Runaway additive prices crunch profits and processors

Suppliers blame rising energy and raw material costs as the primary culprits. Brace yourself, because more price hikes are on the way.

In the classic ''60s movie "The Graduate," a young man is advised to explore a career in the plastics industry. But if the film were remade today, additives suppliers are not so sure they would make that investment. Runaway energy and raw material costs are prompting them to dramatically raise prices just to keep business afloat.

"It''s fair to say we have experienced an unprecedented and meteoric rise in our raw materials [prices]," says Sean O''Connor, VP, vinyl additives at Crompton Corp.''s (Middlebury, CT) Plastic Additives Group. "It affects all the materials we produce, and nothing''s been spared." Crompton is a producer and marketer of polymer products and specialty chemicals

The state of plastics additives reads like a good-news/bad-news joke. While demand for most additives is growing 8% to 10% a year, experts say, profitability is stymied by skyrocketing prices for the raw materials and energy feedstocks used to produce major plastic additives such as flame retardants, light stabilizers, antioxidants, and plasticizers. This contributed, in part, to suppliers passing through two price increases totaling 10% to 30% last year. Price run-up throughout the supply chain has, in turn, crunched profits.

"We''re also seeing significant increases in soybean oil [prices], a traded commodity which we buy for the plasticizer range," says William Murrell, Crompton''s VP, olefins and styrenic additives. "That''s gone up 58% since February 2003." Low crop yields in North and South America contributed to these increases, he adds.

Throw in escalating transportation costs and a tightening supply-demand balance on major additives and you have an industry struggling to make ends meet, suppliers say. "Margins have eroded," confirms John Buckley, general manager of Rohm and Haas'' (Philadelphia, PA) plastics additives business in North America.

"We are doing what we can to work with our customers to get our prices up and help our margins get to where they need to be," Buckley says. Rohm and Haas raised prices by 5% to 6% on all additives in the past few months, including modifiers, thermal stabilizers, processing aids, lubricants, and antimicrobials used primarily for PVC materials.

It should come as no surprise that more price hikes are in the works. For example, Crompton is seeking 15% to 20% price increases for vinyl, olefin, and styrenic products. Great Lakes Chemical Corp. (Indianapolis, IN) recently announced it would increase prices by 10% for its main antioxidants, and 15% for phosphate flame retardants.

Further compounding matters is the commoditization of the additives business, particularly plasticizers, which observers say contributed to prices declining by roughly 20% to 30% from 1999 to 2002. "These products are all the same," observes Fred Gastrock, project manager, additives, at BRG Townsend (Mount Olive, NJ), a management consultant. He notes that some key patents have expired. "Suppliers are competing with one another for a market that is growing slightly at best."

Escalating tin and natural gas costs continue to batter profit margins and offset price increases. U.S. prices more than doubled from 2002 to 2003, hovering between $5 and $7/million Btus for natural gas, and $4.50/lb for tin. The increases happened so fast that vendors are trying to recoup additional costs resulting from year-end feedstock spikes.

"You go out with your price increase and seek to regain some of what you lost on raw materials," Crompton''s O''Connor says. "Then, by the time you negotiate and give customers 30 days notice, you fall behind because the price of tin has gone up since that period." He notes that rising natural gas prices impact a number of raw materials used by Crompton, including DPA, a key ingredient for producing antioxidants.

In addition, experts say tin prices have been adversely affected by tightening supply-and-demand relationships, particularly in China, where the economy and infrastructure are growing by leaps and bounds. "There are supply restrictions from Asia," O''Connor observes, "so not as much supply gets into the marketplace as demand needs."

Suppliers say the announced price increases have had minimal impact on demand. "Many customers appear to be more concerned about securing adequate supply of flame retardant additives to ensure their ability to meet their customers'' growing end-product requirements," notes Angelo Brisimitzakis, Great Lakes'' executive VP. "We expect these increases to stick." Future price hikes could occur if demand and raw material or energy inflation do not subside, he speculates.

Finding an offset

While all this is happening, suppliers say they are trying to soften the blow by passing only a portion of their additional costs downstream. Meanwhile, processors are struggling under pricing pressures from large customers such as automotive OEMs and mass merchants, who demand sharp price decreases. "Our customers are under lots of pressure on price, and to save costs," Rohm and Haas'' Buckley says. "The last thing we want to do is go in and raise their prices. We try to look at our costs first and try to figure out how to be more efficient."

Most specialty chemical firms with additives operations have implemented programs to improve efficiencies and contain costs in all their businesses. In addition, suppliers say much of their R&D time is spent tweaking products to meet specific customer demands. This includes evaluating less expensive alternative raw materials that meet or exceed the performance of those used to produce existing additives.

"You want to give customers something that gives them a cost decrease," Buckley says. "If we come up with products that are more efficient, in the end, the customer gains."

Moving forward, suppliers and processors will have to make hard choices as to whether they will continue producing or using certain additives. No doubt a big factor will be the changing dynamics of the business. For some suppliers, this may lead to the sale of underperforming businesses.

Crompton, for instance, is performing a segmentation analysis of its portfolio to determine where it can make or lose money. "Some families are not very profitable or have no profit," O''Connor says. "The question is if their raw materials pricing continues going up, how much longer can one sustain a loss business."

By Greg Valero

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