Falling Oil Prices: What Should Resin/Plastic Component Buyers Do Right Now?
Crude oil prices are hitting record lows and are having a significant impact on resin prices.
But the real question is: Have they hit rock bottom yet?
The short answer is that timing and price movement will vary greatly by region and resin type and grade. Buyers of resins and plastic components need the right predictive tools and strategies to take advantage of the lower prices and expected market volatility – but of course, there’s much more to consider.
Crude Oil Price Forecasts
Experts believe crude oil prices will remain relatively low for a few years. North American production continues to increase, and inventories are growing. By all accounts, OPEC intends to continue production at current levels, keeping global supply high and pushing prices lower. Following second quarter 2015, the effects of slowing oil production may tighten supply enough to support higher prices.
Adding to the scenario is the abundant production of natural gas in North America in recent years with resultant lower prices. Taking advantage of lower prices and higher ethylene yields, many ethylene producers have shifted their feedstocks from oil-based naphtha to natural gas liquids, ethane, propane and butane.
However, this win for ethylene producers has resulted in reduced by-product production of critical inputs to the plastics market, namely propylene, benzene and butadiene. Among the results are lower polymer costs.
Best Practices for Resins Buyers
If you’re a resins buyer and looking to take advantage of lower crude prices, here are three best practices to follow:
- Conduct a deep-dive analysis of the resin spend, segmenting each major plastic by its type and family. This includes understanding the price change frequency of each resin/family by supplier, examining the correlation between buy-side and sell-side resin prices, and re-assessing the type of pricing mechanism used to negotiate for resins.
- Build cost models, follow market publications, track the monthly movement of indices and network to gain greater market intel to arrive at best pricing levels. Be sure to look at the price change frequency of each resin/family by supplier and by timing (by year, quarter, month, etc.)
- Communicate with key stakeholders, leveraging the knowledge and insight purchasing professionals bring to the enterprise. This includes impact on cost of goods, inventory (on-hand, in transit and finished goods), buy-side and sell-side prices and more.
Best Practices for Plastic Component Buyers
While lower resin prices should mean lower plastic component prices, buyers will achieve their goals if they:
- Assess the impact of existing supplier contracts to uncover potential savings opportunities, looking at contracts with and without automatic adjustments for resin price changes. Both types of contracts have positive and negative traits to consider.
- Fully understand all details about the resin content and cost of plastic parts – and make use of supplier cost breakdowns and cost models.
In addition, it’s important to know the exact makeup of the specific resins in plastic components and the historical and projected price/cost movements of the raw material.
And finally, don’t forget to include customer expectations of price reductions in the overall equation!
How are lower crude oil prices affecting your resins and plastic component spend?
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