Lately there are many customers who ask us: Why if the price of oil is falling down there is no direct impact on the price of semi-finished plastics?
We tend to think that the relationship between the two parameters (oil and plastic) is directly proportional and in a way is true but there are many other factors in the equation of price so that reality is not always so simple. In order to explain clearly let’s take the example of the evolution of the price of polypropylene sheets.
For years some of the processing companies of polypropylene sheets had agreements with manufacturers of raw material (resin) by which prices remained stable at list for a year. Subsequently they became valid just for each semester, after each quarter and finally, due to the volatility of markets, prices were only valid for one month.
To avoid changing each month rate prices, some manufacturers of polypropylene sheets began to negotiate the purchase of Propylene C3, the gas which (once polymerized) become Polypropylene or Polyethylene resin. In this way they’ve got to return to a quarterly price stability. This also allowed them to keep their rates over time and also to index their rates to this value: if the C3 Propylene gets up, prices rose and if it fell down prices would decrease. The final customer could see the evolution of the C3 rate in the ICIS index so that the information was public and truthful.
However, in recent years, they have involved two factors significantly (both related) that has modified the logic of dynamic prices:
- Systematic and prolonged decline over time of the oil prices
- The fall in demand caused by the global economic crisis.
In this situation many manufacturers of PP resin reacted to modify the logical mechanical of balance sheet of price rate, that means, if the petrol price fall down and if the demand of goods also decrease (due to the global economic crisis) consequently their sales, and margins, should fall dawn too. However, the raw material market reacts and it happens the as follws:
- Close plant feedstock production in Europe: They get down the offer so therefore demand grows.
- Suspects closures of force majeure of amny manufacturers: Producers of resin who have contracts with clients are obliged to sell a stated amount per year. The only course by which they can help serve the negotiated amount is to stop production by introducing what is known as a “force majeure”, thus stop producing the agreed amount without breaking the legal agreement they have with their client . This has occurred in some cases simultaneously among several producers, something strange if we see the number of simultaneous strikes especially in Europe. The equation again corrected: Retail sale price increase.
- Termination of contracts with customers: Many wholesalers have stopped agreements with customers and send them to the spot market, this means that prices are more volatile and also incorporate a new factor: speculation.
Today most manufacturers of Polypropylene sheets no longer have contracts with manufacturers of resin but take their products on the spot market, which represents a significant increase in their prices and in some cases supply problems.
We must also mention other factors that are not derived from the evolution of oil prices and significantly involved in the mechanics of price, these are: the cost of energy, evolution of labour costs etc.
To conclude the following graph attached price developments C3 which is clearly what has been the evolution in the spot market
The graph shows that the difference between C3 and PP resin remain stable until the end of 2014; since the PP resin has gradually evolved.
In conclusion: yes, the oil price directly affects the price of the raw material but not as significantly as we might think.