We might be nearing the light at the end of the inflation tunnel, with the rate of inflation starting to ease during the month of December so far. The Federal Reserve also boosted key interest rates by half a percentage point, marking a continued effort to increase the cost of borrowing, though at lower levels than previously seen this year.
Overall, resin demand has dropped, and availability is rising back to normal. In terms of the market, the automotive industry is expected to be up 5% for the beginning of 2023, which will feel bigger than the sounds when seeing inventory on dealership lots for the first time in a long time. Semiconductors are becoming less of an issue, especially with officials in US and the European Union starting talks to work towards strengthening semiconductor supply chains to boost domestic chip production.
The appliance market is slightly down on demand, which is typical for this time of year, and the E/E market is following suit right out of the gates in Q1 of 2023.
Housing market continues to head in the wrong direction for growth, as the Feds raise interest rates again to cool the economy. Mortgage rates are at recent highs, with the number of applications at near 35+ year lows, and rates expecting to peak in the first half of 2023. We expect to see inventory of houses on the market to increase in number in the near term, becoming a buyer’s market again if those buyers can pay larger mortgage payments compared to the last two years. This also coincides with a sharp decline in residential construction activity.
Macroeconomic issues are still in play, with more job openings and not enough people to fill them, and while the current supply chain is more stable, there’s still a risk for disruption. Energy prices have stabilized in the US, but the lack of long-term investment in addressing environmental issues will become a problem.
Demand for PC has begun to cool down, lower than seasonal expectations, most likely due to lingering inventories and slowing markets. Though most organizations are still work out of old inventory, buyers are saying that it’s getting to the point of depletion. With that, we expect they will be buying again early 2023, and at lower prices.
The concern on the supply side is: PC producers in North America are expected to be running 5-10% below optimal operating rates in Q1 2023. That means prices will drop to get volume pull-through sales, with domestic lead times at 4 weeks. But there’s a twist: China’s operating rates are at 40%, meaning many plants have been fully shut down and others are operating at the 80%+ level. This means there is more inventory available from Asia when demand firms up.
In Western Europe, over 40% of supply is offline in PC with shutdowns and FMs coming from several large producers. With lower operating rates, it makes sense that China imports to Europe in larger volumes, but will that take pressure off North America? The answer seems unlikely with the significant volume of materials without a home. With energy in Europe still 15x in price year over year, plants are better off shutting down if they don’t have purchase agreements on feedstocks.
ABS demand is slowing, and supply is still abundant with inventory available currently. Operating rates are an issue again; it’s too low and the majors need to keep the productivity up. While some of the majors expect small monthly increases over the next quarter, ABS pricing seems to slip downwards toward the end of Q1 of 2023.
For the medium-to-smaller-sized processers, prices are 50% more than what distributors or large-volume processors are seeing. Producers are going to resist the additional push down, but their hands will be forced as the imports dump into North America. Plants in Asia with low operating rates, supply available, and equipment to fill, orders will be continuing to produce in Asia and sell in NA through 2023. The only fly in this ointment for Asia is West Coast labor concerns, which could slow import supply.
Nylon 6 is more competitive in the market, and drops have been seen since their peak in July. China’s material imports of both nylon 6 and 66 to North America are priced lower, but those prices aren’t sustainable. This is due to weak demand in Asia (and globally), and they’re looking for an outlet for the material. In Europe, we’re seeing overall increases in the price of nylons as expected based on their ongoing energy issues.
Demand for nylons continues to look stable for the first few quarters of 2023. Automotive production has steadily grown recently as materials become more available, especially with the semiconductor shortage becoming less of a concern for the supply chain.
For PBT, the market seems to be quiet, but imports from China and Taiwan to Europe are on the rise. Materials previously destined for NA compounders are now moving to Europe, reducing the supply in NA. With the Chinese New Year soon approaching (January 21st), there will be a lot of material on the table with low demand.
Diesel prices are going to continue higher as stocks of this critical fuel continue to get drawn lower and lower. This is going to continue to hold freight rates higher even as freight volumes drop, which usually correlates with lower freight rates.
Germany is looking to impose a 33% extra tax on oil and gas companies due to high profits, and Italy is reviewing a 50% tax. The argument is that the windfall profits are too much and should not be used for things like stock buybacks and distribution to investors.
Freight rates are dropping fast, and container companies are re-evaluating their strategies of supply. An example of this is Costco, who is writing off over $90M on leases that they don’t need anymore for vessels in 2023. For them, this is cheaper than sitting on unused inventory. The current spot rate for west coast entries is running at about $1,800, with contracts at $6k and dropping to $3k sometime in early 2023.
Labor negotiations on the west coast are still to be determined. If they strike on the West Coast, why not move material to the East Coast? Because there is not enough capacity to consume LA, Long Beach, and entire west coast volume on the east coast. If a strike occurs, there would be a slowdown in imports from Asia.
Sustainability was a big topic for K Show 2022, with multiple companies showcasing sustainable material solutions, including recycled resins, recycling technologies and platforms, and tracing software. Covestro, for example, announced climate goals and the use of bio-based feedstocks while in Dusseldorf, and Avient Corp promoted success in developing colors with recycled resin as well as bio material products, with the goal of improving customer experience of working with PCR in packaging.
Electric vehicle batteries have also recently become the topic in sustainability news, but for a new reason – recycling of EV batteries could play a significant role in providing the auto industry with materials to produce battery cells vs the lengthy time it takes to mine and extract new materials. GM wants at least 75% of the materials for its batteries sourced from North America by 2030 – so returned vehicles could be the best source of critical materials. The next step leaders in this industry see is the matter of designing batteries with end-of-life recycling in mind.
To this end, battery swapping stations are popping up all over Europe for Electric Vehicles—around 1,100 have been installed year-to-date. These stations install a fresh battery in less time than it takes to make a cup of coffee (estimated around 3 minutes). This concept solves two problems: reducing the batteries’ wear for charging efficiency and the issue of collection for recycling.
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