Oil costs slide but downstream prices still high

Manufacturers aren’t ready to offer lower-energy-cost discounts

By Tom Stundza -- Purchasing, 9/3/2008 11:43:00 AM

Crude oil prices are falling but consumer and commercial goods manufacturers have not yet dropped oil-related price increases they have made this year. The New York Times reports that even though oil prices have fallen closer to $100 a barrel, from $147 about two months ago, many companies that cited higher energy costs for increasing prices are resisting a rollback, saying they still need to recover money lost in the run-up.

Analysts suggest that large users of oil-based raw materials appear to be waiting to see if oil prices will stay down or continue to fall before they commit to price cuts on their end products. “Everybody still feels there is too much uncertainty to be clear about what action they should take,” says analyst Ali Dibadj at Sanford C. Bernstein & Co. in New York. “They won’t immediately drop their prices,” he tells the newspaper.

Looking at oil-based raw materials, the mavens expect pricing to slide as long as late-summer demand continues to be soft. Dow Chemical of Midland, Mich., for example, has raised prices this year by nearly 50% for oil-based raw materials and won’t give up the increases until the company recovers its old profit margins, says a spokesman, who adds that “our prices continue to lag our cost increases.” However, Purchasingdata.com reports that its monthly Chemical Price Index dropped 2% in August, paced by a 21¢/lb decrease in the average monthly price for benchmark ethylene, which may slip further this month (see and purchase the latest Chemical Flash Report.)

Although spot ethylene prices last week increased by 4¢ as the Gulf Coast awaited Hurricane Gustav, they have dropped back toward 45¢/lb this week. Atop that, subscription news service ICISpricing.com says contract buyers have been holding back on deals while they await resumption of activity shut down just before the storm struck the mainland. Another key chemical, benzene, has been selling around $4.20/gallon this week, as compared with $4.21 average for August.