Prices doubled: Was plastic a driver of inflation?

In our modern world, nothing works without plastic - and across all industries.

Prices doubled: Was plastic a driver of inflation?

In our modern world, nothing works without plastic - and across all industries. Crude oil is an important raw material for plastic. So if the price of oil rises, this has far-reaching consequences.

The village of Mesum usually has nothing to do with world politics. 9,000 people live here south of Rheine in northern Münsterland, and many are more enthusiastic about the rifle festival and Christmas market than about politics. But in the middle of the village, where a huge chimney soars into the sky, world politics suddenly plays a central role. At the plastics manufacturer Gröning, one of the many hidden champions in the German provinces.

In the modern world, nothing works without plastic - and that across all industries - whether asparagus growers or call center employees. Plastic is actually always involved in some production step. With one it is the thermal foil, with the other the headset. At the same time, this makes the world so dependent on plastics - and their prices.

The logic behind this is simple: if plastic prices rise, the costs for other companies rise. They then pass the higher costs on to their customers. This can ultimately lead to inflation, and significantly so. In fact, plastic prices have doubled in the past year. And around the same time, global inflation also began to rise. Prices are now falling again and inflation is also falling.

So it's not surprising what Bank of America's commodity expert Warren Russel recently said: "Plastic could have been an important driver of inflation over the past year." The German economist Isabella Weber comes to a similar conclusion in a recent study. According to Weber, individual sectors could fuel overall inflation. The focus is on commodities such as crude oil. And crude oil is one of the most important primary products for plastic. So has plastic carried the rise in crude oil prices to other industries?

When Matthias Becker-Gröning speaks, it quickly becomes clear that he comes from the region. The people of Mesum are tough but warm. Most stay here or come back later - like Becker-Gröning. His great-great-great-grandfather founded the company in 1871 as a jute and linen trading business. At the turn of the millennium, Becker-Gröning studied in Hamburg and Sydney, later worked for Tesa before joining the family business in 2008. He knows the old stories, the upheavals and crises. But few episodes have been as intense as the past three years. "Corona, delivery bottlenecks and the Ukraine war were just three of many events that kept us busy," says Becker-Gröning.

The fact that medium-sized companies have to keep a close eye on the world situation is mainly due to the manufacturing process. The focus is on the ethylene gas C2H2, from which plastic granules, the so-called polyethylene, are later produced. Producers like Gröning buy in this granulate. The ethylene gas is produced in many different ways, in Europe and Asia, for example, mostly via crude oil. This is refined, for example into kerosene, diesel or petrol - but also into the waste product naphtha. The naphtha is then broken down - in technical jargon: "cracked" - and C2H2 is formed.

Depending on the region of the world, however, the paths are different. The USA mainly uses natural gas, China coal, and Brazil uses what is supposedly the cleanest way of fermenting sugar cane. However, this has the disadvantage that there is a lack of arable land for the food sector.

This already shows how dependent plastics producers are on raw materials. If prices rise or supply chains falter, this quickly leads to distortions throughout the market. In addition, Europe cannot supply itself with ethylene gas, so it is a net importer. The major manufacturers include the petrochemical groups ExxonMobil, Lyondellbasell and Total. "This is ultimately a global oligopoly," says Becker-Gröning, who buys globally. There is no exchange for polyethylene like there is for electricity. The price developments are published in price information services, which form an index from numerous interviews.

These indices paint a fairly clear picture over the past few years. According to the "Plasticker" portal, the price for particularly dense polyethylene (PE-HD) fluctuated around 0.55 cents per kilogram between March 2018 - the oldest data point - and February 2021, both inflation and PE-HD costs knew afterwards only one direction: up. The harmonized index of consumer prices in the EU had previously been largely stable, but has risen by 14 percent since February 2021. In the same period, HDPE rose by 25 percent - and in July 2022 even by 96 percent to 1.02 euros per kilogram, when the energy crisis and the Zero Covid policy in China met. Both have been falling again since the end of last year and are now at just under 75 cents.

Correlation does not always result in a causal relationship. With plastic, however, this can hardly be dismissed out of hand. In fact, every global crisis has so far led to a temporary price peak - be it wars, Corona or just the onset of winter in Texas. Manufacturers like Gröning secure their supply with long-term contracts. But that doesn't help much against price spikes. In some areas, purchase prices are still 50 percent above the pre-corona level. Although the extrusion lines run on electricity and not on gas, prices have risen here too. All of this meant that Gröning also had to pass on the higher costs to its customers - who in turn did exactly the same with their customers. And because plastic is used so widely, these second-round effects are all the more significant.

However, one hope remains: plastic prices are very volatile. "We've seen prices similar to the ones we're seeing right now," says Becker-Gröning. On the contrary, before Corona, prices were extremely low. Therefore, it could also quickly go in the other direction.