Get A Grip On Plastics Pricing
Growers typically lock in on one set of prices–the one they’re paying–in discussions with manufacturers and distributors about pots, trays and other plastic materials. Most growers probably realize there are external factors that influence a manufacturer’s costs, but it’s unlikely they dwell on them a whole lot.
One person who’s in tune with the complex plastic resin market is Tony Ferrara, the director of purchasing and logistics at Landmark Plastic who buys all of the Akron, Ohio-based plastic manufacturer’s raw materials. Ferrara advises growers interested in learning more about the factors influencing plastic material costs to spend some time on PlasticsExchange.com. But perhaps the best starting point to comprehend why pots and trays are priced as such, he says, is to better understand the monumental role of polyethylene and the factors that influence its production.
“The plastics world is driven by the production of polyethylene,” Ferrara says. “Everything else is a weak stepsister.”
The Power Of Polymers
The petrochemical plants that produce ethylene run on natural gas and fuel oil, Ferrara says, so fluctuating natural gas and oil prices obviously have a tremendous effect on a polymer company’s ability to produce polyethylene. This much growers already seem to get.
There are other factors that influence a plastic manufacturer’s costs, though. One such issue is the rising cost of benzene, a chemical that’s a component of polystyrene, which is one of two principal resins used to make horticultural containers. Benzene, which Ferrara says sold for many years between 90 cents and $2 per gallon, now costs between $3 and $4 per gallon.
“Benzene is made from crude oil No. 1,” Ferrara says. “It was one of the things in paint that we no longer use in paint. So because demand of benzene is down, production is consequently down. But the cost of making the monomer is high because of the cost of crude oil.”
Ferrara says benzene, as well as propylene, can be used as additives in gasoline. So rather than make either one available to plastics manufacturers, polymer companies have the option to sell them as gasoline additives when gas hits a certain price.
“They don’t have to make polypropylene,” Ferrara says. “The producers are in business to make money. So they’re going to make the most money with the least effort.”
Jim Daw, director of operations at Myers Lawn and Garden, sees shifts at the supply level, as well. Daw says suppliers now want advance forecasts, which optimize the supplier’s output and minimize the availability of surplus resin. Suppliers have historically operated at 90 percent-plus utilization, he adds, but suppliers are now realizing such a high production rate isn’t necessarily to their advantage.
“Now, they supply only what was forecasted and do not have any surplus material in the market that supports the monthly price increases we have seen over this past year,” Daw says.
Fortunately, over the next two years, Myers, Landmark and other plastics manufacturers anticipate a more global supply of resin to be made available to the United States.
“When all that capacity gets online, it might make some foreign country an exporter to North America,” Ferrara says. “We actually had that happen 10 to 12 years ago. There were certain distributors bringing in resin from offshore because they could sell it cheaper than domestic resin could be bought. And it could happen again. We’re not building reactors here because of EPA regulations, so capacity is coming on in other parts of the globe.”
So how do plastics manufacturers stay in business? It’s certainly a challenge as margins erode and more costs are pushed onto manufacturers. Landmark’s Jim Frederick says manufacturers absorb as many costs as they can, but there’s a limit to how much cost they can absorb before they must raise prices on growers.
“It’s not that we want to change our prices,” says Frederick, Landmark’s national account manager. “We’re forced to make some changes because of these different factors and because we use so much plastic. It’s such a major part of our business.”
The Box Stores As Drivers
Plastics manufacturers are also forced to react differently than they traditionally have because of Walmart, Home Depot and Lowe’s. The three box stores combined represent the majority of plants consumed in the market and, subsequently, the majority of plastics consumed at the retail level.
Because Walmart, Home Depot and Lowe’s have each stressed the importance of differentiating their brands from the other two, the number of colored pots on the market has increased. And the more color in pots, the more virgin resin is needed. And virgin resin runs up costs.
“Everything we were producing at one time was black,” Ferrara says. “It was all produced out of regrind plastic. Now, because of all these colors, we’re running 50 percent of what we process every month as virgin resin. One of the big boxes actually started the trend several years ago, saying it had to have every plant in a different colored pot.”
Still, even the box stores are realizing the more color used, the higher costs become.
“That same box store has since dropped back from the stance of having so much color,” Ferrara says. “When virgin resin reaches the type of pricing we’ve seen the last several years, companies are forced to the regrind market.”
Freight As A Factor
Another factor that influences plastic manufacturers’ pricing is freight, which is substantially higher than it was just 10 years ago. Ferrara identifies three specific events as the biggest influences on freight:
1. Mandatory driver drug testing. The mandate has reduced the number of available drivers, he says.
2. Sept. 11, 2001. “The terrorist attacks changed the way the insurance industry looked at everything,” Ferrara says. “A lot of guys had to shut down because they couldn’t afford insurance.”
3. Change in hours of service. Under old laws, drivers were permitted to be on the road 10 hours per day. Now, drivers can be on the road for 11 hours, but there’s a catch. “From the time they turn on the truck they have 11 hours until they have to shut it down–regardless of whether they’re driving or not,” Ferrara says.
Drivers are more particular about which loads they’ll take, too, because they worry about slow unloads or waiting around to get their truck unloaded. Traffic is another big factor that steers drivers away from particular loads.
“Traffic has always been a problem taking freight east into the New Jersey, New York and New England areas,” Ferrara says. “Another problem is the freight coming back is very low-paying freight. We’ve loaded many trucks over the years that get here to Ohio by hauling trash from the East Coast to a landfill. They’ll have to wash their truck and then haul plastic back to New Jersey, for example, because they’re a New Jersey carrier.”