It is not unusual for plastic resin buyers, whether purchasing large or small quantities of plastics, to have suppliers present them with the opportunity to buy some resins on a contract basis as an alternative to buying all of their resin on a spot price basis.
While starting resin pricing is an important part of any potential raw materials contract, the prices initially offered, no matter how attractive, are necessarily only valid at a specific time or for a specific period of time. The question in any resin contract negotiation then becomes: how do the prices of the plastics that I purchase move up or down going forward?
One of the most common pricing mechanisms for plastics resins contracts is to link the starting price to one of the plastics price indexes that are available either free of charge, or more commonly available by subscription. Major plastics indexes available by subscription that cover North American resin pricing include CDI (Chemical Data, Inc.), IHS (formerly CMAI) and ICIS.
While the actual published prices for specific resins such as High Density Polyethylene (HDPE) or Polyvinyl Chloride (PVC) can vary widely from index to index—between CDI and IHS, for example—the monthly price changes for specific resins are correlated almost one hundred percent between and among CDI, IHS, ICIS and the others over time. That means that while ICIS may publish a price of 75 cents for Polypropylene in the same month that CDI publishes a price of 65 cents for Polypropylene, if there was a five cents increase or decrease for Polypropylene in that same month all of the major indexes are very likely to publish the exact same price change of five cents regardless of how much the actual base Polypropylene prices they publish may be different.
How do the various indexes almost always end up reporting the same exact changes month after month? The main reason is that CDI, IHS and the others are normally surveying a wide range of resin buyers and resin sellers each month about what they are paying for various resins and there is substantial overlap between the plastics industry people with whom the index publishers speak on a regular basis. So, from a practical perspective, as long as you are using one of the major resin indexes to benchmark your resin pricing, the mathematical result—the monthly price changes—will almost always be the same.
But, even though most indexes will give you an accurate estimate of the overall up and down price changes for Polyethylene, Polystyrene, etc., there are some important things to keep in mind before entering into a resin contract that moves up and down in alignment with changes in a resin price index. This article looks briefly at several things to keep in mind if your resin prices are linked to the prices of polymers in a published resin index; polymer contracts that are instead linked to plastics raw materials such as monomer prices will be discussed at a future date.
Almost every resin purchaser measures his or her resin buying success based on how much better they buy than the plastic price indexes over time. For example, if Polypropylene went up five cents in the past month according to the indexes and Company A only went up three cents in that month then Company A has the potential to pass along a full five cents in resin price increases to its customers and the potential to correspondingly increase its profits by two cents per pound.
The plastics resin index publishers are quite familiar with the way that individual buyers purchase resins and how this causes general market prices to drift over time from the plastics price changes that they are reporting in their publications.
Some index publishers deal with the differences between overall market prices and what individual buyers may actually be paying by offering multiple indexes that track resin prices for large, small and average resin volume purchasers, or by showing the resin prices paid in the top, bottom and average percentiles of the resin buyers they survey. This can allow small resin buyers to compare themselves to other small buyers and large buyers to compare themselves to large buyers and so forth. The most common way, however, is for the plastics index price publishers to deal with the drift by making periodic, one-time adjustments to their overall market prices that are normally referred to as “Non-Market Price Adjustments”.
“Non-Market Price Adjustments” are resin index publishers’ way of getting the overall market price for a particular resin back in line when prices have drifted so far that they believe it is beginning to hurt the credibility of the resin prices they are reporting. Though IHS, CDI and the others understand and communicate to their customers that the individual prices they publish are normally different, usually higher, than the prices any particular plastics buyers are paying, they try to keep the gap between their overall market prices and what buyers are actually paying as consistent as possible over time.
The timing between Non-Market Price Adjustments for individual resins is normally measured in years rather than months, and the timing varies from resin to resin—some resins might be updated every three years or so while others might be adjusted less frequently or almost never. But when they do occur, Non-Market Price Adjustments are almost exclusively reductions in the overall market price of a particular resin and the reductions can be very large. Downward Non-Market Price adjustments of five, ten or more cents per pound are common.
Though there is no industry-wide rule for dealing with Non-Market Price Adjustments, the general rule of thumb for buyers and sellers of resins and plastic products whose prices are linked to a particular resin price index is that the Non-Market Price Adjustments are normally ignored and treated as if they never occurred for purposes of resin or plastics product pricing. What this means, for example, is that polyethylene buyers at Company A don’t get a one-time ten cents reduction in the price of their polyethylene resin and Company A’s customers don’t get a one-time reduction in the prices of their polyethylene containing products either.
Just because the general rule of thumb is to ignore Non-Market Price Adjustments as if they never occurred that doesn’t mean you should just ignore them:
- If you haven’t been measuring your company’s resin buying performance against the resin price index your pricing is linked to, measuring it backwards in time from when an Adjustment occurs is a good time to start.
- Graph the average monthly price your company is paying for PVC or any another resin versus the resin price index as far back as you can, ideally at least as far back as the last time the index publisher made an Adjustment.
- If the average price you have been paying has been steady versus the index over the time period since the last Adjustment that suggests other companies, possibly including your competitors, have been buying resin better than your company.
- If the average price you have been paying has moved down as much or more than the Non-Market Price Adjustment since the time of the last Adjustment your company has probably—but not necessarily—been buying well during that time period.
- By “not necessarily” buying well we mean that the market is constantly moving, but the resin price index publishers are not constantly making adjustments. For example, since many index adjustments are made starting in January and many resin contracts are negotiated in November or December, if some buyers received larger than average discounts when negotiating their new contracts in December the indexes may already be several cents behind the market even after an Adjustment.
- In addition, averages can be deceiving. Your company may have been buying resin at the same discount versus an index at the start of the period and at the end of a period, but there may be long stretches of time when your company’s pricing was substantially higher or lower than average.
In summary, when linking all or a portion of your company’s resin prices to a published resin price index it is important to remember that the indexes are not always a true reflection of what other resin buyers are paying or whether other resin buyers are paying the same amount of price increases or getting the same amount of price decreases as your company over time.
Take the time to understand what the indexes are and what they do and what they don’t do and please feel free to contact us to learn more about this topic and how it can affect your company’s financial performance.