Row materials shortage. Real or artificial?

For the last couple of weeks I have received several unpleasant letters from our suppliers. Unpleasant because the main subject was the price adjustment due to the sharp and unprecedented increase in raw materials. Information is scarce. All we know is that prices for MDI (methyl di-p-phenylene isocyanate), butanediol and derivatives went up. Well, nobody likes price increases, especially in the middle of the year. A significant part of such increases will be absorbed by the middleman, and, if you bear in mind the all-time low margins of the last crisis-ripped years, the situation looks even worse. However, my question is why it happens now?

Key reasons for price increase in any industry.

Anyone who deals with chemicals of any kind understands that it is very much about raw materials, as far as the pricing is concerned. Automotive coatings industry is no exception. With a great part of raw materials in paint and auxiliaries are petrochemicals, and those are linked directly to the crude oil prices, while some others are also dependent more on the costs of energy supplies. We all know that. Another key parameter is demand. Probably most of you know one of the basic laws of “supply and demand”. In plain English, a low supply and high demand increases price, and in contrast, the greater the supply and the lower the demand, the lower the price tends to fall. So, the current price increase by the European producers (I don’t have the clear picture of the other markets at the moment) must be due to the one of the above mentioned reasons or the combination of them. Let’s see if this is the case.

Oil and energy resources prices in 2017.

Even if you are not involved in oil related business, you probably know that crude oil prices are very low in comparison with 2013-2014, not to mention the record of 2008, when price per barrel reached 147.27$. In 2017 the price for barrel did not go beyond 54$, while currently it is well below 50$ mark.

Supply and demand

Unfortunately the market demand for the automotive coatings is far from sky rocketing. Even if some of the PIGS countries (Portugal, Italy, Greece and Spain) turned to slow but steady economy growth, namely Spain and Portugal, still they are far from booming. Greece and the Balkan area is going through shaky economic and political period. UK economy is far from its best due to the Brexit issue. While Germany is doing well, it is not at its best. To sum up, I do not see a solid reason for such demand, which might cause a sharp increase in pricing for the products and hence the raw materials.

What is the cause then?

As you see, we do not have an extraordinary oil prices or demand increase. The other two causes could be either force majeure situations, or under the table agreements of the main players to raise the prices. I heard about an accident in one BASF factory last October, but I doubt that this event could have such an impact. In addition, this factory in Ludwigshafen was less than a year old, and it wasn’t running at full capacity anyway. In principal, it couldn’t affect the market at such extant. Neither I heard of some major strikes, which would have affected the production sites in Europe.

I am not a fan of conspiracy theories nor I believe that under the table agreements are not possible. Supply manipulation in order to manage the pricing and profitability is not a new thing. In fact, OPEC (Organization of the Petroleum Exporting Countries) is “playing” with oil supply and, therefore, prices regularly and on legal (well that is to say a big question) bases. Although we have the European competition law, under which cartels and anti-competitive practices must be dealt with, I doubt that it is always very effective. Could it be the case that the main coating raw materials suppliers decided to cover the loses of the preceding years – loses due to the global economic crisis now? I can not say with certainty. The only thing I can do is wonder.

What is your opinion?

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