Why the Price of Plastic Is Crashing After a Record Surge

Tracy Alloway (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:14)

And I'm Joe Weisenthal.

Tracy Alloway (0:16)

Joe, do you know what a nertle is?

Joe Weisenthal (0:18)

No, is that like something related to a wordle?

Tracy Alloway (0:23)

No, sounds like it.

Joe Weisenthal (0:25)

A nerdier wordle?

Tracy Alloway (0:26)

A nertle is, it's like that tiny little pellet or bead of plastic, which is used to make bigger plastic items.

Joe Weisenthal (0:35)

Yeah, I had no idea.

Tracy Alloway (0:36)

Yeah, it's one of my favorite words, and this episode is really just an excuse for me to say nertle several times. But today we are going to be talking about the plastics market, which I kind of think is an underappreciated thing in global supply chains, but also potentially in inflation.

Joe Weisenthal (0:53)

Yeah, it's super interesting because plastics are obviously huge. They're in everything. They package everything. They're omnipresent. But I feel like we don't actually talk about plastics very much.

We've never done a plastics episode. And by and large, like when you like read the news, you know, read about commodities or things like that, I don't think there's actually much discussion about the plastics industry.

Tracy Alloway (1:13)

Right.

So I wrote a tiny bit about it in 2021 It was based off of this great Bank of America note talking about how there was this huge arbitrage opportunity that had opened up between US and European and Asian plastics markets. And the price of plastic at the time was just going absolutely nuts, like everything at that time.

Since then, it has come crashing down. So we flipped from record high plastic prices to, I think, a two-year low. So it's kind of similar to what we've seen with a lot of commodities, a lot of different types of consumer goods, which means that we need to check in on what's going on with the market.

Joe Weisenthal (1:51)

Let's do it, because like I said, I'm kind of starting from scratch. I don't know anything. I don't know what a nerdle is, but more importantly, I really don't know anything about it, about the plastics industry at all, which is kind of indefensible for such an important part of our lives.

Tracy Alloway (2:03)

We'll just keep saying nerdles. Okay, well, we have the perfect guest to discuss this. We are going to be speaking with the author of that analyst report that I just mentioned. We're gonna be speaking with Warren Russell. He is a commodity strategist at Bank of America, and he's going to give us the lowdown on nerdles and what's going on in the plastic market right now. So Warren, thank you so much for coming on Odd Lots.

So maybe just to begin with a very basic question, but when we talk about the price of plastic, what are the sort of ingredients or factors that go into that?

Warren Russell (2:36)

Sure. So the primary feedstock for this comes from oil.

So when we think about the fundamental pricing of plastic, it comes down to a large degree with what's happening with oil, but there are a lot of other nuances as well with regards to capacity within the plastic space, the ability to meet demand. So is there enough capacity to meet demand? And obviously, during the last few years, we've had a bit of a challenge doing that. And so you've seen some disconnects in price between what oil is doing and what some of the plastics are doing.

Joe Weisenthal (3:11)

So talk to us a little bit more. First of all, within the broader world of petroleum consumption, we think about cars, we think about jet fuel, how big is plastics?

And then talk to us about that refining component. Again, we talk about gasoline refining and we talk about diesel and all that. But in terms of the process for turning oil petroleum into plastics, what do we talk about in terms of capacity, spare capacity, how tight has that got?

Warren Russell (3:41)

Sure, so I guess I should just start with where this is all coming from. So when you drill a well, right, you've got, most people just think of gas and oil, but you actually have a broad spectrum of what we call hydrocarbons coming out of the ground. And so you'll have the very heavy viscous stuff that looks like, or feels like peanut butter, and then you've got the very light stuff, which is pretty much natural gas or methane.

And in between, you've got, just after methane, we call them hydrocarbon chains. So you start with methane with 1C, 2C is ethane, 3C is propane, and up the stream, the plastics come from the light ends of that. So you drill a well, you're producing oil, you're producing what we call wet gas. That wet gas is separated out into different streams. So you're gonna split out most of the natural gas. There'll be some ethane in that, but it recovers some ethane. That in the US is used heavily in our pet chem industry. You're also producing propane and butane and what we call C5s as well.