We all have been witnessing the continued rise in resin prices since the middle of 2020. Many times we have been scratching our head as to why and asking ourselves when is it going to end. In this blog post we spent some time with Mike Ashton of Enduring Investments to try to understand how we got here and where it might end.
Mike, what caused this this spike in resin prices?
When resin prices continued their slide in early 2020, to reach a low point during the hard global lockdowns of April and May 2020, it was not terribly surprising. The recovery later that year was also not surprising. And, while the spike in early 2021, to $1.265/lb on the CDI PP index in February 2021 caught everyone by surprise, it was understandable: the freeze in Texas damaged polypropylene production and caused a supply crunch. We get it. Moreover, hedges based on polymer grade propylene, which usually trades at a fairly steady spread to PP, were not very effective as the PP/PGP profit margin claimed by PP producers exploded. Painful, but understandable.
Do you see this ending anytime soon?
The latest rally, though, came as a complete surprise. It began long before Hurricane Ida approached the Gulf of Mexico, but it likely has something to do with the fact that we were heading into hurricane season with tight supplies of high-grade polypropylene. (Chart via ICIS)
Are there any opportunities to ship resin in from Asia?
The enormous spike in global shipping costs and the shortage of containers contributed to this squeeze. Under normal conditions, when North American PP gets much more expensive than Asian grades, the market adjusts as larger players shift purchases to Asian sources and arbitrageurs move resin stocks from the Eastern Hemisphere to the Western Hemisphere. But the current shipping conditions make that very difficult and expensive to do, so that the usual mechanism by which this pressure is released is not operating.
Is there a light at the end of the tunnel for us?
While this spike is painful, the forward curves for propylene suggest that the market sees this as being temporary. We should take pains to point out that futures markets are almost comically bad at making predictions. However, the fact that forward curves are backwardated (near-term prices are higher than deferred prices) does mean that sophisticated providers who are willing to take some basis risk on the spread between PGP and PP can hedge, effectively buying future resin at a discount to today. BAG, for example, is pricing orders for forward delivery (for prime clients) at the moment based on the “implied” CDI curve indicated below.
We hope this has been helpful. We appreciate Mike Ashton taking time out to meet with us and answer our questions.
