Chemical Price Forecast: Storm clouds block chemical buyers' view of the horizon
Deteriorating economic conditions and market volatility create challenges in chemical price forecasting.
By Rich Weissman -- Purchasing, 12/11/2008 2:00:00 AM
When discussing their always changing weather conditions, New Englanders often say "If you don't like the weather just wait a minute and it will change." Unfortunately that old adage can also be applied to today's volatile chemical markets. With a global recession brewing on the horizon just after 2008's record breaking jump and crash in commodity prices, most chemical markets have been thrust into chaos and accurate chemical price forecasting has been one of the first victims.
Chemical buyers and suppliers alike are looking for any signs of market stability as a chance to dust off their forecasting instruments and models for next year and beyond. But until those signs appear, chemical spend planning and forecasting seems to be measured in hours, days and weeks rather than months and quarters. In most cases there is just too much risk and uncertainty on both sides of the supply and demand see-saw to structure annual supply agreements.
"Chemical prices are so tough to forecast that I could not even tell you what they would be next week, let alone next month," says Alan Garwood, director of quality assurance for Montreal-based manufacturer Handy Chemicals. Garwood, who is also responsible for the company's major chemical purchases, says market knowledge, a key to his forecasting, is tough to come by in today's markets. "We are being hit on all sides, including raw material costs, supply constraints, transportation costs and even regular force majeure enforcement due to this summer's damaging hurricanes."
"The market is not following any logic, especially as it relates to supply and demand. At this point, forecasting is just about impossible and I feel that there is hardly a chemical cost that we can control," says Garwood. He sees the loss of North American chemical production capacity, and the resulting dependence on imports, as a key issue impacting the market.
"We are in less control of our own destiny and are more vulnerable to marketplace changes," says Garwood. "We are doing our best to mitigate risk by revising the recipes of some our products relative to raw materials." Garwood is an advocate for a comprehensive North American energy policy which he feels will lessen the volatility in the marketplace.
Oil spill
The price of crude oil is a primary tool in the forecasting for Resintech USA, the Miami-based supplier of thermoplastic rubber and PVC. "Crude oil pricing is a key forecasting number that we, and our customers, use when looking at our raw material prices," says Rolando Perez, general manager of U.S. operations at Resintech. "When crude prices go down our customers pressure us for price reductions, but we are at the mercy of the [raw material suppliers]." Perez noted that when oil spiked to more than $145/barrel in July his raw material costs were priced to reflect oil at $120. When prices did not drop immediately a few of his buyers had issues. "Some of our customers forecast our prices using their neighborhood gasoline prices as a reference and that is not necessarily accurate. It is a bit more complicated than that."
Resintech supplies materials to injection molders and extrusion customers in Central America, the Caribbean and the U.S. In addition to the cost of crude, Perez uses price indices and even the robustness of the scrap market to forecast pricing. "I can forecast pricing and demand when the cost of scrap increases because it is more economical to reprocess it than sell it to a dealer," says Perez. "I try to look at those kinds of related trends for some kind of insight."
In the current market, Perez also is doing his best to run his business more effectively by watching inventory levels and cash flow while developing closer relationships with both customers and suppliers. "I try to keep low inventories to reduce risk but I also have to worry about getting some of the products I need when supply tightens," says Perez. "It is a balancing act."
The middle men
The chemical distribution industry is also feeling the pinch and having difficulty planning for 2009. "The pace of change is fast and this is a dynamic time in the chemical distribution business," says Chris Jahn, President and COO of the Arlington, Va.-based National Association of Chemical Distributors (NACD). "The terms on which prices can change as well as the frequency of those changes are creating uncertainty in the industry." Jahn says NACD's member distributors are on the front line between the chemical manufacturers and their customers, chemical buyers. "We are working closely to educate customers about a very volatile market and help them to make rational business decisions and minimize risk."
That risk extends to all aspects of the chemical distribution market. "This market is certainly no fun and we are working in unprecedented times," says Chad Massie, vice president of materials management for Brenntag Mid-South, a chemical distributor and specialty manufacturer in Henderson, Ky. "Our forecasts, based on traditional sources, have been very far off and we've just about given up of where they should be. Firm pricing in our industry has just about gone away."
As a distributor, Massie walks a fine line of managing inventory, fluctuating customer demand and price changes from manufacturers. "We are seeing some significant global supply issues and in some cases products are being sold to the highest global bidder, driving up prices," says Massie. He sees some fragmented pricing relief recently in the oil-based commodities but still expects continued high pricing in caustic soda and chlor alkali products. "We are trying to be out in front of the issues by educating our customers on market conditions and pricing trends, while still actively managing relationships with our suppliers," says Massie. "Communication throughout the supply chain is critical in the current market."
The inability to forecast accurately impacts business operations at chemical firms as well. "Our forecasts impact our inventory turns, our cash flow and our ability to service customers," says Donna Boldt, president of chemical distributor Deeks & Company in Stone Mountain, Ga. "We are increasing our attention on costs, prices, and gross margin." Boldt says her company is trying to better manage inventory and price fluctuations by buying forward where appropriate, usually depending on the cost of the material. "We are managing our cash flow and working to keep our costs down and our productivity up, especially as it relates to transportation."
Boldt tries to keep a handle on the market by using industry reports, but also says communication plays a key role in planning. "We have increased the level of communication with our principles to better understand costs structures and forecasted price changes," says Boldt. "Our industry typically allows 30 days notice for price increases but this year even that has often gone by the wayside."
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