Stumbling To Scarcity

Plastic resins—the ubiquitous building blocks that are used to make the soda bottles we drink from, the fibers in our athletic clothing, the personal protective equipment that medical providers rely on, and the dashboards in our cars—are yet another input facing unexpected supply and price shocks due to the COVID-19 crisis. Over the last year, the prices of the two most common resin types, polypropylene and polyethylene, have increased by around 100% and 60%, respectively, in the US. In Europe, which has access to a broader range of suppliers, prices for the two resin types have increased by 20% and 5%.

Like many of the shortages we’ve seen recently, the resin shortages are due to the pandemic’s effects on both supply and demand. Demand for resins did not decline as much as expected due to the virus because locked-down consumers started purchasing more consumer electronics and packaged food, milk, and juices. At the same time, the global supply of resins grew more slowly than expected, as cautious producers delayed new plant openings and opted to draw down inventories in the early months of the recovery rather than ramping up production. Unplanned production outages caused by hurricanes in the fall of 2020 and the winter storms across much of the US South in February further curtailed supply.

Plastic resin isn’t in everything we buy, but darn close. If its price doubles, other prices get pressured in turn. Often, it’s just in the packaging of something more valuable. Packaging can be changed. But sometimes the product is plastic. Think of outdoor furniture, waste baskets, many automotive parts. They’re just pieces of plastic in different shapes and colors—and they’re getting more expensive.

This is exactly the kind of thing that will, if it persists, feed through to other prices. That may not happen; the Bain analysts think plastic resin prices will ease later this year. But it still has an effect in the meantime. Companies that need resin have to respond. They will find alternative materials, swallow the cost as lower profit margins, or raise selling prices. Competitive pressure may prevent the latter.

Another obvious example is lumber, up as much as 200% according to the NAHB. Part of the problem is a beetle which has been destroying trees for decades, plus forestry and lumber mills have faced lower labor availability and COVID-19 restrictions. Trucking costs have increased. But again, this should smooth out as we return to normal business activity.

Rising prices in key goods have a psychological effect, too. People wonder what prices will rise next. They may begin stockpiling or stop buying other goods to offset the higher cost. The impact is unpredictable, but quite real.

The inflation talk we hear right now doesn’t all emanate from Wall Street bond traders. Some of it is from real people and businesses seeing inflation firsthand. It may not last, but they’re not imagining it. They are thinking about how to “do without” items they once thought critical. That thinking, if it takes hold, leads nowhere good.

Abundance to Shortage

My friend, Gavekal co-founder Louis Gave, is a systematic thinker. He doesn’t simply say that A leads to B. He adeptly identifies the multiple components that combine to produce an economic or market effect. It is one of his trademark abilities.

Recently Louis explained why we may be moving from an age of abundance (my basic position) to an era of shortages. Obviously, not everything has been abundant, nor will everything become scarce. But the general trends matter. I will try to summarize Louis’s vision. I don’t 100% agree, but he brings up critically important points. First, recognize what happened in recent decades.

  • Globalization created abundant labor. Or actually, the labor was already there; transportation and communications technology unlocked it, letting people in Asia “work” in the US and Europe without actually moving. Job automation is having a similar effect.
  • Energy became cheap and abundant thanks to the shale oil revolution, which put the nail in the coffin of the “peak oil” fantasy (which I have said was a silly idea for decades). Recent advances in other energy sources—solar, wind, nuclear, hydrogen, etc.—amplify this trend. The same was true for other commodities.
  • Information flowed freely around the world, enabling rapid innovation and technological advances.
View single page >> |

Disclaimer:The Mauldin Economics website, Yield Shark, Thoughts from the Frontline, Patrick Cox’s Tech Digest, Outside the Box, Over My Shoulder, World Money Analyst, Street Freak, Just One ...

more
How did you like this article? Let us know so we can better customize your reading experience.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.