In the world of plastics, pricing has been a bit of a moving target the last year-plus.

Since the beginning of 2016, the price of propylene has:

• Increased 43 percent (Feb.-Sept. 2016)
• Decreased 27 percent (Sept.-Dec. 2016)
• Increased 65 percent (Dec. 2016-March 2017)
• Decreased 26 percent (March-May 2017)

Source: IHS

All in the span of just 17 months. Amazing.

That’s the world we live in—pricing is up and down almost constantly. And, it’s getting tougher to predict. And that’s an increasingly big problem for plastics producers and consumers.

Why? Because price volatility eventually will impact financial results. Price increases are difficult to pass on. Margins get squeezed. And, there’s a growing reluctance to risk losses.

Businesses want predictability in their raw material costs as it allows them to better manage operations, their exposures and their business.

So, I thought it might be worth taking a closer look at the key factors that impact pricing on a daily, monthly and even annual basis. When I look at pricing, I see eight key factors that can have a big impact:

1. Upstream fundamentals that determine cash costs. Let’s use crude oil as example since we’re talking plastics. Now, oil doesn’t impact petrochemicals, generally speaking. But it sure does affect the larger market in a global sense. It’s also often a leading indicator of what might be coming down the pike with other pricing fluctuations.
2. Inventory adjustments. Last fall, poly inventory levels were extremely robust. We saw a significant drop in price in the fourth quarter (according to the American Chemistry Council, to the tune of a 19 percent decrease). Not surprisingly, those who owned substantial inventory didn’t want to carry it over into 2017. So, you saw a lot of producers pricing product very aggressively. That drove down the price. And, that’s exactly what we saw at the beginning of 2017.
3. Operating rates. In April, we saw an operating rate of 83 percent (American Chemistry Council). That was down 13 percent from February. It’s amazing how fast plastics producers adjusted these operating rates in just two short months.
4. Demand. In May, sales of poly were the highest they’ve been so far in 2017. Once those prices got lower, it got people back in the market buying.
5. Capacity adjustments. Earlier this year, Flint Hills, the big poly producer, went down for scheduled maintenance. Then, it went down for another 20-30 days, unexpectedly. Just as Flint Hills was scheduled to come back up, Dow’s PDH unit went down unexpectedly. It’s events like these, from a capacity perspective, that can have big impacts on price.
6. Evolving industry trends. Growing demand for packaged food such as ready-to-eat meals, frozen foods and dried processed foods is expected to further drive industry growth (Future Market Insights). Also we continue to see a transition from rigid packaging to flexible packaging.
7. Policy and geo-political events. The current Qatar-Gulf crisis, repeated military provocations by North Korea and daily media coverage of Trump’s campaign investigation have spun oil and gas markets and foreign exchange markets into moments of uncertainty.
8. Imports/exports of finished goods. Since the 2016 presidential election campaign, Trump has been critical of a 2012 bilateral free free trade agreement and barriers to U.S. auto exports (Fortune). The Trump administration continues to review multiple trade deals focused on possible re-negotiation which could lead to significant issues or changes in import and export flows.

Given all these factors, you can see how tough it can be to accurately predict price. But, by being aware of these eight factors you can get a better handle on your price risk and how it plays a role in your overall risk management plan.