Raw power: Materials can affect prices on many levels

By Miles Moore, Rubber & Plastics News Staff

In the latest spate of price increases, tyre and rubber products makers have once again named raw material costs as the culprit.

Raw materials such as natural rubber, synthetic polymers and petrochemicals--always major factors in the cost of any finished rubber goods--have been especially crucial in the past year or two.

The rollercoaster ride of petroleum prices since the beginning of 2008 has ensured that. Petroleum hit $147 a barrel, with gasoline reaching $4 a gallon, mid-2008.

Those prices fell to roughly half those levels within a few months, but now are climbing again, with oil hovering between $75 and $80 a barrel and gasoline in the $2.75 range.

At the same time, however, other factors have gained prominence. The 35-percent tariffs President Obama levied on tyres imported from China, beginning in September 2009, have led US tyre distributors to complain of higher prices across the board for the tyre market, especially at the bargain end.

So, at this juncture, what is happening to raw materials prices? Are they still the main reason for product price increases or are tariffs and other factors more important now?

Positioning goods competitively

Most rubber companies are reticent about discussing their pricing decisions, and this point in time is no exception. Cooper Tire & Rubber Co. declined comment for this article, as did Bridgestone Americas, which announced 5 Feb a 5-percent price increase on all its Firestone-brand agricultural, forestry and construction tires effective 1 April.

Michelin also chose not to discuss its raw materials experiences in depth, preferring to allow its fiscal 2009 report, released 12 Feb, to speak for the company.

Michel Rollier, Michelin managing general partner, said in the report that the market visibility prevailing in early 2010 and the rising cost of raw materials, particularly natural rubber, are prompting his company to exercise “extreme vigilance.”

Michelin states that the negative impact of raw materials prices, combined with low capacity utilisation and depressed markets, contributed to massive losses in the first half of 2009.

In the second half, however, raw materials prices had a positive impact and helped redeem the year for Michelin.

Goodyear raised prices up to 5 percent on its commercial truck tyres effective 1 Jan, 2010, and up to 6 percent on its consumer tyres effective 1 Dec 2009. Tariffs played no part in Goodyear's price hikes, according to a company spokesman.

“We don't really compete in that segment of the market where China is,” he said. “Less than 2 percent of our production comes from China.”

As for raw materials, it isn't just what they cost that determines how they affect product manufacturers and their prices, the Goodyear spokesman said.

“It depends on what you're paying for raw materials, when you bought them, your accounting methods and how long it takes the materials to go through the process,” he said. “There can be a lag time of three to six months between raw materials purchases and their effect on the bottom line, depending on the product.”

Because of different accounting and manufacturing methods between product makers, no one can really pinpoint the “tipping point” when the manufacturer must pass on raw material price increases to the consumer, the Goodyear spokesman said.

“I don't think anyone can really say that when they hit an x-percent increase in raw materials costs, they have to raise their prices,” he said.

For Continental Tire the Americas llc., market conditions and the actions of competitors are key to pricing decisions, according to Bill Caldwell, Conti vice president of sales and marketing.

“We always try to position our products competitively,” Caldwell said. “It's a normal part of business. We're constantly revisiting where our products are positioned and adjust prices in reaction to what our competitors are doing.”

Tariffs on Chinese tyres may have a short-term effect on prices, but in the long run raw materials prices will remain the prevailing factor, according to Caldwell.

He too said that there's no such thing as a “tipping point.”

“The problem over the last two years has been the huge volatility in raw materials prices, plus a little bit of uncertainty as to what the future holds,” he said.

“No one has the perfect crystal ball as to what raw materials will do in 2010,” he said. “But no one wants to wait until the last minute and do something drastic; customers don't like that. We just try to keep up and remain competitive.”

Word from materials side

Among raw materials, ethylene has seen the steepest jump in prices because ethylene prices have been at least partly divorced recently from the actual cost of petroleum, according to Kathy Hall, executive editor of the petrochemical industry newswire PetroChemWire.com.

“There were plant operations problems that were unexpected,” Hall said.

Specialty chemicals such as ethylene and polypropylene are made at steam cracker facilities, mostly in the Gulf Coast areas of Texas and Louisiana, Hall explained.

“One or two usually will be in a state of maintenance at any given time,” she said. “But if two or three others are down, that creates a supply problem. It's been cold, so if a pipe cracks or freezes, that creates a little bit of a surprise.”

During January, ethylene went from 41 cents to 46.75 cents per pound, according to PetroChemWire.com. However, ethylene prices will go down again as steam cracker capacity comes back on-stream, probably by the end of February, according to Hall.

Meanwhile, prices also have gone up for specialty elastomers. Dow Elastomers, for example, announced price increases of 8 to 12 cents per pound for the Amplify, Primacor and Tymor families of polyethylene resins effective 15 Jan 2010.

Dow also increased prices 5 cents per pound for its Nordel hydrocarbon rubber effective 15 Jan and 6 cents per pound on its Affinity polyolefin plastomers, Engage polyolefin elastomers and Very Low Density Polyethylene (VLDPE) resins effective 1 March.

“In general we consider ourselves a specialty products business, and we try not to raise prices more than once a year,” said Mark Sullivan, commercial director for Dow Elastomers. “But with raw materials there's been a lot of volatility.”

No one can anticipate a situation like 2008, which saw 50-percent jumps in raw materials costs, Sullivan said.

“Price increases are among the most challenging parts of relations with customers,” he said. “No one likes them.”

But during the 2007-09 period, Dow???s customers modified their business models to respond to the pricing situation, according to Sullivan.

Because Dow positions its products to the specialty market, its customers understand the value of those products, he said.

“Between 2007 and 2009, our customers--if they didn't before--got a great education about price volatility,” Sullivan said. “They still may not like it, but they understand where it's coming from.”

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Raw power: Materials can affect prices on many levels from Rubber & Plastics News (a Crain publication)