As we continue with the fourth wave of the Covid 19 pandemic, industries face the reality that manufacturing supply chains across several sectors are expecting long-term disruptions.
Disruption of plastic resin supply, namely the polymers and other derivatives produced in the plastic value chain has come to the forefront of public discussion as the reality of enduring disruption and price shock sinks in.
There’s a confluence of a number of factors, both on the supply and demand side affecting the supply chain crunch for resins. Covid-19 covers part of it, but it is not the entire story. There have been many supply-demand challenges for plastic resins. Some are Covid-19 related, some weather-related in 2020 and 2021 and some are due to global trade issues.
In the equation of supply versus demand, for many materials, the elements are out of balance. Currently, there are demand-side issues and supply-side issues, but you’re getting a widening gulf between the two sides resulting in elevated pricing.
Since resin is a critical raw ingredient that is the building block of many plastic products that are ubiquitous in our daily lives, globally we are facing long-term supply chain disruption- rapid price escalation and enduring high prices. Industry predicts the ongoing shortage of resins is unlikely to be resolved quickly and we will continue to see price hikes that inflate the cost of consumer necessities – adding to inflation.
“The problem is really the sustained price increase, for most plastic resins you’re looking at anywhere from 80 to 150% price per ton increase over last 12 months- so it’s pretty substantive.” according to Bob Masterson, President and CEO of the Chemistry Industry Association of Canada
Covid 19 as a key driver
Looking at the demand first, Covid is one of the key drivers of this imbalance.
The pandemic created a sudden, massive demand for single-use plastic products- masks, face shields, gloves, syringes, and gowns and all the packaging used to transport them and keep them sterile for use.
As reported recently in Scientific American,
“COVID-19 triggered an estimated global use of 129 billion face masks and 65 billion gloves every month. “The oil market collapsed, making plastic cheaper to use than ever. It is now extremely advantageous to package your goods in newly made, cheap virgin plastic. And while takeout has been the saving grace for many restaurants, it’s also contributing to the growing heap of single-use plastic globally. Recycling systems around the world are starting to break down because of COVID-19 budget strains.”
A Shift in consumer buying habits
The pandemic changed our daily activities and shifted consumer buying habits. Stockpiling groceries surged demand for products – all wrapped in plastic -while plastic use to wrap or bag food for both in-store and online purchases also surged. Food dollars were shifted away from restaurants — which buy food in bulk containers — to grocery stores that use much more plastic packaging. As home improvement surged, the price of lumber peaked and consumers turned to materials made with plastics like composite decking.
According to Bob Masterson,
“All this is built on a global plastics industry that grows at one and a half to two times global GDP year after year for the last 70 years since World War Two. In addition to increased demand, new construction was put on hold as companies weren’t sure of their financial position. You saw large corporations suspend their CapEx programs – companies like Inter Pipeline in Alberta or Nova Chemicals in Ontario that had major construction underway, They had to slow it down to make workplace accommodations for Covid exposure. So we saw sustained demand increase at a time that we’re not building the new facilities in the past two years to support normal growth. “
Perfect Storms and Plastic Plant Shutdowns
The majority of North America’s plastics industry is located in the US Gulf Coast and three very serious weather disruptions affected some important facilities in 2020-2021.
In summer 2020, Hurricane Laura shut down many big Gulf Coast polymer producers, suspending 15% of polyethylene (PE) and polypropylene (PP) production according to a report in canplastics.com.
In addition, the winter 2021 Texas ice freeze occurred in February 2021. As reported by Wood Mackenzie in March 2021, there were lingering impacts from the deep freeze. “The Gulf Coast ‘freeze’ in Texas during February 2021 had another devastating impact on the plastics industry, shutting down major production facilities for polyethylene and polypropylene and decimating the power grid. The freeze alone caused an estimated 12% reduction in US polyethylene production.
When Hurricane Ida arrived on Aug 29th, there were still some facilities that had not come back online since the February storm which was devastating for the chemical and energy sector. The result was a big demand increase because of various factors of COVID and sudden supply challenges.
Masterson says there are further complications,
“On the supply side, we see in Alberta and Ontario, large petrochemical facilities that have to undergo a major maintenance activity every two to three years and shut down for six to eight to twelve weeks during that time. Thousands of workers come on-site to support those turnarounds. In 2020 none of those maintenance turnarounds took place due to Covid and there is a physical limit to how long the facilities can run without a turnaround. Now in 2021, you’ve got normally scheduled maintenance plus the maintenance that was missed last year. At the current prices, the facilities would continue to produce as long as possible but will be forced to shut down at some point to complete that deferred maintenance from 2020.”
All these issues in terms of demand & supply are driving record prices
Price Makers vs Price Takers?
If we look at polyethylene, Canada is a global-scale producer. 80% of all the polyethylene resin we make in Canada is exported – largely to the United States- so we are a very significant exporter. When you look at polypropylene resin, today we don’t produce any. The new Inter Pipeline project will give us a domestic source of polypropylene. 100% of whatever polypropylene we use in Canada now is coming from offshore. As a country, our plastics are part of the energy value chain. We have world-class, low-carbon, well-priced natural gas liquids in Western Canada that we can use for feedstock.
“So why can’t we get more plastics on the world markets? I talk often about the missed opportunities Canada has had. There has been about one and a half to two times global GDP growth. The U.S. in the past seven years has seen 300 new chemical plant expansions/chemical plant investments. That’s about $300 billion of new investment. In Canada, we would have expected/would have seen 30 projects- $30 billion in new investment instead we have about $7 billion underway, so we’ve missed incredible opportunities.”
Masterson wonders if Canada has become a fly-over destination for the global chemistry sector with the exception perhaps of Alberta? He questions why we don’t strive, as a nation, to be more self-sufficient. The world needs the materials we can produce and they need them at the price, the quality and the low-carbon footprint we can offer. So why can’t we get more of that product into the global market?
Masterson says Alberta is doing the right thing to be on the radar of the global chemistry industry, so investments are at least being invited and incentivized. He sees the municipal governments, like the Alberta Industrial Heartland Association, are very supportive. If we look at the Alberta Industrial Heartland Association, they’re looking at $30 billion of new investment in the region by 2030. Municipally and provincially, Alberta is doing everything possible to secure the interests and to secure tangible investments in the future. We only have one very large project with shovels in the ground right now but you have a number of publicly made proposals and a large number of discussions happening behind the scenes.
Masterson’s main message is clear. The largest commodity chemical in the world is ethylene, which is the precursor to polyethylene- which is in turn, the most widely consumed plastic globally. So for every ton of polyethylene, we make in Alberta, we can do it with half the greenhouse gas content of polyethylene produced in a jurisdiction that makes its plastics out of crude oil. He points out that two-thirds of the world still makes its plastics out of crude oil.
“Alberta can be leaders in low-carbon production. My point is we have access to world-class, high-quality, well-priced natural gas liquids that are low-carbon because of their links to carbon capture and storage and hydrogen production – top priorities for Alberta and that will reduce the industry’s GHG footprint. We can make our plastics at half the greenhouse gas footprint of two-thirds of the world. We don’t seem to talk about that, but we should.”
Maureen McCall is an energy professional who writes on issues affecting the energy industry