Catalyst

Chemical makers continue to struggle with high and volatile feedstock costs as third-quarter earnings reports demonstrate. Forecasts that energy and feedstock costs would moderate in the second half have not materialized as crude oil, propane, and ethane continue to notch up to new record highs.
Conditions overall are solid but producers are still trying to recover soaring feedstock costs. “Margins [in the third quarter] did not expand to levels that we believe reflect the supply/demand balance,” says Lyondell Chemical chairman and CEO Dan Smith.
Ethylene increases of 5 cts-6 cts/lb in October have been announced, and a further increase of 9 cts/lb has been announced for November. Polyethylene increases totaling 15 cts/lb have been announced for October and November. Specialty chemical makers are also feeling the pain. Rohm and Haas announced price increases of 5%-15% across its product line last week, citing raw material pressures (p. 7).
Fourth-quarter price increases are more difficult to implement because of seasonal demand weakness and end-of-year inventory drawdowns. Margins dropped sharply for chemical producers, particularly those in the ethylene chain, in late 2006 and early 2007, due to a consumer-led inventory correction that caused prices, margins, and demand to fall sharply.
The failure of feedstock costs to moderate in the third quarter has led producers to become more urgent about the need for price increases this quarter. Conditions appear stronger this year as ethylene operating rates remain in the mid-90% range and exports are soaring. “I do not believe we will see much opportunity for any meaningful inventory builds in the fourth quarter, so I am also very bullish on 2008 for our industry on the assumption that the global economy stays reasonably healthy, oil prices and therefore naphtha prices stay relatively high, and the U.S. dollar will not strengthen significantly,” says Nova Chemicals president and CEO Jeff Lipton.