Things continue to go crazy in the logistic world. On April 28, my friend Anne Sasso posted an interesting article about the container shortage and its impact on freight rates. If you haven’t seen it, I recommend it. It’s a quick read but explains how, as container capacity maxes out, sky high freight rates and delays are going to get much worse in the months to come.
As you know, I am a numbers nerd. So I decided to look at how high freight rates are for real these days. For this, I visited Hapag Lloyd‘s site where you can request freight quotes for different routes. For those of you who care, the quotes I got and that are used in the next charts are for 20’ containers, FAK (Freight all Kind), were requested on April 28, 2021 and have different expiration dates depending on the route. Also, the values I am presenting include not just freight charges, but other surcharges that vary from route to route (export surcharges, freight surcharges as well as import surcharges).
The first thing you notice is how different are the rates going East to West than from West to East. This is not unusual, as the East to West move is mostly empty containers, and the costs tend to always be lower in that direction. What I do find interesting is that the West to East cost is eight times higher than the East to West. For us (meaning the plastics industry), the consequences of this differential are very interesting.
Currently, polymer prices and particularly polyolefin prices in the Americas are much higher than those in the rest of the world. In an efficient market, these price differentials (which are known as arbitrage opportunities) should be short lived. As the price differentials appear, entrepreneurial spirits around the world see an opportunity. Those paying high prices for their raw materials will search around the world for lower cost materials, and those with lower prices will seek to sell to the higher priced markets. As the material flows across regions, the price differentials eventually fade.
At the end of March, PP homopolymer prices in North America were as much as 75 cents per pound higher than the prices in China, and the premium for HDPE prices in North America versus Asia was as much as 25 cents per pound. Since then, the premium for both polymers has eroded, but it remains high. So, for converters looking for alternative supplies, the logistical issues are creating a non-tariff barrier that keeps imports at bay.
What do I mean? Say, for example, that you are a polyethylene buyer in Peru. You are paying a premium for your imported polyethylene from the United States. So you look for alternative suppliers in South Korea and in Saudi Arabia. The first thing you notice is that it can take as much as 24 days to get your material from South Korea, and 40 days from Saudi Arabia (versus 22 days from Houston). And the transportation costs will add 11 cents per pound to your cost if you chose the South Korean supplier, and 10 cents per pound from Saudi Arabia. What do you do? What if the U.S. prices slide down faster than expected? What if they stay elevated? Do you take the risk and buy from either one of those suppliers?
These are not hypothetical questions these days. These are real dilemmas faced by converters in the American continent. And, at least for those located in South America, the packaging of the polymers is not an issue. For North American buyers, they need to concern themselves with breaking bags and super sacks and transferring the material to railcars, which adds another layer of complexity (and risk) to these decisions.
Indeed difficult times and decisions for polymer converters. One thing is for sure; we should expect continued volatility in polymer and feedstock prices in North America (have you looked at ethylene prices lately?), and difficulties in logistics around the world. We will continue to monitor these and other factors that impact our industry. If you like what you see, sign up on the link to the right of this article (it’s free!); you will get a notice every time we publish a new article. And, of course, feel free to contact us; we will be happy to help you navigate the complexities of this market.
Looking forward to your comments!