How2022affectedmaterialsprices... and what's in store for 2023

In his first report of the year, Mike Boswell, managing director, Plastribution, takes a deep dive into the influences on resin prices last year, and looks ahead to 2023.

The market in 2022 was dominated by the Russian invasion of Ukraine, which was an event that came as a complete surprise to the whole world in February. What for Russia, was expected to be a short conflict has subsequently become a long battle in which the support for Ukraine from the West has resulted in retaliation from the Russians in the form of energy sanctions. Whether inflation was already becoming an issue in developed economies or not, the spiralling energy costs resulting from the Russian energy supply restrictions caused significant inflation with rates typically in and around 10%. Central banks in the US, Europe and the UK then applied significant hikes in base interest rates in an attempt to curb inflation. Here in the UK the Bank of England rate has already jumped up 3.4%, with more likely to come, albeit the impact of these changes on a generation of consumers who have never experienced more normal borrowing rates is unproven.

In the crude oil and petrochemicals sector the risk of global recession far outweighed any initial concerns about scarcity of oil and gas supply from Russia and prices fell dramatically from the record highs recorded just before the middle of the year, with the ‘polyolefins basket’ price falling some 25% by the end of December.

Energy costs became a key topic both for polymer producers and polymer converters with each sector defined as energy intensive. For polymer converters in the UK, it was commonplace to hear of electricity price increases of up to 400% whenever fixed price deals were up for renewal, however some of this extreme cost inflation has been offset by falling raw material costs and the possibility of some temporary government support. Polymer producers made some valiant efforts to pass through their energy cost increases, often in the form of surcharges, but these became unhinged by the challenging market dynamics.

Whilst the burgeoning supply of PP and PE from Russia was quickly aborted following the Russian invasion of Ukraine, the combination of diminished demand and revived PE supply from the USA, following constrained supply from that region in 2021, ensured that supply was plentiful. Furthermore, falling East-West shipping costs in H2 enabled the normal movement of plastics to resume on the basis that it is once again economically viable.

Despite the challenges of 2022, the UK plastics sector has once again demonstrated resilience in the face of significant challenges.

UK Economy & Brexit

Subject to confirmation from HM treasury it is likely that the UK economy will have moved into recession, by recording at least two consecutive quarters of negative GDP growth. Many economists predict a short and shallow recession lasting between 12 and 24 months and likely to see annual GDP growth dip into the -1.5% to -2.0% range. The impact on the industrial sector may be less severe, as other sectors such as retail and hospitality bear the brunt of a fall in consumer spending.

One element that is difficult to isolate is the move from ‘just in time’ to ‘just in case’ and back to ‘just in time’. The move to ‘just in case’ resulted in part from Brexit and then was continued as a result of supply chain disruption and abnormal demand during the Covid-19 pandemic. The return to ‘just in time’ is driven by a combination of falling prices and recession; as prices fall there is no financial incentive to keep inventory and companies trend towards cash rather than inventory in times of economic uncertainty. This situation may go some way to explain the very pessimistic outlook being recorded in the UK Manufacturing Purchasing Managers’ Index (PMI).

The S&P Global/CIPS UK manufacturing PMI published on 3.1.23 included the following commentary: “The seasonally adjusted S&P Global/CIPS UK Manufacturing Purchasing Managers’ Index (PMI) fell to a 31-month low of 45.3 in December, down from 46.5 in November but above the earlier flash estimate of 44.7. The PMI has remained below the neutral 50.0 mark for five successive months (fig. 1). Excluding the series lows registered during the first pandemic lockdown, the current PMI reading is one of the weakest since mid-2009. The seasonally adjusted S&P Global/CIPS UK Manufacturing Purchasing Managers’ Index (PMI) fell to a 31-month low of 45.3 in December, down from 46.5 in November but above the earlier flash estimate of 44.7. The PMI has remained below

Who is ‘Polymerman’?

Mike Boswell is Managing Director of UK materials distributor, Plastribution, as well as the Chairman of the British Plastic Federation’s Polymer Compounders and Distributors Group and its ‘BREXIT Committee’. ‘Polymerman’ is the title used for announcements made via his Twitter account. This column is compiled using data from PIE (Plastics Information Europe) www.plastribution.co.uk | www.pieweb.com the neutral 50.0 mark for five successive months. Excluding the series lows registered during the first pandemic lockdown, the current PMI reading is one of the weakest since mid-2009.”

Already two years have passed since the UK finally left the EU, and much of the fallout became inextricably combined with the broader impact of the Covid-19 pandemic on the UK and global economy. The trade agreement made on 31.12.20 removed the imposition of duties of goods manufactured in the EU27 and UK passing from one to the other. However, administration has become burdensome as import and export regulations have been more strictly imposed, and the Northern Ireland situation continues to generate controversy.

Political events in the UK caused economic turmoil and in particular the short stint of service by Liz Truss as Prime Minister and Kwasi Kwarteng as Chancellor of the Exchequer caused untold grief as their ‘mini budget’ was announced. The ensuing reaction from the financial markets enabled a rapid correction and much confidence has now been restored through the appointment of Rishi Sunak.

Nonetheless, international markets remain concerned about the future prospects for the UK economy, and hence the continued pressure that is being placed upon the value of the GBP against other leading currencies.

Logistics

As illustrated in figure 2, the extreme inflation in East-West container shipping rates peaked in mid-2022, since which time prices have fallen back to near normal levels. And as illustrated in the table below, high shipping costs in the context of typical polymer prices became prohibitive and effectively isolated Europe from the perspective of importing more competitively priced polymer, where exporters did not have the protection of shipping rates that were contracted. It should be noted that shipping rates within Europe have declined less, and this is having an impact on trade within the continent. Finally, it is possible that a similar East-West shipping crisis could recur, as China relaxes its Covid-19 restrictions with the risk that much of the Chinese manufacturing sector is shuttered in an attempt to control the spread of the virus.

Within the UK, the shortage of HGV drivers appears to be less acute, with a combination of more drivers and the economic slowdown both contributing to more availability of resources.

Exchange Rates

Following the invasion of Ukraine by Russia, the USD gained strength as there was a market move to what is perceived to be a safe currency (see figure 3). The negative impact of the UK ‘mini budget’ is clearly evidenced in the September performance, with intra-month GBP:Euro falling well below 1.10, although the predictions of sub-parity against the Euro and USD were never realised. Most recently the USD has weakened as concerns grow about a slowdown in the US economy.

(Source Bank of England https://www. bankofengland.co.uk/monetary-policy/the-

interest-rate-bank-rate)

After almost 14 years, interest rates in the UK have increased significantly, as the Bank of England takes action to reduce inflation from the current rates of 10% to the target level which is below 2%. Whilst the objective is to reduce consumer spending, businesses who raise working capital through borrowing are also facing significant increases in the cost of financing.

Crude Oil

Crude Oil prices are often regarded as a proxy for the global economic outlook and following a long-term recovery from the low point that ensued from the Covid-19 pandemic hitting the Western World in April 2020, prices have been falling since mid2022 as concerns about global economic growth continue to mount.

Feedstock

The volatility of aromatic feedstock continued in 2022, with both Benzene and Styrene monomer recording large swings, which were almost entirely independent of Brent Crude and Naphtha.

In terms of olefins and to some extent Naphtha, the market situation was quite unusual, in that a strong recovery in demand for transport fuels coupled with supply restrictions of refined products from Russia resulted in refineries operating at exceptionally high rates. Furthermore, the high demand for refined fuels from Europe resulted in exceptionally high refinery margins, which could easily be observed through the persistently high retail prices for petrol and diesel at a time when crude oil prices were moderating. Since petrochemical feedstocks are typically a by-product of crude oil refining, supply significantly exceeded demand and hence prices fell. This phenomenon was especially apparent in the case of the C3 (Propylene) spot price because the FCC (Fluidised Catalytic Cracker) used in the petrol refining process results in significant C3 and hence the C3 spot price falling below the crude oil price in September as C3 molecules desperately sought buyers, so that the refineries could continue to operate and cash in on the high margins for fuels. Towards the end of 2022 the retail price of petrol and diesel started to fall, suggesting that supply and demand are starting to become more balanced. Figure 7 below demonstrates that all monomers were discounted in 2022, and the relative reduction in C3 compared to C2 is further evidence of the excess supply outlined above. None-the-less all monomers have recorded a significant net gain over the two-year period and the economics of monomer production remain attractive.

The passing through of monomer price adjustments to polymer prices remained a matter of serious contention between buyers and sellers. In attempts to recover increased energy costs polymer producers sought to discount reductions but to pass any increases on in full and in some cases applied energy surcharges. Ultimately, the level of reductions was a reflection of the market with plastic processors typically enjoying the full reductions as producers continued to chase volumes, even in spite of their best efforts to balance the market through reduced operating rates.

The graph clearly confirms through spot pricing the over-supply of C2 and C3, which were effectively cross subsidised by the high margins resulting from refining transport fuels.

Figure 8 clearly illustrates the volatility of aromatic feedstocks, with periods of discount and significant premium.

Polyolefins

2022 was really a tale of two halves, with already high prices, escalating to record highs in September, before prices rapidly fell away. The negative market sentiment was driven by oversupply to a market where demand fell significantly, and even despite the efforts of polymer producers to curb output rates prices continued to drop on the back of oversupply.

Polypropylene has traded at a discount to polyethylene throughout 2022, and is a combination of factors including:

1. A relative reduction in the C3 price compared to the C2 price

2. PP producers taking advantage of the low C3 spot pricing

3. Lower production and/or demand for consumer durables such as cars and white goods for which PP is a much more significant component than PE

In the course of 2022 the supply of PE from the USA resumed, following a period of restricted supply in 2021, and towards the end of the year significant volumes of C4 and C6 LLDPE for film applications and HDPE for blow moulding were physically present in the UK market, and as mentioned above these materials have substituted the volumes from Russia that have now disappeared from the market.

Styrenics

As in the prior year, the volatility of aromatic feedstock costs was a key factor in the economics of the production of styrenebased polymers. In addition, volumes from Asia were constrained for much of the year as a result of the high shipping costs. The softening of prices after the summer is a reflection of demand in Asia, the reduction in shipping costs and some dramatic falls in feedstock costs.

The year ended with the shocking announcement that Trinseo would discontinue styrene production at its Böhlen site in Saxony, Germany due to poor economics and a failure to find a buyer for the business. The closure will remove 300k tonnes of European capacity and will have a significant impact on the supply demand balance.

Engineering Polymers

The engineering polymers market very much reflected the broader economic situation; up until about the mid-year point supply for most grades was limited and demand from most sectors, apart from automotive, quite robust. However, the realities of a global economic slowdown coupled with falling East-West shipping rates started to put prices under pressure from September onwards. The nonintegrated nature of engineering polymer production enabled producers to recover margins after a dip in the summer months that was related to the volatility of aromatic feedstocks, however energy input costs will also be a matter of concern with the relocation of some base resin production for PBT compounds being relocated to Asia on economic grounds.

Trinseo announced that in addition to closing SM (styrene monomer) capacity, that it would also shutter one of its two production lines for polycarbonate in Stade, Germany, citing overcapacity and poor economics as the rationale for this decision.