Podcast Episode 20

Plastic Resin: Where are we today?

With Guests:
  • Mike Burns of RTi Global
  • Randy McGill of Prinsco

Jamie once again sits down with Mike Burns of RTi Global and Randy McGill of Prinsco to get an update on the situation with the plastic resin used to make agricultural drainage pipe. This is a unique look at how the global plastic supply works. They look at how far the resin supply has come since last talking and what the future is looking like for the industry.

Episode 20 | 29:11 min

Guest Bios

Mike Burns

Mike has over 25 years of experience in the plastics industry. He is considered by many as one of the foremost experts in the polyethylene resin markets. He manages over 4 billion pounds of polyethylene transactions for over 40 RTi clients.

Randy McGill

Randy McGill is the VP of Finance at Prinsco. McGill has over 20 years of industry experience.

Jamie Duininck (00:02):
This is The Water Table.

Kent R. (00:05):
A chance to hear the agricultural side of these issues.

Jamie Duininck (00:09):
A place where people can go find information and education.

Matt H. (00:13):
Water management is just going to become even more critical into the future.

Jamie Duininck (00:20):
How misunderstood what we do is.

Kent R. (00:22):
I would encourage people to open their minds, and to listen to this dialogue.

Jamie Duininck (00:31):
Welcome to The Water Table Podcast. Welcome back. Today we are going to do kind of a second part of a conversation we had earlier this year about material pricing, plastic pricing, and how that has really escalated over during 2021 and pretty much all year, late into 2020 and then 2021. Just want to give you an update on what we’re seeing and what we think the future holds, the near future.

Jamie Duininck (01:01):
So again, I have Mike Burns from RTI, who was with us before, back a couple of months ago, on this conversation, and Randy McGill from Prinsco. And we’re just going to have a conversation about what’s happening in the world of plastic resins.

Jamie Duininck (01:17):
Welcome, guys.

Mike Burns (01:18):
Thank you, Jamie. Thank you, Randy. I appreciate the opportunity to be back. I had a lot of fun last time, so look forward to having a good discussion here.’ And the topics pretty obvious. It’s the phone calls I get every day. And people want to know what’s going to happen, and when it’s going to happen, and why it’s just happening right now?

Mike Burns (01:37):
So I’ll do my best to recap a little bit of what we talked about last time briefly, and then go into the crystal ball and see what we were looking at coming up, and how we got where we are. But just to quick recap last year’s in less than a minute here:

Mike Burns (01:58):
The 2020 March shutdown sent everybody home, closed down manufacturing, and scared the heck out of the US economy. And due to that, the US manufacturers shipped everything they could to China. So what happened when we got home, we realized that Home Depot and Dick’s Sporting Goods and Walmart were all essential businesses, and they were open so we could go shop. And we went and shopped, and we bought everything we could, and we stayed home and did home projects. But meanwhile, all that stuff touches plastics, from Clorox cleaning supplies, to meat packet-ing, to the paint supplies at Home Depot and lawn and garden stuff. So all that stuff was now bought off the shelves. And the Home Depot’s of the world called the manufacturing segments, said, “We need product.” And they called everyone back to work. And then they called the resin suppliers and they said, “Sorry, we don’t have any resin. We shipped it all to China.” And therefore we went into $0.24 of increases between March of 2020 through September of 2020. We started to see some recovery in the fall of 2020.

Mike Burns (03:09):
What was happening that we didn’t know what was happening is at the end of 2020, you had the Big-Box starting to place orders in December and going into January. So when the vaccines are rolled out and the shutdowns are opened and things started to look a little better, in the spring when we went shopping there was something on the shelf to buy. So our demand started to pick up in the month of December and January. Not crazy, but it was strong. So we had good demand starting the year restocking, some people call it pre stocking, for the COVID vaccine rollouts and the spring time parties we were already to have.

Mike Burns (03:55):
Well what happened right in line with that is, as we know, we had the Texas storm. 10 days froze Texas out. Everything was down. If it wasn’t broken, it was down, but everything was down. And it took over a billion pounds out of the market in Texas, in the Gulf Coast, and polyethylenes. Some longer term than others, but what it did is really put everybody into an allocation situation. So you took a lot of resin out, where you had strong demand already in the markets for all different plastic segments. So no resin, strong demand, we get into March with no inventory, and this thing happens to us and we’re out of resin.

Mike Burns (04:43):
So that’s how we got to where we are in 2021, good demand leading into a Texas storm. And now we have strong demand continuing after the storm, as the economy starts to open up, vaccines are rolled out. It’s a party in the USA, and people are out there buying stuff and spending money. On top of that you had some government stimulus to keep the economy going as well.

Mike Burns (05:12):
So that’s kind of how we got to where we were, but it’s really … It’s hard to explain this. It’s a timing thing. And the demand, both years, came after there was no resin. So this gives the suppliers an incredible amount of strength to raise pricing. Because orders are coming in, you need to get stuff out to the shelves, and you need resin. And the only guy who has resin is in the Gulf Coast. And there’s only eight or nine of them, and those guys are raising the price month after month. So you’re handcuffed. You got orders, and you can raise your pricing, and that’s what’s happening there.

Mike Burns (05:59):
But it’s really a matter of timing again. So if you look at … We’re trying to figure out when’s this going to be over? And how’s this going to straighten out? And how long will it take? So here’s the simple thing that you have to remember in the US polyethylene world:

Mike Burns (06:16):
50 to 53 billion pounds is made every year of polyethylene. ’18, ’19 and ’20, 50 to 53 billion pounds. And there’s new capacity coming on at different locations, Shell, Bayport, Nova. There’s a new Exxon-SABIC joint venture coming on, so that could add up to another seven billion pounds. But right now, below 50 billion pounds. The US uses 30 to 33 billion pounds a year. So we overproduce by 30 to 40% every year. So even if our demand was to go up so significantly that we would consume that 50 billion pounds, there’s two obstacles in the way: there’s not enough machines in this country to run 50 billion pounds, and right now we don’t have enough people to run those machines. So we’re going to be oversupplied by 20 billion pounds sometime soon.

Mike Burns (07:15):
So second half 2020, the resin, there was 26 billion pounds made. In the first half of 2021, there was 25 billion pounds made; just one billion pounds short, that Texas 10 days. The exports, the second half of 2020, same as the exports in 2021: roughly eight billion pounds.

Mike Burns (07:43):
So we’ve consumed 15 billion pounds of resin, the first six months of 2021. We consumed 16 billion pounds, the second half of 2020. So we’re very close, but we’re about a billion pounds behind supply.

Mike Burns (08:03):
We’re about a billion pounds behind supply, so that’s what we need to do to get even. Now even doesn’t lower pricing; even keeps pricing the same. You cannot say no when the markets are that level. Suppliers still have control. So we need to have good production rates for the next two to three months to build that billion pounds and then continue to build from there. So that will happen. It’s just a matter of when. So we’re going to catch up to demand, supply will catch up to demand, and then supply will exceed demand. And when supply exceeds demand, then we’ll see market changes. Then extra resin will be available, and competitive offers begin, and once the competition begins, we’ll start to see some lower prices.

Mike Burns (08:57):
But there’s one big obstacle between now and that time, and that’s the month of September and late August in the Gulf Coast. It’s historical, there’s some type of weather disruptions. Now a hurricane does not have to hit land on the Gulf Coast; it just has to threaten. A good enough threat will shut down equipment. You don’t shut down while the storm’s hitting your place. You shut down as it’s approaching. So we have to watch that very carefully in the Gulf Coast. A big storm could be catastrophic and just call 2022 over. If there’s no storms, production continues to be run as fast as we can. We’re overpriced for the export market to Asia. So they will not be able to move that resin to Asia until they get in line, and I’m talking 30 to 40 cents higher than the Asian price right now, China and Southeast Asia. So that’s not going to happen until we have a lot of resin.

Mike Burns (09:55):
So right now, the machines are running. The demand is kind of leveling off, and then we’re going to see more production and get that supply above the demand. Jamie, if you have any questions or want to get me into another direction here. I apologize for running on there, but that’s kind of where we’re at right now. And then the next thing would be to look at the end of this year, into next year and what we think is going to happen.

Randy McGill (10:22):
Yeah, Mike, I recall our conversation a few months ago, probably four or five months ago now already, your calming around, we’ll see the price increase in grocery and Home Depot, and that absolutely came true over the coming months. And I think everyone saw the increase in all types of consumer goods that they’re utilizing every week. So that premonition was absolutely true. And I was going to note too, yeah, August 1 is peak hurricane season. So just a couple of days ago, that’s when everything really ramps up. And to your point, it just takes the threat of that or something getting close and that’s going to push pricing and continue to put pressure on inventory levels.

Jamie Duininck (11:06):
Yeah, it’s interesting. I’m glad you kind of gave us that backstory again, because it’s pretty complicated on how this all goes. And yet, we’re going into now Q3 and Q4 of 2021, and we’re probably not, on how I’m reading you Mike, it’s still pretty volatile, and we’re probably not going to see any relief at the supplier to the manufacturer really into late 2021 or even into 2022. Just to be more clear, is that correct?

Mike Burns (11:45):
Yes. Yeah, that’s fair. There’s a couple of things that’ll happen. As the supply grows, then we’ll be able to measure the price. The price will be dictated by the supply. There’s no question about it, but there’s some things that could happen going into the end of the year too. Knowing that this is some of the highest prices of all time, you’re going to have fourth quarter orders for the first quarter of next year probably not be as robust as last year. There is no spring time party next year. There’s no COVID rollouts or reopening the restaurants and the stadiums. So you may have your demand level, towards the end of this year into the beginning of next year, significantly change. That’s one of the key things here that could help accelerate pricing.

Mike Burns (12:48):
If demand continues, that will slow the pricing down as well. There’s several thoughts on inflation here. There’s the timing and supply chain consideration that that’s what’s causing inflation. There’s other thoughts that just peers, people spending money like crazy that they may or may not have is causing inflation. So that’s going to play out in the fall too when people go to buy their children’s school supplies and they find out a box of pencils cost five times more than it did last year. Maybe they put the brakes on the demand. So there’s a lot of the questions on what’s going on with the true demand going into the fall, which will be a big impact on plastics because it all touches plastics. Will there be more disinfectants bought for the schools or will they not be buying them? Will the people at home be buying that type of product? Is there going to be another shutdown where everyone’s going to run and loads up on the toilet paper again? These are questions coming that nobody knows the answers to.

Mike Burns (13:58):
And then to touch on the hurricane thing again, that’s serious and that does create some demand, false demand, but people are going to put resin in their silo that they may not have an order for because this year could be catastrophic if you didn’t have that and there was this sort of thing. So there’s a few things that come into play here between now and whenever then is. I think then is going to be November/December, and then the first half of next year will be supply, supply, supply, but any bumps in the road between now and then is your setback. And you can’t get that billion pounds I talked about with any setbacks, and to look at the resin industry in 90 days and say we can’t have any setbacks, I would never take that bet in my 30 years of experience in resin. So it looks good, but there’s a lot of things between here and then.

Jamie Duininck (14:55):
Yeah. It’s middle of summer; it feels like we’ve been in the hurricane season for awhile, but we’re really just entering that. So it is a little bit of a concern on, like you said, all it has to be as a threat. It doesn’t have to hit land for them to shut down for a day or two, which getting them back going is more closer to a week.

Mike Burns (15:20):
So to consider, the last two hurricanes that caused shutdowns was Hurricane Laura last September and Hurricane Harvey, which was the last day of August in 2017. Both of those shut down the industry for 10 days, and the industry came back and recovered very quickly. There was some damage done to some plants, but keep in mind, at that time, we were 20 billion pounds over supply. So there was a lot of extra resin that was out there. That’s not the case this time, and that’s what’s really important. We are even with the demand, and supply is… Actually demand’s ahead of supply

Mike Burns (16:03):
And actually demand’s ahead of supply right now, but we’re even going into the fall. Every other year, we were long, long, long. That’s a big difference.

Jamie Duininck (16:12):
Yeah, and I think that’s important to note too. That goes all the way through the supply chain. The pipe industry, and that’s what we’re talking about here, is water management on the podcast, but the pipe industry is not long on inventory and not long on raw material supply. I mean, we’re buying everything we can get, and it’s really not enough. I think, as an industry, that would be true. So to fill those coffers all the way back from the pellet producer, all the way through in our industry is pipe, but any industry, whether you’re making toys, plastic toys, or whatever, I think are all in the same boat where they’re running hand to mouth, which it’s good to be busy, but all of that needs to get filled back up. So if you start to see end of the year of 2021 that the price at the resin supplier starts to go down, you still have to fill all those supply chains back up. So we’re probably talking a mid-year 2022 before the consumer’s seeing it.

Mike Burns (17:18):
Yeah. The other thing too, and this is by a whole other podcast a little above my expertise here, but the clients that I talk on a daily basis have one common thing besides being very busy is they’re turning off machines because they don’t have enough employees. And that creates a backlog to get things out to the stores as well, so that needs to be corrected. So your Home Depot shelf might be a little empty because the Home Depot supplier isn’t running 10 out of 10 machines. They’re running out of eight out of 10. And that’s a challenge too for the resin markets, for the resin processors out there.

Jamie Duininck (18:01):
Yeah. Interesting side note on that is I’ve heard and read some articles about some of these big box stores. They might have, I wouldn’t have no idea how many, but 200,000, 300,000 different products in their stores. And pretty much all of them are going up and they don’t have the people to physically go out and put the new price on the shelf at the rate of which the product’s going up. And so I’ve heard some say, “We can do 200 price increases a day,” and they might be getting 2,000 price increases a day across the system. And so they’re actually taking price increases and eating them because they can’t get it to the consumer fast enough, unless it’s online.

Mike Burns (18:48):
There’s a lot of that pricing in that industry from grocery all the way through to the big boxes, it’s done quarterly. So the second quarter price determines the third quarter pricing. Third quarter, which is right now, will be the highest pricing of the year, I believe, which will determine fourth quarter pricing. So do you order in the fourth quarter knowing that it could be the highest price you’ll ever pay or do you wait until the first quarter of 2022? That’s going to be something that’s happening? And it’s really a matter of demand and the consumer and our behavior, if the changes. I think everybody listening, you’re a part of this because you will decide when you’re going to order from Amazon and when you’re going to buy extra toilet paper and when you’re going to stop going to Home Depot to buy lawn edging and things like that. So you’ll see it. I think we’ll all be able to see it. I’m not now, I still go by the stores on the weekends, and you can’t find a parking spot. So it’s still rocking.

Randy McGill (19:52):
Yeah, one thing that changed during the pandemic as a result of the shutdowns, the lock downs of all, of everybody really, was just the way plastic is used. They ramped up production of PPE and medical devices. Then everybody’s ordering from Amazon and online, so your shipping containers and packaging went up and then ordering from restaurants instead of eating in, so you have your takeout containers and things like that, that just that plastic consumption really increased during that time. I don’t know how quickly that changes back. There’s work in Congress going around about, how do we change the design in packaging and collection and reuse of those packaging containers and single use beverage containers and things like that. So there’s proposals out there to put a pause on building new resin plants and the infrastructure things as well, which will mute that inventory build over time, if that does come through.

Mike Burns (20:57):
But I hope it’s not forgotten the role that plastic’s played during this pandemic. It allowed people to keep food longer in their house. It protected people from getting sick. There’s a lot of good things that the industry does and it continues to do, and hopefully we can remember that. Usually, our memories are not that long, but there’s a lot of things that came out of this that without plastics I think we would have probably been worse shape. That’s probably another podcast and another can of worms.

Jamie Duininck (21:33):
Yeah, and the podcast isn’t a sales pitch for our water management industry either, but it all starts there. We manage the crop, which grows a better yield, which feeds the world. And then we use the plastic containers to store the food. So, interesting that you bring that up.

Mike Burns (21:50):
Yeah. There’s some things about there now, talking about less plastic being made and the information I have, that’s not true. There’s more expansions globally around the world and demand continues to grow for plastics. Just get a responsible consumer out there to make sure they put it in the right garbage can and we’ll get that better. If you want me to wrap this up here, the price correction is based on production rates and we need to continue to have good production without disruptions, the speed of the recovery would be just driven by that. And the pricing is not going to soften until our supply exceeds the demand, and I think that will come. We talked about that earlier. It’s just a matter of when, and we can’t have any bumps in the road between now and then, and there’s a big month ahead of us that’s going to be the biggest challenge every year.

Mike Burns (22:53):
So we will see some correction to get back to that 2019 level, I think it’s fair to say. But how you get there and how fast you get there, it’s going to be tricky. The resin suppliers have a lot of discipline. They’ve shown their discipline the last two years. Pricing is up all about 60 cents over a two year period, almost 70 cents over a two year period. So they’ve got a lot of discipline, but there’s a lot of fat in the market. It’s just a matter of what happens in 2022. But we can’t compete in the global market with our pricing where it is today, so that will change.

Randy McGill (23:39):
One risk we didn’t really mention, but it seems like every time there’s an inventory build up it seems like there’s an untimely plant fire at one of these resin producers that takes production off. You mentioned there’s nine of them in the Gulf, so if you take one of them out that reduces production for quite a while, and that always holds that price in the market. And what I worry about is we had-

Randy McGill (24:03):
That price in the market. What I worry about is, we had the Texas storms that froze all the pipes and things down there in the production facilities for Resin, and that build back, and they’ve been so busy and running as hard as they possibly can. It just feels like that risk is out there again.

Mike Burns (24:21):
Right. Keep in mind, plant turnarounds do not happen in the August, September, October timeframe because you can’t put a crane up and scaffolding up with the threat of hurricanes. So that will happen probably in the spring of next year. So, that’s something that may slow down the recovery too if there’s a lot of plant turnarounds going forward. Just a quick story there’s a supplier in the Gulf Coast that is down from the storm. They had to order a gearbox from Germany and it takes two months to get and that’s it. You got to wait, you don’t get your machine for two months. So there are supply chain issues too, where if something like that happens it’s out of your control.

Jamie Duininck (25:09):
Yeah. We’re definitely seeing a lot of that, I think, in all industries as soon as the pandemic hit and people had money in their pockets, they started spending it, everything started going crazy and industry had to try to keep up. And we mentioned it before Mike, but not having enough people. So we’re running equipment really hard when we can run it and equipment breaks down. So I’ve heard that more than once now that we’re starting to get to that point too, where we pushed this stuff to the point where there is mechanical issues and we’re going to see that too going into the rest of the year.

Randy McGill (25:50):
Supply chain is super complex globally and just in North America alone, it just takes one little disruption like that and you’re sitting, like Jamie said, so it’s big risk we’re currently under in that area.

Mike Burns (26:04):
Yeah. And the supply chain of polyethylene is a natural gas based and we have lots of natural gas in this country, but to get from natural gas to polyethylene, there’s ethylene and the ethylene plants are in exactly the same position as the polyethylene plants, they were all shut down and they’re all coming back. And the same things that you guys just said, they’re running hard, they’re running long. We had five ethylene plants got shut down, unplanned to shut down in July, took the price in the low 30s to that high 50s in a week, cents per pound. That’s another industry that’s just behind us that supports the polyethylene industry that is running parallel to us. The same conversations I have with the ethylene people we say the same thing. It’s all a matter of getting that supply ahead of demand. There’s plenty of ethylene supply, but the shutdowns, five shutdowns in July, they’ve got some new capacity coming on, but same thing. So there’s a lot in the chain here that’s been affected from polyethylene world.

Randy McGill (27:19):
We live in a just-in-time world with the supply chain thing and it’s all connected. So once you have one bottleneck anywhere, it just a domino effect after that.

Mike Burns (27:29):
Yeah. And just for the listeners, the polyethylene price is driven by supply and what’s driving supply. And historically it’s been the high oil price that’s driving the high price globally that we were able to export, and then you have disruptions. In my 30 years of experience, demand has never been a driver for polyethylene pricing and it has been for the last two years, but it also came with some real good timing and serious disruptions.

Jamie Duininck (28:09):
Thanks a lot. Mike, it’s always information that is consumed by a lot of people. And we just sit here and there’s like Randy said so many moving parts to this conversation that it’s a very fun conversation to have and to have with somebody that has your experience and knowledge is even more beneficial for us and our listeners. So thanks for your time and taking the time to do this podcast with us.

Mike Burns (28:34):
I appreciate it. It’s fun. And maybe it’s not at the end of the year, maybe at the beginning of next year, we can sit down and see where this conversation lead.

Jamie Duininck (28:43):
Yeah, for sure. And hopefully there’s some relief for everybody in the chain. But have a great day. Thank you, Mike.

Randy McGill (28:51):
Thanks Mike.

Mike Burns (28:52):
Thanks guys.

Jamie Duininck (28:55):
If you enjoy what you’re listening to, you can find us on your favorite podcast platform, you can find us on Twitter or Facebook and you can also find us at watertablepodcast.com. Thanks for listening.