Plastics Markets are Softening, But There is Hope for Plastics Economics

Implications: First quarter results from converters confirm that demand for plastics packaging materials is down.  The good news is that higher revenues are attributed to thier ability to increase prices.  If converters have pricing power in the market, this should be good news for resin producers.

Analysis: Graham Packaging is one of the largest converters in the world.  They produce packaging materials including plastic bottles and other containers across North America, Europe, and Asia.  The announcement of the first quarter results is a good indication of what resin producers already know – demand for plastics is down this year.  These materials include the high volume plastics like polyethylene, polypropylene, polystyrene, and PET.

The article specifically notes that their sales of household goods and personal care packaging materials was lower this past quarter than Q1 of 2007.  This is particularly indicative of market conditions related to a poor economy.  This product category – bleach bottles, detergent bottles, mouthwash and make-up – are often viewed as resistant to mild economic downturns.  The items might be considered non-discretionary and, therefore, recession proof.  If sales of these goods are down, this strikes at the core of the polyolefins business.

The good news captured in the article is that Graham’s sales were higher because they were able to pass on higher material costs.  Resin producers have faced very stiff opposition to attempts to raise resin prices this year.  Announced price increases in January failed and some prices actually fell.  Thus far, spot prices for contain materials like HDPE and copolymer polypropylene have increase only 4¢ per pound and 6¢ per pound on spot markets this year.  As resin producers have faced stiff raw material increases from oil and gas derivatives, their margins have been squeezed about as thin as they can go.

If converters like Graham Packaging can continue to pass resin price increases on to their customers, then resin producers will have more room to try to recover the increases in their costs.  This provides some hope that, as operating rates continue to fall in petrochemicals and plastics, producers may be able to maintain breakeven economics, at least.