Some info

I am in the industrial, food, and pharma chemicals market. Prices have rapidly gone north the past 10-14 days and not just small incremental increases. Many producers have cut operating rates and it has finally ...finally ....caught up with inventories, so suppliers are no longer carrying the inventories they had the past 90-120 days (they are much more balanced from a production/inventory standpoint albeit at much lower operating rates).....we are getting big and across the board increases. Raw materials are all going north rapidly...chlor-alkali, propylene, ethylene, benzene, Edible and non edible oils, hydrocarbons, etc......nothing is staying put price wise......just FYI....here comes the start of inflation folks...give it about 90 days to reach consumers..............just an FYI.

 

Primarily demand and lowering operating levels resulting in a more balanced market.

Demand is down and many of the raw material manufactures have cut back their operating rates. So there is not the overabundance of inventory and they are now more balanced with what they make and what they can sell. Also many products such as chlor alkali and acetone are product/by product type production. When you make products like Caustic Soda you have to produce chlorine and therfor you have to get rid of it and vise versa...same with phenol...when you make phenol you get acetone.....if you cannot get rid of the caustic to the PVC market (Housing) then you cut back....and you cut back the available chlorine (a product still in demand), so price goes up on both. Phenol is the same...when you make phenol you get acetone....phenol has no demand, so you do not make it and in turn you do not make a product that has decent demand...acetone. And price goes up on both.

You also cannot inventory some of these products so you have to sell it quickly, so it takes a fairly long while (90 days or so) to balance production with the contracts for products that are still in some demand.

Per unit margins are lower also, so they have to raise price to maintain profitability...they have cut personnel and variable operating costs as much as they can to maintain profitability, so profitability has to come in the form of margin increases.

Many of the manufacturers (processors) of products like ethylene and benzene have taken down time and unplanned maintenance because of the lack of demand and this has helped balance markets.

Edible oils growers have cut back harvesting (Palm Oil, PKO, coconut, etc...). The interesting thing about edible oils is that generally the largest players are vertical in that they own interest in Oleo Chemical/food/ bio companies and they balance their profitability in all of their business units and it is not making sense to make a penney in on the oils and lose two pennys in the oleo business...so they push oil pricing higher by cutting back availability of oils and in turn that pushes up Oleo pricing (with no increased operating costs, only raw material costs).

Oil derivatives are almost exclusively driven by operating costs and raw material (Oil)...the market balances historically (forever) at a cost plus and not demand driven pricing...the reason they set pricing wherever they want and get spikes in profitability.....they have cut back operating costs over the past 18 months and are at the bottom so the incremental increases are now more going to closely follow oil pricing than the overall operating costs.....and I personally bet gas spikes in 2010 to levels higher than 2008 as these O&G companies will "recover" the lost profitability of 2009.

All the signs are very bad for inflation in consumer goods from a raw material standpoint and if cap and trade somehow passes then their is no room to absorb the costs...margins are cut to the bone because the manufacturers have cut personnel as much as they can...hopefully....hopefully demand cannot get much worse than it is now......IMHO...it is bad....very very bad environment for any increased cost structure such as taxes, raw material increases, or regulatory compliance costs...........it ain't good..........

 

That is my take on it also. The difference that I see and the "normal" cyclical downturns is the compressions in margins which has led to the cutting of personnel to increase gross to net ratios. This one has been so prolonged that there is no more room to cut operational costs...at least legally........margins are compressed with 90% of the companies I deal with and they have cut to the bone...there is no room left to cut................they are going to start passing on all costs and market share be damned.