Despite the complications presented by adverse weather and COVID-19, the fundamental market dynamics for plastics remains strong. The plastics industry’s outlook for 2021 is positive. As the resin demand and supply gap closes, upward price pressure should eventually dissipate.
It was expected that the plastics industry would experience demand and supply distortions due to the recession caused by COVID-19. But we are not alone. During a recession, the economy’s demand and supply dynamics are out of sync. From March to April last year, the industrial production index for plastics material and resins decreased 4.5%.[1] The capacity utilization rate in resin production also decreased by 3.9 percentage over the same period. However, the demand for resin began increasing in the second half of 2020 due to a strong rebound in plastics production. As resin inventories were depleted and demand continued to climb, prices rose that in November, they were already above the pre-pandemic level. Resin prices remained elevated in February (see chart below).
Against the backdrop of rising resin prices, the winter storm in February added a layer of complication to what was already a widening resin demand and supply gap. This meant that the weather-induced production decrease resulted in added upward pressure on resin prices. The latest Federal Reserve estimates of resin production reveal the effect of the February winter storm on the country’s resin production hub: Texas. The industrial production of plastics material and resins fell 28.1% in February following a 2.1% rise in January as shown in the chart above. Capacity utilization in resin production dropped to 65.8% in February from 91.7% in January.
It is highly unlikely that resin manufacturing capacity utilization rate will remain at 65.8%. The plastics industry saw the resilience of its resin manufacturing sector during the 2008-09 recession. Resin manufacturing capacity utilization fell to 59.3% in September 2008 and rose to 92.6% six months later. In the ten years that followed, resin capacity utilization fluctuated between 78.4% ~ 94.9%. In 2019, resin manufacturing capacity averaged 86.7%. Last year it was 86.3% – less than a percentage point despite the disruption of COVID-19.
Despite the complications presented by adverse weather and COVID-19, the fundamental market dynamics for plastics remains strong. The plastics industry’s outlook for 2021 is positive. As the resin demand and supply gap closes, upward price pressure should eventually dissipate. Plastics are essential in healthcare and in other goods manufacturing and service industries. However, the supply chain disruption of the pandemic has resulted in current shortages of plastics for automotive and medical supplies manufacturing. A steady supply of plastics material and resins is important for the U.S. economy. It would be unfortunate if heavy-handed regulations such as the Break Free from Plastics Pollution Act.
[1] Monthly plastics industry industrial production and capacity utilization data are available at https://www.plasticsindustry.org/data-analysis-reports/.
