The Water Table
The Water Table
Resin pricing nine weeks into the Iran war… an honest update
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Two months into the Iran war, Jamie welcomes back Sleiman Bassila, founder and president of BIC Advisory Group, and Tom Hughes, founder, president, and CEO of Quantum Polymers. These two polyethylene industry experts have been closely watching the events in Iran and the Strait of Hormuz and share their insights into the wide-ranging market effects of the ongoing war.
Sleiman and Tom summarize what’s happened since their last visit to The Water Table. The conversation touches on supply shortages, damaged petrochemical plants, unprecedented daily pricing increases, impacts on domestic pipe prices, and what it all means to the fertilizer supply chain. They also talk through the possibilities for recovery and how long it might take for stability to return once the war is over.
Chapters:
00:00 Introduction
01:36 A recap of recent history
05:35 Re-exporters enter the market
08:58 Impacts of petrochemical plant damage
12:00 Recovery possibilities, challenges, and timelines
18:30 Material availability, competition, and prioritization
22:32 The unprecedented pace of price increases
27:13 How lags in resin prices impact domestic pipe costs
31:09 Expectations of inflation
32:47 What about the fertilizer supply chain?
36:28 How oil prices impact resin re-exports
38:54 Closing
Related Content:
- #144: The Iran war and pipe prices
- #124: Who pays? The impact of tariffs on U.S. and Canadian ag
- #8: Cause and effect: Plastic resin supply
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Tom Hughes (00:00):
I don't think we've received the worst news yet. And the worst news is going to be once they can get in there assessed, all these numbers are justified.
Sleiman Bassila (00:07):
This is unprecedented. For prices to double over the span of five weeks is incredible.
Tom Hughes (00:15):
We're just going to be longer for hire. The new bar is going to be set and then we'll get back to fluctuating.
Sleiman Bassila (00:21):
These wars don't end and you go back to where you were before then.
Jamie Duininck (00:29):
Welcome back to the Water Table Podcast. I want to again welcome Sleiman Bassila and Tom Hughes. Tom with Quantum Polymers and Sleiman with BIC Advisory Group. These guys joined me back in March and we talked about the Iran war and how it was going to affect pricing. To date, it's been the most viewed episode of the Water Table in our 140 plus episodes. We've launched over time, and so just thought it'd be really good to come back in and visit a little bit about, okay, now we're six, seven weeks into this thing. What is it looking like? What do we know now that maybe is the same that we said it would be or maybe different? Just to give our customers and stakeholders in this industry some facts on what's going on and where we're going from here. So welcome back guys. Thanks so much for joining me.
Tom Hughes (01:23):
Thanks for having us, Jamie.
Jamie Duininck (01:24):
Absolutely.
Sleiman Bassila (01:24):
Thank you. Thank you, Jamie.
Jamie Duininck (01:25):
We really appreciate it here at the water table. So, Sleiman, we'll start with you kind of maybe just give us an update on what's happening and where we're at.
Sleiman Bassila (01:36):
Yeah. Yeah. So if you remember the last time we spoke, you were keen on mentioning when the episode was recording because we thought maybe by the time it publishes things kind of resolve or are better different. Unfortunately, we find ourselves eight weeks now into this war.
Tom Hughes (01:54):
We just begin our ninth week. Yeah, just beginning ninth.
Sleiman Bassila (01:56):
Ninth week, week nine this week, right, Tom? Without any kind of resolution.
Jamie Duininck (02:01):
And hold on here. Week nine, it's April 27. I just want to mention this for people.
Tom Hughes (02:06):
Here's the disclaimer.
Jamie Duininck (02:08):
And we're going to launch it later this week, probably Thursday or Friday. We're going to say Thursday as I look at my crew back there, we're going to launch this thing. So anyway, so right around May 1st, it'll get launched.
Sleiman Bassila (02:19):
Okay. So let's say two month net and in those two month shortages of a lot of commodities, oil, gas, fertilizer, helium, and polymers have still shown up in the marketplace and impacted price to a very large extent. So a bit of very short history of pricing over the last two month. What you saw in March is an increase of prices. On average, about one cents per pound per day of increase, which is never seen before in the industry. And Tom's been around for a long time as well. And this is unprecedented. For prices to double over the span of five weeks is incredible. And really what it tells you is about how bad this restriction is on supply, how bad the crunch is. And now that we are at double previous levels, maybe Tom can comment on the last week or so. I think prices have reached maybe a temporary plateau here and waiting to maybe decide where to go next. Right, Tom?
Tom Hughes (03:36):
Yeah. Remember when I talked about it, we'll hit a series of ceilings where there'll be a pause. And actually I reached out to Jamie, I think probably about 10 days ago and with his corporate buyer Harold and we talked about it and it was a good time to maybe take a pause if you got enough weeks of inventory. And we did see, it's funny, people are saying, "Well, there's some material out there. We're seeing a pullback." And then I read some periodicals today where they talked about how the market was up 24 cents or so over just the last three weeks and that, well, we saw a three cent pullback. A three cent pullback is not a pullback, a three cent reduction. It's really just if you look in the middle where we operate, that's just some folks willing to say, "Okay, I've got some inventory. We're coming up on the end of the month and we're going to just lessen our margin to move some product."
(04:21):
That is really all that has kind of happened. Sleiman, you'll talk a little bit more about this because also what we've seen is a little bit more China discussion. And Sleiman will go into this. They're usually a net importer, but because they feel like they can take advantage of the current situation, they are now exporting. The reason I'm saying that is now that information has fallen into our market, which is getting some people maybe some negative sentiment that maybe we have hit the peak and we are now going to drop. And I'll just say everything I'm reading, whether it's about oil or about petrochemicals, we're just going to be longer for hire. The new bar is going to be set and then we'll get back to fluctuating.
(04:57):
If you look back when we were transacting or operating in the '30s and '40s, we were operating at about a five cent window. Any given month, any given quarter throughout the year, start to end. We're probably operate now as we get up more, people get more familiar with '70s, '80s, '90s, we'll probably operate in like a 10 cent window. Some months it's going to feel higher and some months it's not. It all depends really what shakes out. But there's still a lot of time to go, and I'll let you talk a little bit more about that, Sleiman, on the Strait of Hormuz, the impact that we're hearing about in domestic market about China and the impacts that North American producers on export and why there's a little bit of a pause here. I'll let you go onto that since you're more familiar.
Sleiman Bassila (05:35):
Yeah. Yeah. So if you remember last time we did talk about the domestic buyer wondering why their prices are going up so quickly. And we said, "Okay, welcome to now a global world where the resin is being bid internationally by the highest, the person that is willing to pay the most." That also means that whatever happens now in the export market is going to impact prices that people are willing to pay domestically as well. And what Tom is alluding to is in the last week or so, there's been some, I wouldn't call it unusual, but there's been some re-exporting or exporting of resin that's happening from countries that are net short of polyethylene. So typically you don't expect that to happen. Typically, you're a net importer and you don't sell or re-export. That has been happening significantly in the last week or so by mainly Chinese re-exporters and maybe even outside of China, some Indian traders deciding maybe to lock in some high margins with the resin they've bought initially in March and lock in some margin and some profits.
(06:53):
It's really hard to say how big that volume is. Structurally, they're short, these Asian countries, and therefore I don't think this kind of lasts for very long, but it's impacting the export prices. And this is where the hesitation of the last couple of weeks, I think, Tom, is people see those prices softening or staying put instead of increasing. And they're projecting on the domestic prices, wanting that to be this case domestically, but domestically, that has not been the case yet, other than third party margins or distributor margins that kind of fluctuates up and down. But from the producer point of view, I don't think you've seen any softening of prices domestically.
Tom Hughes (07:36):
That is correct. Yeah. And the other thing too, to realize is, and by the way, Sleiman, if you could touch on this real quick, we talked about it before we open. Most analysts, they believe that this inventory that maybe China has the re-exporting or their ability to export has about a month window. Would you assess that similar?
Sleiman Bassila (07:58):
I mean, I would put that as a month maximum. Listen, you buy stuff and you get it through the waters and maybe you decide to re-export it, but you don't have a ton of holding inventory of it. Okay. I think those deals will dissipate and it'd be interesting to see new deals going in this week and next week by US producers. Are those going to be at much lower prices or are they going to maintain the high pricing? I think once you digest this kind of bubble of available inventory at lower prices, that goes away and you go back to where you were before, which is a super tight world for polyethylene specifically.
Tom Hughes (08:41):
Yeah. I mean, it was funny real quick, Jamie, here we are starting our ninth week. Nothing's different. We still know nothing.
Jamie Duininck (08:49):
Yeah. Yeah. And that's where I was going to go with this.
Tom Hughes (08:51):
Uncertainty is a killer. Uncertainty is a killer.
Jamie Duininck (08:53):
Yeah. Yeah. I appreciate that because that was kind of where I was going to try to go is what do we know about, Sleiman, about like obviously the Straits aren't open yet. It feels like, and you guys are closer to it than I am, but it feels like that's probably going to happen pretty quick here. But with all the backlog of oil, either if it doesn't, then we got other issues the way it sounds if they have to start shutting down those wells because they're full. But what we don't know is on the plastic side and the nat gas facilities that have been potentially damaged, anything new there from your perspective or from what you hear that we may not know in the general public?
Sleiman Bassila (09:38):
I think what you're asking specifically is around petrochemical plants that have been reported as damaged by the war. Okay? So let's focus on that for a minute and then we can talk about the Strait of Hormuz. That's almost a separate issue. But in terms of the damage from the war, the physical damage, the IEA last week just reported that 80 different energy sites have been damaged from this war, eight zero. And that includes refineries, that includes petrochemical plants, that includes upstream gas and oil facilities, could include terminals for exporting, et cetera.
(10:21):
But the point I guess there is, it's an extensive list. It's not a short list and that affects the whole supply chain more specifically for polyethylene, as opposed to oil where you just want to extract it from the ground, clean it up a little bit, and then ship it. And if you go through the Strait of Hormuz, great. And so you supply the market. For polyethylene, for polymers in general, there is like three different steps that you have to go through to get to the final product. And extracting oil and gas is just the first step. And that
Sleiman Bassila (11:00):
... that has been disrupted there. The second step is sending that oil to a refinery to extract the chemical feedstocks, the naphthas to make ethylene, and that has been damaged and disrupted in the Middle East. And also, the last one is the petrochemical plant, the polyethylene plants that are making the finer resin that you buy, Jamie, those also have been reported to be damaged by the war, physically damaged. And that physical damage, as a follow-up question if you want, we can talk about what it means to recover from that, but that can significantly halt, slow down that recovery. Even if the war ends tomorrow, the Strait opened tomorrow, fully unlikely, you still have to repair a lot of damage before you get back to where we were last year, in January or February of this year.
Jamie Duininck (11:54):
Yeah, yeah. So let's talk a little bit more about that as far as timeline. The other thing that we mentioned in the first podcast was if these refineries, even the ones that aren't damaged, if they get full, they have to shut down. And I would assume, I don't know if you guys have any feedback on that, but I would assume they're full. We're nine weeks into this. Your comment was when they do shut down, it's a three to four month process of getting them back up and running also.
Sleiman Bassila (12:25):
It could be. Absolutely it could be. And it's really two cases, one is with no damage. So with no damage, it can take weeks and maybe month for a full refining complex to be up and running and producing at target rates, at maximum rates.
(12:44):
One of the big question mark is in terms of upstream. If your extraction out of the basins that are underground, gas, oil, et cetera, if those are shut down, it really depends on the specific field. Some of them will restart fine, within weeks let's say. But others, you can incur some longterm damage to these reservoirs, depending on how they were shut down, what they are like, et cetera. So you could have ... This is back, Tom, to your comment of higher for longer.
Tom Hughes (13:19):
Higher for longer, yeah.
Sleiman Bassila (13:19):
Okay. Is even past this disruption, if you got physical damage to oil and gas extractions that diminish your output, that will impact the availability of those feedstocks to make polymers.
Jamie Duininck (13:34):
Yeah.
Sleiman Bassila (13:34):
To make polymers.
Jamie Duininck (13:35):
Yeah. And I think what I hear in the general public and our customers, so we maybe transition to the Straits a little bit. But that they're connecting the dots so much to this problem being because the Straits are closed.
Sleiman Bassila (13:51):
Yes.
Jamie Duininck (13:53):
So what I want to talk about is the decoupling, how we need to decouple the plastic from oil and gas. Because if the Straits, one day it's open, oil drops 30 bucks.
Sleiman Bassila (14:05):
Yes.
Jamie Duininck (14:05):
The next day it's closed, it goes up 40.
Sleiman Bassila (14:08):
Okay.
Jamie Duininck (14:09):
So I think people are think that's the same thing with plastic. If it just opens up, it'll go down quickly. That's not the case, so speak to that a little bit.
Sleiman Bassila (14:18):
Yeah. We had a bit of a mini-experiment a week ago where it was open for a day and then it was shut down after that. So what happened during that day is really interesting. There was some 25, 30 ships that transited through that strait. Those were typically not plastic container ships. The priority now of course, you can imagine, even if you resolve the Strait tomorrow is to get the oil, the energy out because people are desperately in need of that to heat and to use that gas or oil for fuels, et cetera. You see some cancellation of flights around the world because they can't get enough jet fuel as well. So what'll happen if it opens is you've got those higher importance cargoes that will transit.
(15:15):
The second there will be refinery products as well, like finished products, gasoline, diesel, refinery fuels. With plastic, you're at the back of the line. So you're absolutely at the back of the line. In a day that 30 ships can transit, you don't have a lot of ships that are carrying polymer resin in bags so you get lower priority.
(15:42):
So it really is going to be important as well how the Strait opens. Does it open and go back to where it was before at that level, 130, 140 ships per day? Unlikely as well because now you've got mines maybe you have to worry about. You got Iranians that want to control it and then get payments out of it. So you can see a scenario where war is resolved, Hormuz opens, but it doesn't open and go back to that high level of throughput that you need to relieve the supply pressures. You get back to a lower level of output that is going to constrain how quickly you can get out of there and how quickly these petrochemical plants can restart and run full.
(16:28):
So even in a resolution scenario, you might be pinched for supply and this is where Tom's higher for longer kicks in. In that scenario, you can be for a month on end at lower supply than relative to before.
Tom Hughes (16:47):
Sleiman, I read somewhere there's some analysts who are predicting somewhere between seven to nine months, call it, even if it opens tomorrow, before normalcy just in the Strait in terms of movement of products. That's how long it could take.
Sleiman Bassila (17:01):
Oh, for sure. There is so much you have to untangle now in the supply chain and the production. So you've got oil and gas production, it has to come back, refineries have to come back, petrochemical plants have to come back. Warehousing, and bagging and shipping have to come back for you to start recovering from this mess.
(17:20):
So it'll take a long time and therefore, Jamie, back maybe to our comments earlier on in terms of how quickly will this price, is it going to drop as quickly as it went up, no. No chance.
Jamie Duininck (17:34):
Yeah, yeah.
Sleiman Bassila (17:34):
It's going to be very sticky. And it's going to depend also on the development of this resolution. These things, these wars don't end and you go back to where you were before them. The world changes and that supply chain changes therefore with it, and you're in a new normal where things are a bit different or harder to get to, or more expensive. Just ensuring these ships now is going to be-
Jamie Duininck (18:03):
Yeah.
Sleiman Bassila (18:03):
... even if it's open, it's going to be more expensive by multiples.
Jamie Duininck (18:07):
And I think human nature and how humans work over time, it'll even itself out because the cure to high prices is always high prices.
Sleiman Bassila (18:17):
Yes.
Jamie Duininck (18:17):
As people make too much money, then people overproduce.
Sleiman Bassila (18:21):
Of course.
Jamie Duininck (18:21):
But we have all these constraints. They could be overproducing much sooner than the ability for the supply chain to react to that. Tom, one question probably for you that I think relates right now is if we are going to have high prices for longer, one of the things we're hearing, there's some mischief in the market. And a lot of times we all deal with large competitors, you do in your business, we do. But that are saying there's going to be a constraint of available material and some people, i.e. smaller producers, aren't going to be able to get material. I don't believe that to be true, but can you speak to that?
Tom Hughes (19:07):
Yeah. Well, I would say that's interesting because those are two contradictory things. Because you got some out there who are telling, even maybe some of those larger volumes, who are saying, "Well, the numbers are going to start to pull back, but yet no one's going to be able to find resin."
(19:17):
So if you remember, when we had that first discussion, pricing is going to be pricing. And then if you look at, you got to absorb the shock of the 30, 40, 50 cents that people saw. And keep in mind, with did have those type of run-ups about four years ago. I guess over four years now, four-and-a-half, five years ago. So you get to that point.
(19:37):
Now the difference I think between now and maybe back then is that we're doing fine here in North America. That's why you're seeing pellets. Yes, producers have ramped up. But, Sleiman, real quick, how much more could they have ramped up than they already were, a couple percentage points?
Sleiman Bassila (19:54):
Not much, not much.
Tom Hughes (19:55):
Yeah.
Sleiman Bassila (19:55):
They were running full at the base case.
Tom Hughes (19:57):
Yeah.
Sleiman Bassila (19:57):
Polyethylene, anyway.
Tom Hughes (19:58):
Yeah. So you ramp that up a little bit, it's a couple percentage points. That's probably maybe why you see a little bit more off-grade. So there hasn't been constraints, so I do think there is some misleading information in the marketplace that I think some people are trying to leverage themselves. Whether it's larger volume or bigger competitors against more of the midsize ones in trying to leverage that with their customers even though there really is no factual basis to it.
(20:22):
At the end of the day, everybody has a market position. Obviously, yours is very strong in your place and so are others. But I don't see that playing out where only the biggest or only the second-biggest are going to get all the pellets. I do not see that playing out at all. It never has, by the way.
Jamie Duininck (20:40):
Yeah, yeah.
Tom Hughes (20:40):
And history will tell you it never has.
Jamie Duininck (20:42):
Yeah.
Tom Hughes (20:43):
Frankly, sometimes it's only added more small to midsize guys.
Jamie Duininck (20:46):
Sure, sure. Or is there probably a scenario going on here where we're going to run out of pellets? As long as the market can keep up with the pricing, which is another conversation we could have. But as long as the market can keep up with the price increases, there will be pellets available for the market.
Tom Hughes (21:04):
In North America in particular, what happened in ... Early on, I would say, the export side, Latin America, Europe, they jumped in early on the prime. So prime, that's why you saw the tens, the thirties and the twenties. And then the secondary market caught off-grade or excess material. Kind of it moved up, but we were outpacing the export side so the pellets were there. And then if you were obviously, like yourselves, in contract with a producer through people like us or others, or direct, there will be pellets there. I fully expect North America to keep up with the pace of demand around the globe.
Sleiman Bassila (21:43):
And just to add a comment, Jamie, to relieve some of maybe anxiety in the industry is North America historically and still today, they are paying the top price for polymers. The highest prices for polyethylene, the highest prices for other polymers. And therefore, I
Sleiman Bassila (22:00):
I think the supply will be prioritized to the highest prices and you'll get enough supply, again, if you're willing to pay that higher price to secure it. And historically, affordability in more wealthier countries like the U.S. and North America will be supportive of paying higher prices to keep your operations going, relative to some poorer countries where no, I mean, it becomes an affordability question for them and they have to turn down or shut down.
Jamie Duininck (22:30):
Yeah, yeah, yeah. Sleiman, as you think about the past nine weeks and what I would say is you've been right a lot more than you've been wrong about what's going to happen here, but what's surprised you of how this has gone?
Sleiman Bassila (22:48):
I don't know if I was surprised, but because I mean, Tom, you remember you and I talking about this potential scenario before it happened. Right?
Tom Hughes (22:59):
Correct.
Sleiman Bassila (22:59):
The last week of February.
Tom Hughes (23:00):
Correct.
Sleiman Bassila (23:02):
So it was almost expected that if something like a war happens and the Strait of Hormuz closes, it's going to be a big deal. Still, I'm surprised by how quickly prices rose relative to history. For them to go up by a cents per pound per day over a 30-day period, a month period, it's incredibly fast. And I think part of this, Tom, I don't know if you agree, is a bit of a panic buying early on. Okay?
Tom Hughes (23:37):
Well, I think what was happening, people were buying to get ahead of a price. Right?
Sleiman Bassila (23:40):
Yes.
Tom Hughes (23:40):
And that's what you kept doing. And then people, remember Jamie, we talked about this. Some people who waited end up paying the highest price at that time. Whereas if you did just a general escalator up, you actually did very well because you could start selling those customers at up five, up six, and seven, where some just went from zero to 15, zero to 20. Those are the ones that we talked about are going to raise the market price.
Jamie Duininck (24:04):
Yep. Yep. And the surprise in what you're saying, Sleiman, was the only other time we faced this in our careers is four and a half years ago, it took seven months to get to the same point it took four weeks.
Sleiman Bassila (24:15):
Exactly right. Exactly right. So the extent of the increase so far have been comparable. With Storm Uri, you almost doubled prices, but that took five, six months, right? Five, six month. This happened in five, six weeks. So that reaction to it could surprised everybody. Okay. And bit of a shock to the system really. And I'm not surprised and therefore that in the last week or so, people are catching their breath from this crazy escalation and trying to figure out what comes next.
Tom Hughes (24:48):
I think also in terms of some of the impacts we talked about from the re-exporting out of China and some China production or Indian production, the market was also just exhausted. Right? It is a lot. It's a lot to have in that conversation. I mean, I think there was some of the information you and I were going back with Sleiman at one point, it was up going up six to eight cents every week for a period there. Right? And that is a lot for customer, for us to handle, for customers handle, because you got to give that message constantly to your customers, even for you guys, Jamie, giving that information. But our industry has been here before. We've seen these higher numbers before. We operated in these higher numbers. Nobody wants to give customers double the credit, triple the credit. We know it's all hard through the whole supply chain, and it is very hard.
(25:31):
But we've weathered the storm in higher numbers before. Right? I do think this is going to have a little bit more stability when we get to that number for a period of time. I just hear some sentiment out there that I get concerned about for our customers of information that I don't believe to be true. I just think we got to operate in a place, you see a great opportunity, you jump on it, right? And just know that don't expect it always. Right? It's just that's the environment we're in.
Sleiman Bassila (25:58):
And I'll give you a bonus surprise, Jamie, for your question.
Jamie Duininck (26:02):
Okay.
Sleiman Bassila (26:03):
And maybe not as surprising because people learn. Industry participants are learning all the time. But suppliers in this scenario, in this case, maybe have learned from previous escalations and have adjusted their contract prices that much faster to the supply pinch. If it took them six month with Storm Uri to escalate their contracts up to that higher level, it didn't take them much here. March was high. April is going to be higher still in terms of increases, and there might be something in May. But they've adjusted their contract prices that much faster this time around. And I think speaks to the level of that disruption. And I think they realized, especially the ones that have global operations.
Jamie Duininck (26:54):
Yeah, yeah.
Sleiman Bassila (26:54):
A lot of them have global operations, and they can see what's happening in Asia and Europe and Middle East. They have all presence in all regions and they quickly realize how bad this is going to be. And therefore they had to hustle and send these atrocious price letter increases that broke all kind of records.
Tom Hughes (27:13):
I think something to think about too, Jamie, for some of your customers as well. Okay. So you saw the 10 cents in March, and then you saw the 30 in April. And let's just say there's a segment of the marketplace who buy 500, 800, a billion pounds, and maybe there still was a little bit of that 30-day lag pricing. So what I get concerned about is, guess what? In April, they saw March, worst thing. In May, they're going to see April.
Jamie Duininck (27:39):
Yeah. Yep. I appreciate you saying that.
Tom Hughes (27:43):
They'll see 40 cents as you move into May.
Jamie Duininck (27:48):
Yeah.
Tom Hughes (27:48):
And that to me is when the sentiment out there, people have got to be really careful about this to think this is going to go like this, because there's really no indication that it is. And then you take some of the other variables we've talked about, the China re-exporting and then that. I remember in the first podcast, I said when the large volume buyers start to come in mainly in the film space, because flexible is a very large volume product, it's going to shift. It's going to shift. And people, I would say, and customers got to become careful about how they operate.
Sleiman Bassila (28:17):
And the reason why this is so extreme this time, Tom and Jamie, is between April 30th and therefore May 1st, you're going to see one day, some contracts jump by 30 cents per pound, and therefore availability on the spot market is going to get really tricky and tight. And things will kind of worsen, I think still as you go from April to May for prices, maybe availability in some cases.
Jamie Duininck (28:51):
Yeah. And I appreciate you both sharing that, those comments because I think I wanted to make sure I touched on that here was with our customers at the level of buying high density polyethylene, polypropylene pipe in this industry from Prinsco or others, that there has been increases and now a little bit of a pause. There will be more increases. This entire increase has not been priced into the product yet.
Sleiman Bassila (29:22):
Wow.
Jamie Duininck (29:22):
So they need to know that. However, on the other hand, not to contradict, but some hope probably for them is we're not going to see most likely, unless something really catastrophically happens, we're not going to see another 40, 50 cent increase. We're getting close to where the sustainability of this thing will be after we get it priced in, it's not going to go up that much more. But what we're buying, I guess is how I should say that isn't going to go up a whole lot more. We haven't priced it all in yet.
Tom Hughes (29:55):
I think you still have that, Jamie, to go. And I tell people this, I don't mean this in a very scary way, but I don't think we've received the worst news yet. And the worst news is going to be once they can get in their assess, all these numbers are justified. Right? Not going to go higher, not going to go 30 or 40 cents higher, but we're just going to be higher for longer. And that's the reality. And by the way, once everybody has their 60, 70, 80, 90 cent pellets, nobody should want a precipitous drop, nobody. It's not healthy for your level, our level, producer level. It's just not.
Sleiman Bassila (30:26):
And one added to this discussion maybe is resin prices is one aspect of these elevated price of products, but there is also the secondary effects in our industry of fuel and diesel prices and logistics getting more expensive and the whole cost of doing business now getting higher because of everything is moving up in unison. Maybe polyethylene more than others. Polyethylene has been affected more if you compare it to oil, but everything is pushing up and therefore you can start seeing prices across the economy be higher than otherwise.
Tom Hughes (31:08):
Yeah. I think if you want to go back to history, which is while we judge this on, we know we're right around the corner from inflation. I don't see how this does not hit the end user, the pocketbooks of every American. We're just going to see it. And we had a blind eye to it after post COVID pent-up demand and then Uri followed with actually a couple hurricanes in there, and the market skyrocketed. And it's funny to believe that we weren't thinking about inflation then, even though we were in the raw material business, and we should have seen it. And the reality is I do think ... Now what I want to have happen is all chains see higher prices because I want the farmer to get higher prices on their commodities. You guys get higher price in your pipe. And it's healthy when the whole chain sees it. Right?
(31:53):
And then as you get to the highest place where we feel like we're going to operate, you don't have to pay close attention, but you got to be well aware of what's going on at that point. Right? And that's when you got to look close. But there's no indication right now that things are going to improve. There's a temporary pause of first ceiling, as I said in the first podcast, that's where we are right now.
(32:14):
We're just in that first little lull, and people quoting three cents cheaper off of a 24 cent increase over three weeks is not the market going down. Export going down maybe five to six cents over the last 12 or 15 days is not the market pulling. It's not the market coming down. It's a pause. We go through these things, and it would not surprise me to see this thing shoot right back up six, eight, 10 cents as we move into some part in May once a realization that the production level is just not there to feed the globe.
Jamie Duininck (32:46):
Sure, sure. Sleiman, one thing you mentioned at the very beginning that I just want to ask.
Sleiman Bassila (32:51):
Yes.
Jamie Duininck (32:53):
Many of our listeners are in the agricultural space, and you mentioned fertilizer being another product, something
Jamie Duininck (33:00):
... That I wouldn't have experience with, but they're very, very concerned about that going for sure into ... Most farmers had their fertilizer applied for this year, but going for next year, it's a huge expense for them. Do you have any experience or knowledge with that product and will that come along faster or slower like polyethylene?
Sleiman Bassila (33:21):
Well, I don't know if it's going to come back faster or slower, but my understanding of farming is timing is critical. So if they miss a window now or pay higher prices now, it's going to impede their ability maybe to plant what they want and maybe get the productivity if the fertilizer is applied. So I think in farming, maybe even more critical because there is a window if they miss that window, which will be missed here in terms of resolution.
Jamie Duininck (33:55):
I think most of it was purchased ahead for this year.
Sleiman Bassila (33:59):
Ahead. Yeah.
Jamie Duininck (33:59):
So whether a lot of it was applied, some of it wasn't, but it was purchased. So it's probably more of that window of this coming fall and winter, spring timeframe.
Sleiman Bassila (34:11):
Right. So you might see a multi-year effect there. Back to high for longer, Tom, I hate to dwell on this, but the system has moved much slower than what people think of when they watch an oil ticker on Bloomberg or CNBC. They're expecting a drop of $10 to translate directly to what they're paying for polyethylene or polymers. It doesn't work that way. There's lots of slow moving parts in the system that pushes the problem to later on. Fertilizer could be one of those cases.
Jamie Duininck (34:54):
Maybe some last parting thoughts from either one of you or both of you on where we're at here after nine weeks of war.
Sleiman Bassila (35:03):
Yeah. Let me give general advice. Tom is the practitioner, he's in the market every hour, so he can give more exact advice. My advice to the market is still what it was at the last podcast a few weeks back is secure your supply. Okay, don't get too cute on prices. A three cents per pound difference here shouldn't matter to you.
(35:30):
Supply reliability or security is going to be much more important in the next few months for you than a delta price where you're going to give up that car or that supply in the hopes of saving a little bit of money. If I look at where this can go, I'm much more concerned about a downside scenario where the war doesn't resolve and the strait is still closed and there's even more renewed hostilities and therefore prices can escalate furthermore from here.
(36:03):
The downside of prices in the next few months isn't terribly bad, isn't terribly bad. So therefore I would secure supply before you negotiate price. The price negotiation will come, but maybe not today, not this month. You will have your time in the sun when these things turn to negotiate sharp and sharper prices. For now, I would still be more concerned with supply than with prices in general.
Tom Hughes (36:28):
So, Sleiman, as we look at it and we hear about the impact that China re-exporting and then some China production and India production, what impact does, if oil does happen to go up even higher and hold longer, what impact will that have on production for places like China?
Sleiman Bassila (36:48):
Yeah. Yeah. So I mean, like I think you indicated, China, India, other places in Asia are typically cracking naphtha feed stocks. So they have no advantage in terms of oil prices. If anything, oil goes up, naphtha goes up, and their costs go up. So maybe what you've seen then, the re-exporting game can happen maybe once.
(37:15):
Okay. Then after that, that bubble goes through the system and is placed. There's no more fun behind it because costs are high for them, China, India, other places, and availability of that feedstock is still constrained because the Strait of Hormuz is closed. So you play that one, that card once, and then once you're done, you're done, the world kind of have to rebalance without that [inaudible 00:37:40].
Tom Hughes (37:41):
We feel like that has got roughly about a month or even less for that type of inventory to shake itself out.
Sleiman Bassila (37:47):
You would think so. Yeah. I mean, there's not hard numbers around that one, but it can hardly imagine how that goes beyond the month worth of transactions. Let's say if you place that resin, you can place it fairly quickly now with the prices that they're proposing and then once it goes away, it's maybe within the month, that's not a factor anymore. Could be quicker than that, Tom.
Tom Hughes (38:13):
Yeah. It doesn't change the fact that here in North America, obviously with the Middle East out, we're the cheapest producer of poly right now.
Sleiman Bassila (38:20):
Yeah, absolutely. Yes.
Tom Hughes (38:21):
So I think that's how people have to look at it. Once all that dries up, it all comes back here to go back out there and to feed the better part of the globe. So I think that's really important for people to understand.
Sleiman Bassila (38:32):
With the Middle East now effectively shut down in terms of exports, you really have one region, Canada and the USA, one North American region, part of North America that can export and is exporting in a big way for polyethylene, but not many other players can do the same on a consistent basis outside the re-exporting game.
Jamie Duininck (38:54):
Appreciate it, guys. Thanks so much for ... Our whole industry is looking for answers as this ... When things go up as fast as they did, people always feel like whether they are or they aren't, they feel like they're behind when that happens, feel like they don't know enough. So I think the results of our first time together, our first episode certainly tell you that there's a need and an interest in knowing more about this. To have the caliber of people on this podcast that we do with you guys and the history and experience you guys have, is really a great thing for our whole industry.
(39:34):
So I appreciate you joining The Water Table. Here at The Water Table, we'll always try to bring the best content and the most education to our industry. So thanks for joining me.
Tom Hughes (39:46):
Absolutely.
Sleiman Bassila (39:46):
You're very welcome.
Jamie Duininck (39:48):
Hopefully we don't have to do another one, but if we do, you'll be my first call.
Tom Hughes (39:52):
I'm going to guess we do. Thanks, Jamie. It's been great as always.
Sleiman Bassila (39:57):
Thanks, Jamie.
Tom Hughes (39:58):
Great conversation.
Sleiman Bassila (39:58):
Always a pleasure. Thank you.
Jamie Duininck (39:59):
Thank you, guys.
