Impact of Federal Reserve Rate Cuts on the Plastic Market

Last week, the Federal Reserve announced a reduction in the target range for the federal funds rate.The 25 basis points reduction marks the first interest rate cut in 2025, resuming easing after a nine-month hiatus following three rate cuts in 2024. This rate cut aligns with market expectations, but the Federal Reserve has conveyed a relatively restrained policy stance. The transmission effects on the plastics market through the dollar exchange rate, demand expectations, and trade patterns are ultimately significantly diluted by the industry's supply and demand fundamentals, presenting characteristics of "all positive factors exhausted, oscillating slightly weaker."

The support factor on the cost side"Expected overdraft" quickly weakens. Plastic production is highly dependent on crude oil, and theoretically, an interest rate cut may lead to a weaker dollar and higher oil prices. However, before this policy was implemented, Powell's dovish statement in August had already allowed the market to price in the benefits in advance, resulting in a "buy the rumor, sell the news" scenario on the day of the rate cut. New York crude oil futures prices continued to decline after the announcement of the decision. Although the EIA report showed a sharp decrease of 9.285 million barrels in U.S. crude oil inventories, the inventory decline was due to reduced production rather than increased demand. Coupled with the initiation of the second round of production increases by OPEC+, the expectation of an oil surplus continues to suppress the cost side. Data shows that the profit recovery of domestic polyethylene enterprises is less than 3%, and the cost transmission chain is basically broken.

New York Crude Oil Price Chart

Demand side presentationThe deep divergence between policy expectations and real-world sluggishness. Interest rate cuts should stimulate manufacturing by lowering financing costs, but current downstream demand recovery is weak: the operating rate of PE packaging film is only around 40%, with only seasonal demand for items like shed film showing slight improvement. During the stocking periods for the "Double Festival" and "Double 11", the weekly reduction in intermediary inventories is only 1.87%, with essential purchases accounting for over 90%. This sluggishness is closely related to the drag from U.S. tariff increases and the restructuring of the global trade landscape. Companies lack confidence in long-term demand, resulting in the impact of interest rate cuts being limited to short-term sentiment levels.

The changing trade patterns are intensifying price fluctuations. Although the dollar has slightly weakened, the ongoing reduction of the Federal Reserve's balance sheet continues to create tight liquidity, and the relatively strong dollar suppresses commodity prices. The domestic polyethylene capacity utilization rate is expected to rise to81.2%, the supply pressure from the release of new production capacity and the restart of maintenance facilities further offset the potential benefits on the trade side.

It is worth noting that the Federal Reserve's dot plot indicates there may be another rate cut within the year.50 basis points. If further easing measures are intensified, it may create new expectations for market support. However, at present, the triple pressure of excess crude oil, weak demand, and increasing supply dominates the market, and the macro benefits of interest rate cuts have been fully absorbed. In the short term, plastic prices may maintain a range-bound fluctuation, while in the long term, a substantial recovery in demand and optimized production capacity need to resonate in order to break through the weak market pattern.

Author: Zhou Yongle, Senior Market Analysis Expert