From Petroleum to Plastics

September 6, 2005 - 09:29

As petroleum prices continue to increase, plastics manufacturers are feeling the crunch.

Petroleum is getting more expensive, and the price of crude oil has been increasing at startling rates. We’ve all seen the rise in gas prices; it’s costing more and more just to get to work and back. This means higher heating expenses and increased costs for growers to transport product.

Oil increases are especially a concern for plastic producers. Plastic pots and tags depend on petroleum byproducts; materials such as polyproylene and polystyrene all come from ethylene cracking in the process of refining crude oil. In other words, as petroleum prices go up, so does the cost of making a pot or a tag. Growers, in particular, are feeling the effects of this change in the market, and many are being forced by their retail customers to absorb the costs.

Rising Costs

As production costs go up, plastics producers are feeling the increases in price. “We’ve seen prices go up considerably in resin — some 40-50 percent or so over the past couple of years,” says Jack Shelton, general manager of Poppelmann Plastics USA. Others gave different numbers such as 25 or as much as 80 percent, but no matter the exact number, the effect has been the same: Plastics are getting much more expensive to produce.

“Plastics are a byproduct of petroleum,” explains Brenda Vaughn, assistant marketing manager at The John Henry Company. “It’s actually benzene, which is in many of our styrene products.” Other components of plastics come from natural gases, such as methane, and unfortunately, prices are going up for natural gases as well. “Natural gas seems to trail the oil prices pretty much hand in glove, and that's the other feedstock for the plastics we use,” says Terry Robinson, manager of distributor sales at Dillen Products. In other words, prices for the production of plastics are going up across the board.

Reactions

What are plastics producers doing about rising input costs? In the case of Dillen, says Robinson, “We’re dealing with people like Huntsman [Corporation], Shell, Amoco, BP, and we can’t go back to them and say, ‘Well, we’re not going to take this price increase.’”

Some plastics manufacturers are making an effort to shop around for more competitive prices, and pot and tag manufacturers are finding ways to absorb the price increases and minimize the negative effects on their customers. Joe Fox, sales and marketing director at MasterTag says, “I can’t even think of how many semi loads of plastic we bring in at the old price and store all over the city so we can lower our overall average cost.”

Most companies understand the financial strain on growers, especially those catering to big box stores. Many box stores will not accept price increases and will raise their prices only as a last resort. Many manufacturers reuse as much of their material as possible. According to Fox, “There’s a certain amount of scrap in production of tags. And we reuse just about everything. Or we sometimes have pot manufacturers that can use our excess scrap, so we’ll sell it to them. We essentially have no waste.” Other companies are doing very similar things. Ron Vandiver, vice president of sales at Summit Plastic Company, described some of the strategies they are using Á to combat price increases. “We’re also working to cut costs in other areas, increasing efficiencies in the plant, buying other materials that go into the product as best we can. We are focused on doing everything we can to keep costs down.”

Dillen offers an advance-booking program for the distributors of their product. According to Robinson, “We’re in the middle of our spring 2006 booking program right now, so the smart distributors are buying warehouse stocks that they’ll be selling in October, November and December at some discounted prices because they are able to manufacture and ship the product earlier.”

Behind the Price Increase

In speaking to three different analysts of the crude oil market, there was a general consensus that the major reason behind the dramatic price increases of late is not actually the scarcity of crude but rather the limited production capacity of oil refiners. According to Michael Burdette, senior analyst at the Energy Information Administra-tion (EIA), “The biggest reason is the global crude oil production capacity is operating at virtually 100 percent.” In other words, there’s no buffer for the fluctuations in oil production that occur normally.

Another aspect of the price increase is the changing nature of the crude oil that’s being extracted. “What’s happened is that a lot more newer and different kinds of oil are emerging,” says David Ramberg, vice president of publications at Economic Insight. “Refiners are kind of holding back before making this huge investment that’s going to lock them in for about 20 years of refining. They’re trying to find out what crudes are going to become the dominant ones for the next century.”

Oil companies are limited in their ability to refine the crude oil with which they are supplied, and this further reduces any spare production capacity. “Refineries are geared toward usually processing a certain type of crude, either a heavy sour or a light crude,” Ramberg adds. Additionally, while these refineries may be able to expand their existing facilities, environmental restrictions severely limit their ability to build any new sites in the United States. This makes accommodating the refining process for these new crude types very difficult. As such, production capacity can only increase in limited amounts, and prices will remain high.

Predicting the Future

Analysts remain optimistic about the crude oil market. According to Burdette, “EIA right now is calling for crude oil to stay relatively near its current level through the remainder of this year and next year.” After all, these recent influxes have a great deal to do with increases in demand for the spring and summer driving season. As this demand goes down, prices should dip slightly, later rising over the course of the winter due to increased heating demands, until finally stabilizing around the current price of $65 per barrel.

It is difficult to predict what exactly will happen, argues Ramberg. “There are so many factors that [the price of crude oil] depends on, we can’t really predict with certainty. We don’t know how cold it’s going to be this winter, for example. We don’t know how many hurricanes are going to come through the Gulf and disrupt Gulf drilling operations, or for how long, or how much damage they may or may not do.”

On the other hand, Fred Pickel, president of Wilshire Energy Consulting Group, Inc. feels that the market will stabilize despite recent developments. “Technological innovation has managed to beat decline throughout the entire history of the industry, in over 100 years…We’re still below the inflation-adjusted peaks of the late 70s and early 80s.” We are producing more oil now than ever before despite theories that oil supplies have already peaked.

Analysts remain confident that there is ample supply of oil, but Burdette admits, “You know, there’s a lot of oil out there that’s not economical to produce at $20 per barrel, but it is [economical] at $60 per barrel.”

According to Pickel, “The price of oil depends first and foremost on the growth rates of the major world economies.” We are already starting to see the economic ramifications of such high petroleum prices within the United States, and this trend could continue to stifle the world economy as well. Perhaps this will be the reason for a stabilization in price. In any case, unfortunately, it doesn’t look like prices will go back down again. They will, at best, stay where they are now. Furthermore, as prices stay high, refiners may resort to repeat refining to get the most out of their supply, leaving fewer of the petroleum byproducts necessary for plastics production.

Consequences

Unfortunately, prices are going up for everything, and they will continue to do so for some time. Materials such as plastics are getting more expensive, as are heating and fuel costs. The burden has to be passed down the line. Pot and tag producers are being forced to raise their prices. Some growers are shortening their growing seasons to reduce expenses, and others are including fuel surcharges in the prices they charge their customers. Though there may be a change in the market, continue to brace yourselves for higher prices.

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