Recession Fears and Impact on the Resins Market

The global market has faced a slowdown in the last 2–3 months, and due to higher food and energy inflation, most economists believe the world is entering a recession. Given this advisory, we will look at some points related to how recession has affected the resins market in the past and how the predicted upcoming recession could impact the current resins market.

The Great Recession (December 2007–June 2009)

Key Observations During the Great Recession

• Suppliers’ margins were affected in 2008, with spreads between ethylene and crude oil being broadly negative or flat. Similarly, ethylene and PE spreads were affected by 100–150 €/MT.

• The correlation during recession between crude oil and ethylene is high in the range of 80 percent. However, the magnitude of the price change is lower in the case of ethylene and PE, due to drop in demand.

• Demand from packaging polymers dropped by 8–10 percent, while global economies dropped by 4–6 percent in the 2007–2008 period.

• Operating rates for polyolefins were in the range of 70–75 percent in 2008, and the trend continued throughout the year in line with higher crude oil prices.

Key Insights on Current Market Dynamics

• Suppliers’ current margins are affected. The spreads have been consistently declining for the past 3–4 months, and the trend is expected to continue.

• Despite higher crude oil prices, prices of olefins and polymers are expected to drop in the short term in line with the fall in demand.

• Demand from packaging polymers is expected to be soft in H2 2022.

• Operating rates for polyolefins in Asia are currently in the range of 70–80 percent, and the trend is expected to continue in the short term.

What next?

• It is evident that in comparison to the current market trends, similar scenarios and trends have been observed during past recessions. It is highly possible that polymer prices will fall from the current levels.

• However, higher crude oil prices are expected to maintain the current price trends, and due to smaller margins, some suppliers will continue operations at lower operating rates or close their plants for a prolonged period of time, which will keep the prices elevated.

• Trading activities are expected to be muted until H2 2022, and buying trends are expected to pick up from the end of Q1 2023.

• The prices are expected to remain at the current levels or drop slightly lower in the next 4–6 months. Overall, the market is not favorable for suppliers or buyers.

• Negotiation Opportunities for Buyers: Lower-volume buyers can go for spot purchases as the price difference between spot and contract is significant, which  could result in cost savings. Higher-volume buyers can look to consolidate the volumes and go for a 70:30 contract-to-spot ratio, which would increase the cost-savings potential