Chemical, resin producers drop price protection for contract buyers
Purchasing Staff
Purchasing
April 12, 2004
After years of swallowing high energy costs, U.S. chemical producers are now aggressively passing along those costs to customers, scaling back a practice of long-term price guarantees. The price hikes, which have accelerated in the past year, are hitting customers who use chemicals to make everything from garbage bags to paints.
Chemical producers are hoping to bolster profits after a five-year span in which they hesitated to raise prices despite soaring raw materials costs. The latest price hikes include one by Great Lakes Chemical, which lifted prices for fire retardants. That followed Kerr-McGee's increase for white pigments. Dow Chemical, a pricing leader, said in January that further increases were a top priority this year. Recently, the company boosted prices for a wide range of products: styrene/butadiene latex, styrene acrylate latex, solid plastic pigment, premium cellulose ethers, water-soluble resins, and others. "The chemicals industry recognizes it did a bad job of pricing commodity chemicals,” says senior analyst George Dlugos at Evergreen Funds, which manages $247 billion in investments "They simply did not capture the ratcheting up in (costs)." Last Friday, crude oil hovered around $38.50 a barrel, its loftiest level in 13 months. And natural gas--a key chemical ingredient--traded at around $5.60 per million British thermal units, more than double its average during the 1990s. Those heightened costs are just the latest surge in a two-year rally in energy costs, driven by declining reserves of natural gas and the war in Iraq, analysts and chemical executives say.
Starting in 1997, weak demand and excess plant capacity made it difficult to push through price increases, analysts note. That, along with high costs, drove the U.S. chemical industry into its most severe slump since the 1930s. But, with demand reviving over the past year, chemical makers are using new leverage to pass along higher costs. Companies are scrambling to raise prices. The price hikes also reverse a trend of price protection, which emerged during the late 1990s slump. Pressured by anemic demand and the need to stabilize sales, chemicals producers began a practice that was rare in the industry before then--guaranteeing longer-term prices for buyers. In some cases, this meant extending month-long price contracts by two or three months. "The industry as a whole succumbed to that pressure and started giving out additional price protection," said Grant Thomson, vice president of North American polyethylene sales for Nova Chemicals. But since late 2002, Nova has raised prices for a basic plastic resin seven times, amounting to a 21¢/lb increase or about double its price at end 2002. "When there's a lot of volatility in feedstocks, it's very difficult to get in price increases fast enough to maintain profitability," Thomson says. "We're finally getting to a point where we're getting caught up."
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