Resin pricing in a global economy

Now that the era of the world economy is here, why are resin prices in China lower than those in the U.S. or Europe? Here are some not-so-easy answers to a provocative issue.

At Crossroads Forum: The China Factor, an event held during NPE and sponsored jointly by IMM and SPI, one of the most contentious issues that arose concerned resin pricing parity between the U.S. and China. More than a few of the 350-plus attendees expressed their belief that resin producers arbitrarily price pellets sold in China lower than those sold domestically, further eroding U.S. processors’ ability to compete.

When market forces and competitive pressures combine in an apparent tempest that threatens an industry, it is an entirely human reaction to attempt to place blame. While it’s easy to look upon links in the supply chain as candidates, the hard facts point to other factors. In reality, the issue of resin pricing parity between the U.S. and Asia is not a case of black and white, nor are pricing decisions arbitrary. IMM spoke with several experts in an attempt to unravel this issue, which at times rivals the U.S. stock market for sheer complexity.

Pricing Around the Globe

In his capacity as chief operating officer and managing partner for Resin Technology Inc. (RTi, Fort Worth, TX), Bill Bowie works for processors of all sizes and regularly confers with resin producers. RTi’s goal is to obtain the best resin prices for its processor clients by monitoring pricing at the producer/distributor/broker level and negotiating price and supply directly or indirectly with them. However, unlike brokers, distributors, or consultants, the company is supplier-neutral and charges no fees unless it succeeds in saving money for its clients, who make all final supplier decisions.

Seeing both sides of the resin pricing parity issue, Bowie concludes that while we’re in the throes of a global economy, there are still differences in regional markets. “There are times when Asian processors do receive a cost advantage when purchasing resin, but that is due to the regional market for resin in Asia. In addition to Asia, prices for the same resin vary in regions such as South America, Europe, and the Middle East.”

Even within the North American market, according to Bowie, prices for the same product are different. “Resin producers have done a great job of branding products. Often, when we work with processors, the best price for a specific resin, the same molecule, melt flow, and additives can be found with a producer unknown to them. Even though the unfamiliar producer sells the same resin with the same properties at a lower price, the processor considers it a different product. In this case, unfamiliarity breeds contempt.”

This is not the case in Asia, where resin buying habits are focused on price almost exclusively. Manufacturers that import finished parts from China regularly see evidence of multiple resin suppliers from as many as four different regions of the world. As long as the products meet spec, the supplier is not an issue.

In effect, Asian processors buy globally on price. “We are the only place in the world that doesn’t do this,” says Bowie. “Processors not only in Asia but in Mexico, Brazil, and Europe buy resin from the Middle East, North America, even Asia if the price is right.”

What about shipping costs? “Processors in other regions of the world wake up in the morning, check the price of resin, and factor in the cost of freight. If the result is too high, they’ll buy locally. If it is lower than regional suppliers, they’ll buy offshore. And because of regional resin price differences, offshore resin prices can be lower even with freight costs added in.”

Knowledge is Power

Unfortunately, there is no one source for global pricing data, no one exchange to use. Several price indices offer subscriptions at $6000/year and up. These include Chemical Market Assoc., DeWitt & Co., Icis-LOR, and Townsend Tarnell. Chemical Data, another leading price index, is considered a bible of resin pricing by many in the industry. David der Hagopian of distributor Entec Engineering Resins, for example, believes that standardizing resin buying decisions on this index makes the most sense. Others advocate cross-referencing prices from several such indices.

However it is done, making oneself aware of resin prices globally can have a major impact on the bottom line. Along with this, Bowie explains, a change needs to take place in the way processors relate to resin suppliers, and the essence can be found in the golden rules that RTi suggests its clients live by:

Cost of Production

Regional resin pricing contains several components, not the least of which are raw material and energy costs. Until recently, resin producers in the U.S. enjoyed a low-cost advantage in world markets. With the advent of natural gas price increases in the U.S., however, this advantage has all but disappeared. While prices have backed off from Q1 highs greater than $8/MBtu, there are predictions that prices could spike again this winter.

According to SPI data, roughly 70 percent of the plastics industry’s raw materials are now dependent on natural gas feedstocks. For producers who purchase these feedstocks to make resin, the higher price of natural gas affects both energy and raw material costs.

Mark Wall, president of GE Plastics Greater China (Hong Kong, Taiwan, China), was a key presenter at Crossroads Forum: The China Factor and agrees that key feedstock prices are driving variations in resin pricing. He fielded several pointed questions from attendees concerned that the lack of resin pricing parity gave Asian competitors an unfair advantage. In a phone interview from GE offices in Shanghai, Wall elaborated on the Forum discussion to further explain why prices vary.

“First and foremost, market dynamics are the reason resin suppliers are in China. This is a huge market opportunity, the largest consumer population in the world. We have to go where current global and potential customers go.”

While Wall declines to discuss specific pricing policies, he strongly believes that all material suppliers, especially those who produce ETPs, have to base their pricing structure on raw materials and key raw feedstocks. “Prices are also based on supply and demand, and the imbalance of these two factors has affected prices for the past two years,” he adds.

OEM contract pricing is another variable that distorts the resin pricing picture to an extent. “Global customers tend to buy on a global contract basis, which means that all of the supplier plants worldwide producing parts for these OEMs receive the same price.”

Feedstock prices are quoted from three regions, or poles—the Americas, Europe, and Asia, according to Wall. “These published figures are the prices on which resin suppliers base their prices, along with supply/demand variables and other regional market dynamics. All of these factors vary, so prices vary with them.”

Other factors enter into pricing decisions as well, such as factory loads, labor cost, energy cost, capacity, and motivation to sell. “As far as we are concerned, prices are based on key raw materials and the margins we need to make to continue to invest in the business. Our mission is not to be a commodity supplier, but to go up the scale by producing ETPs with cost and performance advantages.” Wall advocates that not only suppliers, but also OEMs and processors “focus on driving products to create value so that there are total cost solutions rather than treating our industry as a commodity.”

Being able to adapt to current conditions is another caveat. “We have to adapt to the change. This year is different from two years ago, and there will be a change again next year. Three years ago, NPE featured dot-coms that are now defunct. As long as we address the world as it changes, there is plenty of growth and opportunity for everyone in the plastics industry.”

To further clarify his position, Wall echoed several previous articles in the IMM series, “Crossroads: Crisis or Opportunity,” which concluded that processors who remain cost competitive in the global marketplace specialize in areas where capabilities are first priority. Examples include large parts that require costly transportation, automotive applications, high-tech and precision products, and high-value-added products. “These are all examples of anticommodity niches that processors in the U.S. continue to fill,” he adds.

A recommendation that Wall suggests processors heed is to look at resin pricing as one of several factors in choosing a supplier. “If a supplier consistently prices resin below its cost to produce it, that producer won’t be in business for the long term. Instead of focusing solely on price, it pays to look at ways your supplier can keep you competitive over a longer term with added services, just-in-time deliveries, and improved products.”

U.S. Molder, Asian Plants

Nypro, the first U.S. molder to set up operations in China, presents an experienced view of the resin pricing issue with its four molding and assembly plants, one painting operation, and two moldmaking facilities in Asia. Ten years after Nypro opened its first plant in Shenzen, China in 1993, the landscape has become much clearer.

According to Bob Smetana, director of global sourcing, individual plants do their own order launching, expediting, and quality inspections, along with managing any deviations. With the exception of large OEM contract-price projects, corporate establishes global pricing agreements based on total volume buying for all Nypro plants. “When you’re in this mode, you notice that pricing does vary by region. Overall, the U.S. and Europe are at one level, Mexico is a step below that, and China is a step below Mexico.”

Experienced with resin buying in Asia, Smetana concludes that resin prices are based on the competitive landscape. “It requires pricing competitive with peer companies, and U.S. suppliers have to respond to local competition by bringing prices in line. Pricing in each region varies, in part, because the set of competitors is different.”

For Nypro, OEM customers typically spec out material from U.S. resin suppliers and set up contract pricing directly with them. Nypro then sources the material locally. Because of the type of products molded—tight-tolerance, highly engineered parts—resins are typically higher-end as well. “Even though Shenzen is running a lean manufacturing program, in which they schedule smaller shipments more frequently, they will still use the same OEM contract pricing when sourcing material.”

While Nypro is perhaps the largest U.S. molder with 40 plants worldwide, Smetana believes it makes sense to step back and understand the supply chain “no matter what size operation you are running. You begin to see the competitive landscape.” To do this, Nypro uses a supply-chain specialization approach in which a key person manages each area of the products and services the company purchases. A resin director, for example, works with plants on a regular basis and interacts with suppliers. Costs can be minimized via better logistics, pricing arrangements can be made flexible based on geographic venue, and Nypro can ensure that suppliers are able to respond to its expectations.

Nypro CEO Brian Jones said several months ago that the company is not in China because labor is cheaper, but because time to market is so much faster. Smetana explains, “You can get plants built and up and running in no time, thanks to an overall attitude of speed and growth. The government is fostering this atmosphere, and the country is in a growth mode with a GDP of about 8 percent. In addition, most products produced at Nypro’s Chinese plants are shipped to OEM plants in Asia, directly to assembly lines, so logistics are better, and collaboration opportunities are better for design and moldbuilding phases.”