The correlation between polyethylene prices to crude oil is 95%

Big Gains for Plastic Companies.

While falling oil prices have created mayhem for industries like energy, the plastic packaging industry is well positioned to capitalize on the situation. Falling oil prices will not only provide a cost tailwind but will also boost demand due to the increasing disposable income at the customer level.

Increased Disposable Income Means Higher Volumes

The macroeconomic environment has been challenging for the packaging industry in the past few years due to weak consumer spending. Moreover, economic uncertainty in the Eurozone and raw material and energy price inflation also had a negative impact on packaging producers.

Now, cheaper oil means lower gasoline prices, which have fallen to $2.47 per gallon, the lowest since 2009. The EIA (US Energy Information Administration) projects that the US drivers will spend about $550 less on gasoline in 2015 than in 2014, assuming prices stay low. This, along with an improving employment scenario, will lead to a positive turn in consumer spending patterns and consequently, packaging demand.

Lower Cost Will Translate to Increased Margins

Companies engaged in plastics are among the biggest beneficiaries of falling crude prices, being derivatives of crude oil polymers. Approximately 5% of the worldwide oil production is used to make plastics. Worldwide production of plastics is currently estimated at 265 million metric tons and still growing.

Oil represents a large input cost to produce the materials used in the Packaging industry. Lower oil prices would lower the transportation costs for the industry. Resin, a derivative of oil, makes up almost a major portion of the cost of goods sold of the packaging companies.

Polypropylene and polyethylene account for the majority of their plastic resin purchases. Plastic resins are subject to price fluctuations, including those arising from supply shortages and changes in the prices of natural gas, crude oil and other petrochemical intermediates from which resins are produced.

The correlation between polyethylene prices to crude oil is 95%. Polyethylene prices fell 3 cents per pound in November and 4 cents per pound in December. Generally, a $10 per barrel decline in oil translates to 4 cents per pound decline in polyethylene prices. This will lead to meaningful margin expansion for plastic packaging companies.