How the Conflict in Ukraine and Russia Impacts the Plastic Industry
Disclaimer: We stand with the people of Ukraine and hope that this conflict can be resolved peacefully. Our team supports the Ukrainian people, their rights, and international diplomacy. This article is meant to discuss the domino effect that this conflict has created for manufacturers and their raw material supply chains.
Uncertainty Across International Commodity Markets
The crisis in Ukraine is creating never-before-seen ripple effects across the world. As tensions build, corporations and governments are seeing fallout that they could have never predicted.
Unfortunately, there’s only so much that governments can do to reduce the negative effects. One example of that is the increase in domestic oil production or tap into existing reserves. Long term, it’s hard to tell how this conflict will impact markets across the world.
During times of conflict, countries tend to hold on to their critical resources to ensure that they can protect their people. For governments, it’s smart to create domestic stockpiles of raw materials so they don’t have to be reliant on international trading partners.
With uncertainty in trade, countries are increasingly focused on making sure that corporate and military operations are not halted due to raw material shortages.
Trendlines in Plastics
Based on trendlines, we can start to see how the decisions being made in eastern Europe will impact global industry.
One of the trendlines we’ve been following is the price of oil, directly impacting the price of plastic.
Since the beginning of COVID, there have been shortages in the plastic supply chain.
This has caused prices to soar, and smaller manufacturers to get pinched.
When large resin suppliers are short on plastic, they tend to fulfill the contracts of their largest customers. This leaves smaller manufacturers in between a rock and a hard place. How can smaller companies buy plastic if all the materials are being saved for the largest companies with the largest annual contract volumes?
This situation has become commonplace in the plastic supply chain. A resin supplier can not afford to lose a large contract. But, these resin suppliers can tell their smaller customers that it’s going to be a few months delay without compromising their entire business.
This puts smaller manufacturers at risk. If they can’t buy plastic, they can’t run their equipment and ship materials. The plastic shortage is creating ripple effects for these smaller manufacturers that are potentially fatal.
Volatility in the Oil Markets
One of the big determining factors of the price of plastic is the price of oil. This is because plastic is the main petrochemical that the oil industry manufactures.
Specifically, the price of WTI Crude is a market indicator that tells the world where the price of gas is going.
When you drive by a gas station and the price of gas is up 10%, that means the price of plastic is going up.
If the price of plastic goes up, manufacturers have 1 of 2 choices:
- Eat added expense by increasing the cost of goods sold and decreasing net profit.
- Increase the price of end products to correlate with the increase in the price of raw materials.
As I’m sure you can imagine, most manufacturers are already working on fairly tight margins. This means that these companies need to raise prices in order to stay profitable.
Inflation
As we know, America is seeing record-breaking inflation rates. In recent history (the past few decades), we have never seen anything like this.
As we track the price of oil (and, conversely, the price of plastic), we can make general assumptions about what happens to the price of end products.
An inflation rate of 5%+ can be due to multiple factors. But, with the price of raw materials increasing, it’s easy to see how the price of end products are increasing at such a rapid rate.
Unfortunately, this problem is not just isolated to plastic. Other mineral and synthetic raw materials are experiencing supply chain shortages and in turn, price volatility.
When will inflation rates normalize? When will we see the pricing of raw materials level out? No one can say for certain.
At this point, the only thing manufacturers can do is expect the price and supply of raw materials to be volatile through the next few years.
Today’s Situation
Manufacturers are fighting with their raw material suppliers over shipments. Without plastic to put in the equipment, manufacturers can’t produce products for consumers to buy.
This means that manufacturers should bet on one of two things:
- Not having enough plastic to put in the equipment.
- Paying orders of magnitude more per pound than they’re used to.
Either way, this puts manufacturers in a pinch. No matter what they do, they’re going to have angry stakeholders.
- If they don’t raise the prices of products, investors will be angry due to decreased net margins.
- If they do raise the prices of products, consumers will be angry due to the invisible price increase of raw materials.
Industry Tailwinds
As companies sort out their options, it’s important that they make decisions in the context of the outcomes that they’re focused on moving toward over the next few years.
One of the focuses that large manufacturers have is on carbon footprint reduction. These companies have created sustainability mandates that cannot take a backseat to supply chain volatility. Companies with sustainability mandates have made public commitments to their shareholders to do things like:
- Decrease the usage of virgin plastic.
- Increase the usage of recycled plastic.
- Increase the usage of bio-based materials.
- Reduce carbon footprint.
These are commonly used KPIs to track success in sustainability mandates.
The problem is: how can these companies work towards their sustainability mandates if they’re in a position where they have to buy every pound of plastic they can get their hands on?
Today’s Options
Experts across the plastic supply chain have told us that volatility in price and supply is not going anywhere anytime soon. Unfortunately, this is the new normal.
This means that manufacturers have to figure out how to make do with what they have.
The concept of companies “extending their plastic supply” is not anything new. But, today, there are new, innovative ways to increase the amount of plastic you have access to.
Biomaterials engineered as additives for plastic is an opportunity that industry-leading manufacturers are starting to grab a hold of.
The question now is: what biomaterial will outperform all the others as a plastic additive?
High-Performance Carbon-Negative Plastic Additives
Since plastics were invented, R&D leaders at manufacturers have been trying all different types of additives. Traditionally, mined and synthetic materials have been used as additives in plastics. This is because they are abundant and cheap.
But, with the increased price and decreased supply of traditional plastic additives, manufacturers and their raw material suppliers have been searching for alternatives.
Agricultural materials have become alternatives that companies are considering as plastic additives. The problem is, most of the materials that are readily available are waste materials. Corn stalks, oat husks, and wood flour from sawmills may be “bio-based,” but they have no performance or sustainability story.
Manufacturers need access to high-performance carbon-negative plastic additives that reduce the weight of the compound.
The goal is to make more products with the same amount of plastic resin.
By using an additive that lightweights the plastic, manufacturers can increase the number of end products they manufacture with the plastic they already have.
According to experts who have tested all different types of biomaterials, industrial hemp fibers have been shown to outperform the competition.
This means that the ability to engineer hemp fibers as additives for plastics is an opportunity that manufacturers and their raw material suppliers can benefit from.
Example: 100,000,000 Pounds of PVC
If today a manufacturer has 100M pounds of PVC, they want to figure out how to turn that into as many end products as possible.
One of the plastic manufacturers we work with has recently done testing on 5% hemp-filled PVC. They found that this increased the volume (in cubic feet) by more than 25%. This means that there is 25% more finished product because it weighs less.
If the total volume of PVC increases by 25% by adding 5% hemp by weight, manufacturers and their raw material suppliers are sitting on an opportunity to reduce the cost, weight, and carbon footprint of their resin.
On top of that, they are extending the number of products they can manufacture with the same amount of plastic.
In this example, 105M pounds of PVC (100M pounds of PVC + 5M pounds of hemp) = volume (in cubic feet) that is equivalent to 125M pounds of virgin PVC.
Why Hemp Fibers
Fortunately, hemp has a 10,000-year history of being a really strong natural fiber.
It has a history of being used as a reinforcement agent in plastic, rubber, foam, concrete, paper, clay, and other raw materials.
So, our team has focused on engineering hemp fibers as additives for the raw materials that manufacturers rely on every day. As a starting point, we have focused on engineering hemp as an additive for plastic.
Henry Ford built a car that used hemp fibers as plastic additives in the 1930s. Unfortunately, hemp was outlawed in America before the end of the decade.
After the passage of the 2018 Farm Bill, industrial hemp became federally legal. This meant that industrial hemp farming and processing could be built to support manufacturing.
We decided to engineer hemp as an additive to plastic for multiple reasons.
Here are the top 3:
- Hemp is about 80% lighter than the traditional plastic additives it replaces like talc, calcium, and fiberglass. This is what allows small amounts of hemp additives to significantly increase the volume of plastic.
- Plastic was created as a stronger, lighter, and cheaper alternative to metal. As that trend line continues, companies are focusing on trying to reduce the carbon footprint of the materials they rely upon.
- The world’s largest companies have created sustainability mandates that require them to reduce their carbon footprint. Since most of these companies use large amounts of resin, access to high-performance carbon-negative plastic additives creates multiple value propositions.
Of course, there are many reasons why our team decided that plastic additives could make a large impact on manufacturers and their raw material suppliers.
Fortunately, we have lots of information telling us that hemp fibers are valuable additives to plastics if they can be properly engineered.
Plastic Supply Chain Volatility
As the situation in Ukraine continues to play out, the price and supply of plastic is uncertain. The tailwinds of COVID have already created volatile market conditions across raw material supply chains over the past few years.
With uncertainty in the plastic supply chain, access to high-performance carbon-negative plastic additives allows manufacturers to:
- Extend the amount of plastic they have (in cubic feet).
- Lower their carbon footprint.
- Replace toxic additives like talc, calcium carbonate, and fiberglass.
- Reduce the cost basis of their raw materials.
- Lightweight the plastic used in manufacturing.
- And so much more.
As the price of plastic continues to fluctuate, Heartland will be here to support manufacturers and their raw material suppliers who will lead our planet toward the sustainable future that we need and deserve.
Join us in making a world out of hemp,