Resin Feedstock Costs: How Ethylene and Propylene Drive What You Pay

When crude climbs a few dollars a barrel over a couple of weeks, the next increase letter from your supplier often blames rising resin feedstock costs. Which sounds reasonable enough. Plastic comes from oil, oil went up, so resin should too. Very logical.

Except most of the polyethylene made in North America starts with ethane rather than crude, and that ethane comes out of the same shale wells as natural gas. So a supplier who points to oil as the reason for a polyethylene increase is usually skipping a few steps. And on polypropylene, the letter may not be about feedstock at all, because many contracts already follow the monthly propylene price by formula and pick up every propylene move without one.

That's why we think it pays to know which feedstock sits behind each resin you buy, and how a move in that feedstock directly informs your contract. Feedstock is only part of what a resin sells for, though, since producers add a margin that rises and falls with the market. Once you can see both, it gets much easier to tell when an increase is bigger than the costs behind it.

Key Takeaways

• Most commodity resins trace back to a short list of building blocks, mainly ethylene, propylene, and benzene.
• North American polyethylene is mostly made from ethane, so natural gas markets usually tell you more about its cost than a crude oil headline does.
• Polypropylene contracts written off the monthly propylene settlement pick up feedstock moves on their own, so a separate increase letter usually means the producer wants more margin.
• Feedstock is one part of what it costs a producer to make resin, while inventories and demand decide what producers can actually charge you.
• If a supplier's increase runs well past the feedstock move behind it and supply isn't tight, much of the difference is usually margin, and that's the part the market has to carry for the increase to settle.

Where Resin Feedstock Costs Start

Before you can check a supplier's cost story, you need a clear picture of what your resin is actually made from. For most commodity resins, the plastic feedstock starts out as natural gas liquids like ethane and propane, or as naphtha, which refiners make from crude oil. Producers break them down in huge furnaces called steam crackers, and ethylene and propylene come out the other side. Those two, plus benzene from refineries and naphtha crackers, are the main building blocks.

From there, each resin family follows its own path:

• Polyethylene: Made from ethylene. HDPE, LDPE, and LLDPE all start here. LLDPE and many HDPE grades also mix in small amounts of comonomers like butene, hexene, or octene, which have price swings of their own.
• Polypropylene: Made from propylene, specifically a high-purity version the industry calls polymer-grade propylene, or PGP.
• PVC: Made from ethylene plus chlorine, which producers make from salt using a lot of electricity. The same process makes caustic soda, and what caustic sells for offsets part of PVC's cost.
• Polystyrene: Made from styrene, which producers make from benzene and ethylene.
• ABS and other engineering resins: Built from several inputs at once. ABS uses acrylonitrile, butadiene, and styrene, while polycarbonate traces back to benzene and propylene through a chain of intermediates.

Since a resin with three feedstocks can get pushed around by any one of them, ABS and engineering grades are harder to read. But for polyethylene and polypropylene, the commodity grades most processors buy in volume, ethylene and propylene drive most of the cost. And because the oil story in an increase letter usually comes attached to polyethylene, that's the resin to start with.

Why US Polyethylene Doesn't Track Crude Oil

That oil story usually falls apart once you look at what a cracker runs on, which mostly depends on what feed is cheap where it sits. In Europe and much of Asia, crackers mostly run on naphtha, so their ethylene costs really do rise and fall with crude. North American crackers, by contrast, have long run on lighter feeds like ethane and propane from natural gas, and the shale boom only pushed them further toward ethane.

The ethane price has stayed low next to oil for most of the shale era, though it still moves. When there's more ethane around than crackers can use, gas processors leave the extra in the natural gas stream and sell it as fuel. As long as that surplus lasts, the ethane price tracks gas, so a gas spike can raise a Gulf Coast producer's costs while oil sits flat. But once ethane gets tight, demand from new crackers and export buyers can push its price up without any help from gas.

Crude does reach US polyethylene, just more slowly, over months rather than weeks. Naphtha-based producers overseas tend to set the global polyethylene price, and since US producers sell into that market, a few months of rising crude can lift export prices and pull domestic contract prices up behind them.

That pull only works when the world isn't already oversupplied with polyethylene. When there's plenty to go around, rising crude tends to squeeze naphtha-based producers' margins rather than lift the price they get. Either way, a couple of weeks of oil headlines hasn't reached US polyethylene yet, so the fair question back is what happened to ethane, since that's what most US producers are actually paying for.

How Ethylene and Propylene Prices Reach Your Contract

What happened to ethane tells you whether a producer's costs went up, but not how that cost reaches your invoice. Since polyethylene and polypropylene get there by pretty different paths, you'll read an increase letter differently for each.

Most large polyethylene producers make their own ethylene, so for polyethylene, ethylene drives what you pay through what it costs to make, which mostly means ethane, cracking, and turning the ethylene into pellets. Those costs set a rough cost floor, and for most of the shale era, US producers have sold well above it. Your invoice, though, follows the published polyethylene index, since most direct contracts are priced as that index minus a discount you negotiated, and that index reflects what buyers and producers actually settle on each month. Ethylene prices quoted in market reports still help as a supply signal, since a hard drop there often means extra polyethylene is on the way.

Polypropylene is more direct, because propylene has its own monthly contract price, which the industry calls the PGP settlement. Where that propylene comes from has changed since the shale boom. Cracking ethane yields mostly ethylene, so as US crackers moved to ethane, they made far less propylene, and refineries and propane dehydrogenation (PDH) plants now make much of the US supply. That's why an unplanned refinery or PDH outage can move PGP prices even when every cracker is running normally. Propylene prices also follow gasoline more closely than ethylene prices do, because a refiner can blend any propylene it can't sell into gasoline.

On a contract written as the PGP settlement plus a fixed margin, a propylene move reaches your price each month, up or down, without anyone sending a letter. So a separate increase letter on that contract is a request for more margin, which waits for renewal unless your contract lets the margin be reopened. Contracts tied to a published polypropylene index pick up a margin increase only if it shows up in the transaction prices the index assesses.

Why a Feedstock Move Doesn't Set Your Price

Whichever path your contract takes, feedstock only tells you roughly what a producer pays to make resin. But anyone who's bought resin through a few price cycles knows that's only part of what you'll pay. Outside a PGP formula, the margin producers take on top of their costs swings with inventories and demand. When inventories are full and producers are chasing orders, that margin gets squeezed, so a feedstock increase can come and go without moving polyethylene at all.

When outages take capacity offline and resin market tightness gives producers room to push, the margin widens instead, and polyethylene can climb with feedstock flat.

Timing adds one more wrinkle. Whether your polyethylene price follows an index or your supplier quotes it month to month, increases tend to reach your invoice faster than decreases do. Over a year of price cycles, that resin pricing asymmetry adds up, so it pays to watch how fast a feedstock drop reaches your invoice, not just how fast a rise does.

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How to Check an Increase Letter Against Resin Feedstock Costs

So when the next increase letter comes in, you'll know what to check it against: the feedstock behind your resin, how your contract passes it through, and how tight the market is. That letter, which trade press calls a resin price increase nomination, tells a cost story you can test yourself. Market reports carry some of the numbers, like spot ethane prices, spot ethylene prices, and the monthly PGP settlement. We'd work through it in this order:

• Name the feedstock: Figure out which building block the resin actually comes from.
• Check the size and timing: Look at ethane for polyethylene, since that's what most US producers pay, and at PGP for polypropylene. Ethane is quoted in cents per gallon and ethylene in cents per pound, so if a letter turns an ethane move into an ethylene cost, ask your supplier to show the math. A move that's already reversing shouldn't carry much weight.
• Match it to your contract: On polypropylene priced as PGP plus a fixed margin, the propylene move is already in your price, so the letter is about margin. On anything priced off an index, the letter is an announcement rather than your new price, because you'll pay whatever actually settles in the index.
• Read the supply side: Check trade press for producer inventories, outages, and export demand. If those point to plenty of material, the increase probably won't settle in full, whatever the letter says about costs.

A feedstock move rarely explains a whole increase, but don't expect your supplier to fill in the rest for you. Producers price nominations to the market, so if you ask for a cost breakdown, you'll usually get "market conditions" back.

You can still work most of it out yourself. Apart from energy and comonomers, the cost of turning ethylene or propylene into pellets doesn't swing much from month to month, so it rarely explains a nomination several cents above the feedstock move. Lay those costs out layer by layer in a resin should-cost model and you'll know roughly how much of the increase is margin. That's the part the market has to carry for an increase to settle, and the part your discount and volume give you room to argue over.

Test Your Next Increase Against Resin Feedstock Costs with ResinSmart

Once you've traced an increase back to its feedstock, checked how your contract passes it through, and read how tight the market is, a letter blaming resin feedstock costs becomes something you can test rather than take on faith. ResinSmart gives resin buyers the market analytics to run that kind of check on their own. Depending on the plan, buyers also get benchmarks informed by more than 3 billion pounds of transaction data, along with advisors who can help them negotiate. Start your free trial today and see how prices for your resins have moved before the next letter shows up.

FAQ: Resin Feedstock Costs

What are resin feedstock costs?

Resin feedstock costs are what producers pay for the raw materials used to make plastic resin, mainly ethane or naphtha and the ethylene, propylene, and benzene that crackers and refineries make from them. Feedstock is usually the biggest single cost behind a resin, but market conditions decide what the resin sells for.

Why don't US polyethylene prices follow crude oil?

US polyethylene prices don't follow crude oil closely because most North American polyethylene is made from ethane, a natural gas liquid, rather than oil-based naphtha. Crude still affects US polyethylene over time through global prices and export demand.

How much of a feedstock price increase should show up in resin prices?

All of a feedstock price increase shows up in resin prices for polypropylene priced as the polymer-grade propylene settlement plus a fixed margin, since that contract passes propylene moves through cent for cent. Polyethylene and index-priced polypropylene can pass along less or more, depending on how tight the market is.

Where does the propylene used to make polypropylene come from?

The propylene used to make polypropylene comes from three main sources: steam crackers, oil refineries, and propane dehydrogenation plants. Since US crackers mostly run on ethane, refineries and dehydrogenation plants supply a large share.

How can resin buyers use feedstock prices to check a price increase?

Resin buyers can use feedstock prices to check a price increase by comparing the size and timing of the relevant feedstock move with what their supplier is asking for. Polyethylene buyers should look at ethane, and polypropylene buyers at polymer-grade propylene. Much of what the feedstock move doesn't explain is usually margin, though energy and comonomer costs can move too.

Which feedstocks drive polystyrene and engineering resin prices?

Polystyrene prices follow one main input, styrene, which is made from benzene and ethylene. Engineering resins depend on several inputs. ABS combines acrylonitrile, butadiene, and styrene, and polycarbonate traces back to benzene and propylene, so a swing in any one of them can move the price.