Oil is the Main Driver

The main factor that drives the price of hydrocarbon-based plastic compounds and resins is the international price of oil. During 2006 the price of oil has been at record levels, peaking at over US$70/ barrel, and passing the previous peak price that was reached in 2005. Industry analysts suggest that as much as US$20 to US$25 of the current oil price per barrel is driven by the “political premium” due to market perceptions of the impact of political tensions in the Middle East and elsewhere.


Tensions Rise, so does the Oil Price

Of course, the over-riding factor behind the current high oil price has been the situation in the Middle East, which produces about one quarter of the world’s oil. Market sentiment has been affected not only by the failure to restore fully output from Iraq but also by concerns about possible US actions against Iran (the world’s fourth largest producer of oil), which would disrupt supplies further. Not only Iran’s but also other Middle Eastern oil production is shipped through the Straits of Hormuz. In recent weeks oil prices have surged again as a result of the increased tension in the Middle East region, currently focused on Israel and Lebanon. On a brighter note, oil output from the Gulf of Mexico has been recovering this year, after the damage inflicted by hurricanes in 2005, but there have also been supply problems recently in Nigeria, with some production facilities shut down due to the risk of attacks by rebels.




Little Spare Oil Production Capacity

There is only a slim margin of spare oil production capacity if a serious supply interruption should arise. Cambridge Energy Research Associates estimate that global demand in 2006 will average 85 million barrels/day, with only 1.9 million barrels/day excess capacity to cope with crises. Longer term, demand from China and India will continue to increase, which will make the supply-demand balance even more critical. Forecasts suggest that over the next 25 years global demand will rise from 90 million barrels per day to 140 million.


PVC and Polyethylene

The two key polymers used in cable-making are PVC and polyethylene. Prices of these materials, while broadly following the trend in oil prices long-term, are less volatile than the oil price. Supply-demand issues in these specific markets affect the prices of these polymers, and it can take some time (weeks or even months) before movements in the oil price are reflected in polymer prices. Prices for polyethylene fell back in early 2006 but have moved upwards since then. PVC prices have been slower to react to higher oil prices in 2006, though PVC producers in the US have been seeking increases. Polymer prices softened in March 2006 as a result of additional production capacity in Asia and South America. Cable production is, of course, only one of many applications in which these polymers are used. Prices for cable-making grades may not strictly follow the overall trend in polymer prices. In particular, prices for some specialised compounds used in power cables (e.g. high purity polyethylene for HV power cables and compounds for semi-conducting screens) can be very different from the base polymer price.