Mike Boswell aka @polymerman explains how polymer producers aim to maximise profit by minimising production costs. However, overproduction in a market with excess capacity may lead to lower prices and force less efficient producers to shut down.
The basic target of business economics in the manufacturing sector is to exceed business costs and thereby make a profit. Costs are typically classified as:
Variable (associated with the quantity of production) and include:
- Raw materials
- Energy
- Direct labour
- Transport
Fixed (costs that arise even if production is not taking place) and include:
- Indirect labour
- Depreciation
- Finance costs
The economics of production suggest that if your manufacturing process is profitable after variable cost, you should produce as much as you can - providing that there is sufficient demand. Furthermore, if by producing more you can do this more profitably, either by reducing variable costs per unit or through a lower fixed cost per unit of output, then the argument to produce as much as possible is further reinforced. Some, or all, of that cost advantage in the form of lower selling prices can be deployed to win market share in order to sell the higher volume produced. In polymer production, a further economic factor to be considered is the manufacture of out-of-specification material when changing grades. If a producer is going for flat-out productivity to win market share, then this may lead to concentration on the production of fewer grades that are in higher demand, which also reduces the need to sell non-prime material output at a discount.
Economic example
In October 2023, Argus Media published a white paper titled ‘Key Manufacturing Considerations For World Scale Polyethylene Plants’ in which it estimated the following costs per tonne based upon the operating rate of a typical 625kT per annum US HDPE/LLDPE swing plant:
- $565 per tonne at a run rate of 600kT per annum
- $672 per tonne at a run rate of 400kT per annum
- The $107 per tonne delta is a compelling argument to run ‘hard and fast’.
Although this economic approach may look like a ‘race to the bottom’, the economic reality is that those producers with non-profitable economics are pressured into shuttering capacity which, in turn, will drive supply and demand back towards equilibrium and, thereafter, more normal economics are restored.
Given the excess global capacity for volume polymers including PE, PP, PVC, PET, it is unlikely that, in the short term, an improvement in consumer demand is capable of restoring a better balance between supply and demand. So, what is more likely is a fundamental shift in polymer production to regions that have lower costs, with the advantage most likely to result from a combination of feedstock and energy costs.
Almost inevitably, this will lead to a further reduction of the amount of polymer produced here in Western Europe, where both feedstock and energy costs are typically higher than in other regions of the world including the USA and the Middle East.