Resin Prices: How Big a Bite?

Everybody complains about high resin prices. They are frequently blamed for sucking up profits and driving away customers. But it’s not easy to find more than anecdotal evidence of what harm they may be doing. That’s why I welcomed the recent publication of the Society of the Plastics Industry’s 43rd Financial & Operating Ratios Survey, which contains data for 2004 provided by 100 processing plants. I hoped it might provide clues to how processors have dealt with the resin price crunch.

Here’s what I learned from this and other SPI surveys dating back to 1974. The accompanying table indicates that direct materials costs as a percentage of sales did increase in the past year and were up significantly since 1974. An exception was 1995, also a time of peak resin prices. (Most other years for which I have data, materials costs were in the low 40s.) It’s also evident that operating profit margins were down last year and even lower than in 1974. And total production cost/lb of product was up significantly from 2003 and a decade previously.

While those facts may support the case that resin prices hurt profits, there is also contrary evidence in the SPI data. For one thing, a high percentage of material cost per sales dollar traditionally has been considered a good thing—a sign of highly efficient processing. There are, in fact, signs of increasing efficiency: Direct labor has declined steadily as a percentage of sales since 1974. Value added (sales minus materials cost) per production worker hour has increased over the past decade. Return on investment has also improved steadily. And pretax profits were up from 2003.

While I can’t belittle the pain high resin prices have caused, the SPI survey suggests processors are coping. Whether by passing on material costs to customers or compensating through production efficiencies, processors are holding their own.

 

PLASTICS PROCESSING FINANCIAL & OPERATING RATIOS
(Based on SPI Surveys)
	2004	2003	1995	1985	1974
Direct Materialsa	47%	43%	47.7%	40.8%	40.3%
Direct Labora	8%	9%	9.2%	11.6%	13.9%
Operating Margina	5%	9%	7.5%	5.1%	5.9%
Pretax Profitb	4.5%	3.5%	4.6%	5.1%	5.6%
Sales/Production Worker Hrb	$99	$96	$68
Value Added/Production Worker Hrb	$59	$58	$39
Total Production Cost/Lbb	$2.10	$1.69	$1.78
Return on Capital Pretaxb	15.1%	12.1%	9.0%
aPercentage of net sales.  bMedian value; other figures are averages.