Plastics

This article describes a commodity traded on a commodities exchange. View articles referencing this commodity.

 

TOP CONTRIBUTORS

Andrew Liyana

Global consumption of plastic in 2007 was 400 billion pounds, and by 2010 researchers forecast consumption will jump 25% to 500 billion pounds globally.^[1][2] Plastics' physical advantages, such as weather and heat resistance, flexibility, and light weight have made it a favorite material in everything from beverage bottling to body armour.^[3] Cheap petroleum prices fuel production for companies like DuPont (DD) and General Electric Company (GE), and support substitution away from paper, metals, and glass.

A transition into plastics picked up steam during World War II, when large supplies of basic materials were demanded for the war effort.^[4] Innovation was rampant, and by the 1960s, inexpensive plastics were common in every household.^[4] However, with oil and gas (the main raw materials for plastic production^[4]) spiking in 2008, companies have an incentive to find alternatives to plastics. Bioplastics, which are produced from high-fructose corn syrup, vegetable oils, and even bacteria, present a viable option to traditional manufacturing processes much like Renewable Energy does to Oil & Gas Refining & Marketing.^[1] Further, environmentalists, who disapprove of the poor degradability of petroleum-based plastics, want to cap its usage.^[5]

These economic and political considerations have affected plastics consumption - China has already banned the use of plastic bags^[6] and Ireland passed a 33 cent tax on each plastic shopping bag which essentially stopped their usage.^[6] The United States may eventually follow suit as several municipalities have passed restrictive legislation. For instance, San Francisco prohibits the use of plastic bags and Seattle has required businesses serving food to stop the use of foam and petroleum-based plastic by 2010.^[7] In response, start-ups like Metabolix (MBLX) and conventional plastic manufacturers such as DuPont (DD) and BASF SE (BASFY) have begun developing bioplastics which won't depend on the price of oil or take the same toll on the environment.^[8]

Which companies benefit from high plastic prices?

• DuPont (DD), BASF SE (BASFY), and Metabolix (MBLX) develop and manufacture bioplastics. Rising Oil Prices lead to increasing cost of production of petroleum-based plastics. As expenses rise, the spread between producing conventional plastics and new bioplastics narrow.^[6] This dynamic lets legislation restrict petroleum-based plastics more easily as it is less distortive, and supports free enterprise to build plants to manufacture plastics from vegetable oil or sugars rather than using petroleum.^[1] As a result, companies that are producing bioplastics benefit the most from rising plastic prices. They capture market share from conventional producers by either forced bioplastic mandates, or better margins resulting from lower input costs and/or tax incentives.
• Fertilizer companies like Mosaic Company (MOS), Agrium (AGU), and Potash Corporation of Saskatchewan (POT) , and seed marketers such as Monsanto Company (MON) and DuPont (DD) benefit from the promotion of bioplastics, because it supports crop usage.^[6] As such, companies that profit from higher Corn Prices and Soybean Prices, also benefit from rising plastic prices.
• Recyclers see improved volume and gross profit margins when prices are high. Only 6% of plastic made in the United States was recycled in 2005.^[6] As prices rose into 2006, the number of PET bottles jumped 102 million pounds.^[3] In addition, the link between Oil Prices and plastics mean that high plastic prices imply an environment of high energy costs. Recycling plastics produce 70% energy savings, so the net benefit is greater with high prices.^[9]
• Because plastics are used in many facets of life, a localized rush of demand that causes a particular plastic to rise in price, and not higher input costs, obviously benefits the manufacturer of the product. For instance, a war spikes the need for kevlar. Kevlar manufacturers would be positioned to take advantage of the increase in demand. Another good example is PVC piping. Good economic growth supports expanding construction. PVC pipes are used extensively in plumbing when construction buildings. PW Eagle (PWEI) benefits with construction booms as it is a manufacturer of plumbing and agriculural piping.

Which companies suffer from high plastic prices?

• Companies that depend heavily on plastics in production suffer the most. The largest consumers of plastics (26% of market) is the packaging industry, which include bottles, bag, and food container manufacturers.^[10] Beverage companies like Coca-Cola Enterprises (CCE) and Pepsi Bottling Group (PBG) pay more to buy plastics needed to manufacture bottles. Building and construction account for 21% of all plastic demand^[10] and the automotive industry uses 4% of all plastics in the United States.^[11] Automotive manufacturers, including General Motors (GM), Toyota Motor (TM), and Ford Motor Company (F), use plastics in engine tubes, tires, panels, and windows.^[3] Large construction firms like Avatar Holdings (AVTR), KB Home (KBH), and Lennar (LEN) use plastics in windows, flooring, and plumbing.^[3] Food packagers also consume plastic. Consumer and institutional goods, like toys and sporting goods, use 13% of all plastics.^[10] When plastics rise in price, it eats into these companies' gross profit margins as they pay more for materials.
• Food and beverage processors, like Tyson Foods (TSN), Smithfield Foods (SFD), Kellogg Company (K), and Coca-Cola Company (KO) suffer from high plastic prices, because rising plastic prices support production of bioplastics.^[6] This manufacturing process demands sugars and/or vegetable oils, so any company that uses these sources will face greater demand for the same resource. These food and beverage bottlers compete for the same corn that it uses for livestock feed as DuPont (DD) or BASF SE (BASFY) would use to manufacture bioplastics, so they pay more for agricultural products, which cuts into operating margins.

Types of Plastics

7 Major Plastics and their common uses include^[4];

1. Polyethylene Terephthalate (PET or PETE): Beverage Bottles, Food Containers, Luggage, Carpet, Furniture
2. High Density Polyethylene (HDPE): Liquid Chemical Containers, Grocery Bags, Milk Cartons
3. Polyvinyl Chloride (PVC): Pipes, Windows, Siding, Insulation Film, Blood Bags, Medical Tubing
4. Low Density Polyethylene (LDPE): Produce Bags, Film, Flexible Lids
5. Polyproylene (PP): Packaging, Ketchup Bottles, Automobile Battery Casings, Medicine Bottles
6. Polystyrene (PS): Egg Crates, Fast-Food Restaurant Trays
7. Other Plastics: Nylon in toothbrush bristles and clothing, Teflon in non-stick coating for frying pans, PMMA in contact lenses and rear light covers for vehicles, UF in wood adhesives and electrical swith housings, ABS in electronic equipment cases, PC in eyeglasses, riot shields, and traffic lights

Oil Prices and Plastic Prices

As the main raw material inputs, Crude Prices and natural gas prices impact the cost of plastic production. Plastics and energy prices move in unison much like gasoline does with crude; the general directions are the same, but there are slight variations depending on supply and demand.^[12]

12-month Historical LME Plastics^[12] - Polypropylene (PP) is commonly used to manufacture grocery bags, sheets, pipes, toys, and flexible tubing.^[13] Linear Low Density Polyethylene (LL) is used to make warm-weather gear, plastic moldings, storage boxes, trading cards, and manufactured rugs.^[14]

12-month Historical Crude (Black) and Natural Gas (Blue) Plotted using FutureSource^[15]

Plastics' Oil Consumption

Americans consume 7.5 billion barrels of oil annually. 254 million, or 3.6%, is used in plastic and chemical production.^[8] The U.S. bottled water market uses 17.6 million barrels of oil annually in manufacturing its products. This usage is equivalent to 1.5 million cars on U.S. highways.^[16] Further, Americans used 100 billion plastic bags in 2007, which equates to 12 million barrels of oil.^[16] The nation imports 13.15 million Barrels per Day (bbl/d or bpd).^[16]

What Impacts the Price of Plastics?

Oil Prices

World Plastics Production^[17]

Legislation

Legislation is a key determinant of plastics price. In the case of China, San Fransisco, and Ireland, the governments banned or taxed the use of plastic bags.^[6] These types of laws directly decrease demand. Other legislation actions include the U.S. House requiring that all spring water be packaged in bioplastics^[18] and Seattle requiring all businesses serving food to use bioplastics by 2010.^[8] These policies favor bioplastic manufacturers and hurts conventional petroleum-based plastics by cutting out demand.

Climate Policy

A move towards environmentally friendly products is negative for conventional plastics. Petroleum-based products decay slowly and account for 25% of all landfill content.^[19] Further, each manufactured pound of plastic produces 2-3 pounds of carbon dioxide.^[5] A move towards using reusable clothed bags, like in Ireland^[6], or promoted by grocery stores such as Safeway (SWY), decreases demand for plastics.^[20]

Bioplastics Development

Innovation in bioplastics will decrease plastic prices if it drives input costs below Natural gas or Oil. So far, companies have found ways to produce plastics by using sugars, vegetable oils, and bacteria rather than petroleum. The European Bioplastics trade group predicts that the bioplastic industry will grow 17% a year through 2012 and have an annual capacity of 1.5 million tons by 2011.^[1] Profitability and increasing returns to scale support competitiveness of bioplastic manufacturers.

Futures Contracts

The London Metal Exchange used to list two plastics contracts but they have been discontinued due to low trading volumes.

1. Linear low density polyethylene (ticker: LL) is used in a wide range of applications that include pastic bags, sheets, pipes, toys, and flexible tubing.^[14]
2. Polypropylene (ticker: PP) is used to make warm-weather gear, plastic moldings, storage boxes, trading cards, and manufactured rugs.^[13]

The Chinese Dalian Commodity Exchange includes various polymer futures, including a Linear Low-Density Polyethylene (LLDPE) futures contract

Data

Trade Stats

The following tables show imports and exports between the United States and its top 5 trading partners.^[21] Exchange Rates, tax policies, and resource availability impact trade flow.

References

1. ↑ ^{1.0 1.1 1.2 1.3 1.4} Wikipedia Article "Bioplastic"
2. ↑ European Bioplastics "Characteristics of Bioplastics"
3. ↑ ^{3.0 3.1 3.2 3.3} WikiPedia.org "Plastics" Article
4. ↑ ^{4.0 4.1 4.2 4.3} AmericanChemistry Plastics Overview
5. ↑ ^{5.0 5.1} EcoGeek "Bioplastics' Leg Up on Conventional Plastic" Author: Jaymi Helmbuch, Aug-26-08
6. ↑ ^{6.0 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9}
7. ↑ Sustainable Business "Demand for Biodegradable Plastics Growing"
8. ↑ ^{8.0 8.1 8.2} Seeking Alpha "Metabolix: Profitable Plastic Production"
9. ↑ WikiPedia.org "Recycling"
10. ↑ ^{10.0 10.1 10.2} Answers.com "Plastic Materials and Resin"
11. ↑ US DOE Fact #352
12. ↑ ^{12.0 12.1} 12-month Historical LME Plastics
13. ↑ ^{13.0 13.1} WikiPedia.org PP Article
14. ↑ ^{14.0 14.1} WikiPedia.org LL Article
15. ↑ FutureSource - Futures & Commodity Quotes
16. ↑ ^{16.0 16.1 16.2} Business Shrink April 26, 2008, "America's Dirty Little Oil Secret: Plastic Bottles and Bags"
17. ↑ World Plastics Production Chart, PlasticsEurope
18. ↑ "U.S. House uses Iowa bottles made from corn" Sept 24, 2008
19. ↑ The Environmental Literacy Council "Plastics"
20. ↑ Reusable Bags Trend Facts
21. ↑ FTD - Top 15 Trading Partners (2008 YTD)
22. ↑ FTD Imports
23. ↑ FTD Exports