Chemicals, resins elevated

Staff -- Purchasing, 11/3/2005

Prices of chemicals and resins have elevated in the wake of hurricanes Katrina and Rita. Natural gas and crude oil prices have exploded, boosting production and transportation costs and creating delivery surcharges. (In a nutshell, the two storms disrupted crude oil and natural gas production and delivery far beyond what had been expected. This aggravated already tight energy supply, pushing prices much higher than forecasted.)

So, buyers tell PURCHASING they expect to see overall price increases for chemicals at 10-15% this quarter. "Energy and fuel costs are driving higher prices," says the purchasing manager for a specialty materials firm. "Price-increase letters are falling like snowflakes." Reason: Even reduced demand for chemicals, plastics and energy products is exceeding supply. "Business conditions are uncertain, given the cost of energy—which will affect pricing of both direct and indirect commodities as well as logistic costs," says a purchasing manager for a heating, ventilating and air conditioning equipment firm.

Analyst Frantz Price at Global Insight expects petrochemical prices "to remain very strong within the next several months, particularly as the coming winter season puts additional, upward pressure on natural gas prices." The upward price cycle should continue in 2006, he says, "assuming that demand remains on course and energy prices remain high."

Almost 70% of the chemicals and resins buyers answering PURCHASING's business survey in October have encountered purchasing headaches since the end of August. "Resin based products are up significantly and some are allocation," adds the polymers buyer at a specialty chemicals company.

Supply constraints aside, energy and demand are the two most influential factors in any outlook, Price says. Weaker demand is the only effective, short-term mechanism that could bring price relief. Buyers have lowered expectations on fourth quarter conditions: 40% surveyed in October plan to expand buying next quarter.