Stability - A Powerful Business Model
April 9, 2013
(Pac Advantage Consulting)
– One the greatest challenges facing companies is dealing with volatility. Volatility takes a number of forms, with supply/demand/price volatility a particularly pernicious destroyer of business plans, new product innovation and introductions.
Stock markets aren’t the only institutions that crave predictability, and it has become very personal for those of us trying to orchestrate retirement. The uncertainty surrounding rapid recession and slow recovery, even after US equities have clawed their way back to pre-market collapse levels, has a lot of people waffling on how many more years to work. “Maybe a couple more, just to be safe”, is thought and said around plenty of kitchen tables these days. What that means for companies managing human talent is a topic for another day.
On the packaging materials front, there is recent very tangible evidence that investing in supply systems that reduce volatility for products and services is an attractive and powerful business model.
Users of polypropylene have been on a rollercoaster of price volatility for over a decade. In early 2002, following what seemed like large, but several year cycles ranging from about 30 to almost 50 cents per pound, PP went on a six year steady climb to peak out at almost $1.25. During 2008, the price collapsed to the mid to upper 50 cent level, but in 2009 started climbing back over $1.25 in mid-2011 and bouncing around between 90 cents and $1.20 since.
In addition to laying waste to countless purchasing budgets, this hugely higher and rapidly fluctuating price for PP proved to be a disincentive for users to adopt a resin previously touted as having a very bright future in plastic packaging. Growth in usage slowed and discouragement set in among suppliers. Why? Largely because the supply of propylene, the essential monomer for PP was seen as too heavily tied to crude oil, especially as US producers shifted to lighter feedstocks. And as we continue to experience at the pump, hydrocarbons derived from crude, while not at their highest prices, have remained at quite elevated levels.
Contrast this with ethylene, which is more easily and abundantly sourced from natural gas. The recent rapid growth in natural gas capacity and its price dropping to historically low levels has catalyzed major polyethylene capacity announcements in North America.
Into the propylene supply gap we now see companies seeing an opportunity to capture value by investing to provide increased security and stability of supply, announcing facilities to dehydrogenate into propylene increasingly available propane sourced as a natural gas liquid. As these plants are brought online in the next 2-3 years, an increased supply of propylene will become available. While the business model is aimed at creating a lower cost, more reliable source of propylene, the nature and magnitude of the impact on PP resin, while generally positive, may be tempered by the usual suspects for a global commodity.
Worldwide supply and demand will influence where, for what applications, and for how much the new propylene supply will be sold, but if installations go as announced, we can reasonably anticipate some price relief and more pricing stability for North American PP. And that should create more confidence for users to build their plans around this versatile packaging material.
Timothy Bohrer is the owner of Pac Advantage Consulting: http://www.pacadv.com/