Fall in oil price offers no respite for industry

C&I Issue 23, 2008

As oil prices plummet below $50/bbl, hitting a three-year low, analysts are not willing to rule out further falls in the price of crude. This is likely to be a mixed blessing for chemicals, squeezed by high energy and raw material prices and with customers – themselves beginning to suffer in the downturn – clamouring for industry to pass on the savings.

 

‘Obviously, lower oil prices in terms of input costs are positive,’ Constantine Biller, an analyst with Clearwater Corporate Finance, says. ‘However, many customers are now demanding much lower raw material pricing as they tackle the falling demand for their own products… many customers are suffering badly.’

 

But Alan Hayes, managing editor of petchems for the European, Middle East and Africa at Platts, says chemical companies can not quickly pass on any drop in the price of oil as they are locked into contracts for raw materials. ‘On the one hand you would think [the declining price of oil] is a boost as you’d think costs are instantly reduced, but petchems doesn’t operate in a vacuum. There is a process to manage volatility, so no one sector gains at the expense of another.’

 

The chemical industry has been slow to cut prices so far, and some companies, such as Rohm and Haas, are still increasing the price of some goods.

 

Oil prices have fallen a long way since the dizzying heights they reached in July when oil almost topped the $150/bbl mark. The rapid rise in the cost of feedstocks and energy led many companies to hike up prices accordingly as well as creating new price structures that track the cost of raw materials (C&I 2008, 11, 5 ; 10, 5). Hayes says that the spot price for ethylene, an important raw material for a range of industries and a benchmark for chemical prices, is ‘out of whack’ with contract prices. Contract prices for ethylene have only fallen 9% since August to around €1100. In contrast the spot price has fallen from its high of €1200 in August to €500.

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