Key drivers of raw material prices
By Douglas Bohn, Orr & Boss
Thus, it is critical for coatings companies to understand the drivers of raw material prices, look forward to potential future raw material price increases, and remain proactive in trying to control raw material prices. Raw material prices are always a hot topic in the coatings industry. They are normally the single largest cost that a coatings company has, and so managing them and working to reduce them is one of the keys to cost control and profitability in the industry. Thus, it is critical for coatings companies to understand the drivers of raw material prices, look forward to potential future raw material price increases, and remain proactive in trying to control raw material prices.
On a broad level, there are two key drivers of raw materials costs. The first is the primary feedstock. The primary feedstock for most coatings raw materials is oil and natural gas. There are others that can drive specific costs too, like certain metals for pigments. But by and large, the key driver of raw material costs is the price of oil and natural gas, with oil being the primary driver. Over the last five years, the price of oil has varied quite a bit. The average oil price was $97.98 per barrel in 2013. It dropped to an average price of $48.66 in 2015, then dropped further to an average of $43.29 per barrel in 2016.
It has since rebounded to an average of over $49 per barrel in 2017. The increase in 2017 equates to a 14 percent increase over 2016 prices, which resulted in some raw material price inflation in the coatings markets. Some coatings' raw materials respond quickly to changes in oil prices. For example, solvent prices can fluctuate within a few months or even a few weeks. Resin and other raw material prices can rise six to 12 months after the rise in oil prices.
The other factor that can impact raw material prices outside of oil prices is supply tightness. Like most other items, the law of supply and demand governs the costs of raw materials. When supply of certain raw materials gets tight, raw material costs increases. Over the last several years this has happened with TiO2 and acrylic resins. Plant shutdowns or unexpected high demand — especially from the Asian market — has resulted in large increases in the raw material costs of these items. Since most of these products are sourced globally, tightness in the global supply market will impact raw material prices.
Raw material prices in 2017
After rising for a good part of the 2000's, raw material prices had been flat. However, in 2017, due to a variety of factors, tightness in a number of markets caused raw material price inflation. Overall price increases depended upon the segment of the coatings industry but in general they averaged between 1-4 percent of sales. This is significant since it effectively reduced profit margins by a corresponding amount. Resins and pigments comprise about two-thirds of spending on raw materials by coatings companies, and thus inflation in both of these categories have the largest impact on total raw material spend. In 2017, both of these raw material categories saw significant price increases.
As mentioned above, the two key drivers of raw material prices are feedstock/oil prices and supply tightness. Oil prices went up 14 percent in 2017 versus 2016. The prediction of the U.S. Energy Information Agency (EIA) is that most of this increase has passed. The EIA forecast is that the average 2018 price will be 1.8 percent higher than it was in 2017. If this forecast is correct, it would mean that feedstock/oil prices should be not be a key driver of raw material price increases. However, unexpected events do occur. If oil prices rise significantly in 2018, they would likely impact coatings raw material prices.
Searching out new global supply sources and reformulating to avoid dependence upon costly raw materials are two ways to reduce costs. Also, plant material yield reduction projects should be undertaken in the plants to avoid the unnecessary waste of raw materials. Given the dependence that coatings companies have on raw materials prices, it is important to remain proactive and work through these problems before they reduce profitability.
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