times and unfulfilled orders as a sign of a weak economy, thus making them a bit nervous in holding so much of our debt. While there is a reality of the narrowing supply of ethylene and propylene monomers (consequently polypropylene), it’s important that the U.S. maintains a good economic game face when selling to their heavy foreign investors. Call it preferential treatment to keep a key customer. The U.S. tends to bend over backwards to meet such demands in order to put forth the impression of a healthy manufacturing market, as opposed to a scarce one. As a result, the U.S. sells what they’ve got to these critical relationships leaving what’s leftover for us. (Reminds me of how teenagers act when their friends become more important than their family. Hee hee) Thus our supply of resin has diminished dramatically making the price higher due to the good old fashion consequences of supply and demand.
That’s not the whole of it either. If we aren’t able to export a sizeable amount of China’s resin requests, then their own market security is compromised. Ironically, all of those “made in China” items begin with the resin we produce here in the U.S. Because of our financial ties, we’ve ensured that we price our resin to them at better pricing than they could obtain from other, closer suppliers This is the exact same scenario that caused the U.S. to deplete our “just in case” supply of wheat. China was clamoring to purchase it in light of serious drought conditions and increased population. We sold it to keep peace in the family. If China’s economy takes a serious hit because of a lack of resin to produce some of their primary exports, then they are no longer able to purchase our foreign debt. See the vicious cycle? The U.S. is already way behind its necessary debt sell rate for 2010 by nearly 500 billion dollars—nearly 1/6th of the entire amount it needs to sell this year. Holding back resin in order to appease our own domestic demand would consequently be throwing fuel on a much larger fire—at least in the minds of the powers that be.
As a way to make all of this news a bit more real to my own world, I took the initiative to interview five national retailers regarding their bucket prices. No surprise, all of them confirmed that, yes, they have experienced a hike in plastic goods pricing—anywhere from 7% -32%! Five Star Preparedness owner, Scott Bishop, stated that he’s seen 4 price increases in the square buckets he offers just in the last three months, impacting his bottom line by approximately 12% on the wholesale side of pricing. That’s pretty steep when you realize that resin is simply ONE component of the world of plastic manufacturing.
So what are we left with? Well, we’ve provided China with as much resin as we dare. In spite of which, their needs are still not satisfied, so they are having to resort to using the more expensive local and Middle Eastern options for resin supplies. This has an unpleasant domino effect causing the resin based imports that we receive from China to increase significantly. This also means that our own supply of resin is critically low and thus everything that is connected to this will increase in price as well.
Let’s see. What does this all mean to you? The same as it always does. Just because you don’t see all that goes on behind the curtain doesn’t mean it’s not there, right? Take time to be methodical and strategic in your acquisition of necessary supplies which will ensure your independence on a rainy day. Personally, instead of waiting until I’m in an organizing mood, I intend to keep a sharp eye out for storage bins and the like and get them when they are on sale rather than waiting for the mood to hit me. I also intend to be more diligent in acquiring items that are packaged in plastics or that are heavily reliant on plastics as I don’t see a cure for this imbalance anywhere in the near future. Some financial experts believe that the pricing will settle down in May, but that doesn’t make a whole lot of sense to me. The snag is that unless you’re a commodities trader, you won’t see an immediate impact because the products have already been manufactured with the more expensive resin since the first of the year. So until the manufacturers can sell through that inventory, they won’t be able to pass on the improved pricing, and by then, the prices could come back up or exceed where they are presently. We’re not going to be creating any new crackers anytime soon, right? We’re still a bit behind on China’s desire for resin—and that’s just one customer. Plus, our technology is constantly increasing in the use of plastics over other more expensive commodities. AND you’ve got the wholesalers who have already invested in the pricier resin who will have to sell through that stock before they could take advantage of the supposedly lower priced goods at the end of May. By that time, a whole lot could happen and the recovery could be swallowed up by another natural disaster or another oil spill accident. So, for me? I’m not going to gamble on things getting better in this regard. Rather, I’m going to be more diligent in taking advantage of this awareness and acting accordingly.
Peace in preparedness, folks.
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