Tight resin inventories, supply disruptions in 2021 lead to record margins but also to calls for more transparency

Tightness in 2021 of plastic resin materials such as the polypropylene fiber widely seen in medical protective masks resulted in unprecedented margins but also brought a proposal for more federal oversight.

Braskem completed this polypropylene plant in Texas in September 2020. Image courtesy of Braskem

“We are looking to build upon the concept that plastics are an essential part of the economy,” said by email on Oct. 24 Tom Sanzillo, researcher with The Institute for Energy Economics and Financial Analysis and co-author of an Oct.2021 report on plastic pricing published with researcher colleague Suzanne Mattei.

“We are thinking, obviously at the conceptual stage, of a regulatory approach that includes: First, development and filing of plastics needs plans; Second, assessment of manufacturing capacity against those plans; Third, review and approval of new manufacturing capacity accordingly,” he said.

“This is more or less the kind of capex planning you see with regard to utility analysis in electricity regulation,” Sanzillo added.

Opaque market

“The federal government provides very limited data on plastics production when compared to other critical resources like oil, gas and coal,” the report said.

“Basic data from private sources, in turn, is expensive to obtain and usually has limited transparency,” it added.

For example, a guild where plastic resin producers are members discloses that the accuracy of their own reports depends on what members voluntarily provide, it added.

Learning about utilization rates is particularly problematic, the report said.

Was 2021 extraordinary?

Margins may have been extraordinary because they may have outpaced utilization rates based on very limited data available, the report said.

Accurate data on utilization rates is expensive and sometimes unavailable even at a cost, it added.

While weather events disrupted production, they were relatively short-lived while strong companies results “suggest a relatively balanced response,” it said.

Few sellers

Ethylene is the basic building block for many goods. The top five companies supply 63% of the U.S. ethylene market, the report said.

Five companies supply 75% of the 17.3 billion-pound U.S. polypropylene market, and also five companies supply 80% of the 22.8 billion-pound U.S. high-density polyethylene market.

Five companies supply 85% of the 7.8 billion-pound U.S. low-density polyethylene (LDPE) market, and also five companies supply 87% of the 22.9 billion-pound U.S. low linear density polyethylene (LLDPE) market, the report added.

Responsible plastic management

Petrochemical intermediates for medical devices rose early in the pandemic while construction saw supply problems and spikes in materials including plastics in 2020-2021, even leading to inflationary concerns. Polypropylene is the most common plastic found in automotive.

“Medical care devices, equipment and supplies have a major impact on the costs of healthcare,” the report said.

“The Federal Trade Commission’s (FTC) scope is typically narrow” because it mostly reviews impacts of mergers and acquisitions, it added.

The agency already annually conducts “dozens, if not hundreds,” of reviews of such transactions in every sector of the economy, the report said.

The Katrina precedent

The FTC has conducted in the past with the assistance of the U.S. Department of Energy research into markets like after Hurricane Katrina.

“Its investigative approach provides useful guidance that can be applied to an investigation of current plastics pricing,” the report said.

One metric was “whether or not the facility was running at maximum capacity,” it added.  

The U.S. 2020-21 polypropylene market

A source described the polypropylene market in early October as unpredictable after an exceptional year.

North American margins between polymer grade propylene (PGP) and polypropylene (PP) were a record 52 cents/pound in the third quarter from 47 cents/pound in the second quarter, reported Mexico’s Alpek along with its latest earnings. Alpek is the only polypropylene producer in Mexico.

This compared with 16 to 17 cents/pound both in the second and third quarter of 2020.

North American propylene contract prices rose from 67 cents/pound in the second quarter to 82 cents/pound in the third quarter. This compared with a 35 cents/pound in the third quarter of 2020 from 26 cents/pound in the previous quarter, according to Alpek.

The U.S. leading polypropylene producer

The leading polypropylene producer in North America is Brazil-based Braskem with a total of five plants in the Northeast and the U.S. Gulf Coast. Braskem is majority owned by Brazilian construction company Novonor, until late December officially named after the family of the founder and owners Odebrecht. It is still widely referred to by its former name in Latin American media.

Braskem has most resin capacity for multiple products in Brazil but also produces ethylene and polyethylene in Mexico.

Braskem’s latest addition to capacity in the U.S. was a plant started on Sep. 10, 2020 in Texas with a billion pounds annual capacity.

In its first year the plant produced over 800 million pounds despite challenges faced from Winter Storm Uri, Braskem said.  

The plant “consistently ran at or above its nameplate capacity through the year,” it added. The company didn't discuss the utilization rates of its other plants.

Mark Nikolich, Braskem America’s CEO, said the Texas investment represented “our commitment to our leadership position in the U.S. market.”

At the time of its opening a source anticipated the plant would help overcome temporary tightness but later add to overcapacity.  

A Braskem official had said in March 2021, on the other hand, that margins were going to be high because there would be no new polypropylene opening until 2022, when Canada will start to have domestic production of this resin after Inter Pipeline completes its polypropylene plant.

A market source in Mexico said in mid-2021 that U.S. polypropylene and polyethylene imports available for Mexico were restricted apparently due to inventory buildup in the U.S. ahead of the heaviest of the hurricane season.

Other considerations

Better planning may help fight ocean and river pollution, the report said.

“The essential regulatory policy perspective would be all the plastics we need and only the plastics we need,” the report said.

Under 10% of plastic is currently recycled in the U.S, much lower than rates in Europe or Asia, according to widely cited estimates by international organizations.

“What our report tries to underscore is that left to traditional market forces the public necessity aspects of the industry would be given short shrift,” the authors wrote.

The IEEFA gets research funding from donors like The Rockefeller Family Fund, that carries the legacy of a man who once controlled about 90% of all refineries and pipelines in the U.S. and who later in life became a philantropist.

By Renzo Pipoli