ANALYSIS: Plastics industry moves away from just-in-time logistics amid increased volatility

Just in time delivery systems took off in the supply of chemicals and plastics after the 2008 financial crisis but it has not been suited to the post-lockdown levels of demand surges seen as economies have opened back up recently, according to polymer and shipping participants.

To move away from a just in time inventory process won't be easy, however, as a key element to this is the container freight market, which has been under strain since the initial shutdowns in March 2020.

"More storage of material and more capacity of material (is required). Just in time is important but we need more back-up. When you look at supply, when you look at consumption, consumption has increased but (supply hasn't)," a plastics consumer said.

Panic-buying – a demand phenomenon associated with the lockdowns did not help the situation either. It also didn't help that the container freight market had seen a substantial consolidation in the years leading to 2020.

Changing demand patterns

The shift in consumer demand away from travel and tourism, dining out and other leisure activities due to the lockdowns and toward consumer products and construction staples put a strain on the supply of raw materials.

Just-in-time delivery of petrochemicals and plastics across the supply chains became an industry standard after commodity prices collapsed in 2009 as a result of the financial crisis. Before then, producers and consumers held vast stocks of commodity intermediate chemicals and polymers in storage. As prices collapsed and balance sheets took a vast hit the market learned how to keep minimal inventory in order to minimize risk.

In the economic recovery after 2009, producers and consumers sold or disposed of their sizeable storage and warehousing facilities, in effect relegating their storage dependency to others - mainly traders like Vitol, Noble etc. who supplied producers, consumers and other supply chain intermediaries.

After that the market got accustomed to 'just in time' supply and not much changed until recently, when the logistics systems and vessel operators consolidated, reducing capacity, just as the market shock of the pandemic arrived.

Since the pandemic began, petrochemical and plastics producers have benefitted from the surge in demand, which coupled with the resultant logistical constraints have delivered record prices and margins.

Key polymer commodity prices are still in record price territory. Turkish polyvinylchloride (PVC) prices hit $2,200/mt CFR Turkey Oct 6, up $50/mt from the previous week and the highest since S&P Global Platts began assessing, while European spot prices remained at $1,600/mt FD Europe.

Whether this marks a long-term change in how the market operates is too early to tell as the pandemic continues to make its mark on the industry, but prices are expected to remain high into 2022.

"We're expecting this strength to really last until Chinese New Year at the start of February. There are so many delays in the system at this point, demand is still very firm and the container imbalance between importing and exporting hubs is still causing huge issues for container lines around the world," Andrew Scorer, Platts Analytics, said.

Polymer industry adjusts

"We built up a lot of flexibility in the supply chain. Earlier this year when there were problems with material (restrictions) we built-in flexibility," an end-user said.

There was an imbalance in the market between supply and demand on the one hand and the ability for logistics and freight carriers to be able to cope with those changes on the other, the plastics consumer said.

This dynamic is about to change again as more ships come onto the market.

"A huge number of ships are being brought onstream in the second half of next year. There is (a lot) of shipping space being built. Either the market balances more (greater logistical capacity) or the imbalance continues," the plastics converter said.

The fact that there were fewer freight companies was another issue which needed to be addressed, according to polymer sources. "They are ruling everything. The number of containers is the same as last year but the imbalance this year is greater."

"If I was a shipping company and I saw these margins being made. I would take advantage and build more ships."

Container costs surge

Container spot freight rates have risen significantly over the past year, with the Platts Container Index, a weighted average of Platts' key container assessments, hovering at multi-year highs. At the start of the fourth quarter this year, the PCI stood at $7,520.29/FEU, close to seven times what it was at the start of the pandemic, where it was at $1,091.54/FEU at the end of the first quarter last year.

Firm demand to move goods across the world, due to the above-mentioned shift in demand was partially to blame

At the same time, factors such as port congestion, equipment shortages, and manpower challenges have hampered the smooth flow of the supply chain and forced end-users to build inventory, which has also supported record prices.