According to Business 101 logic, higher feedstock costs and strong demand should yield appropriately higher prices. In fact, this was probably the point made in every price-increase letter that processors received last year.
The truth is, though, that such a balanced scenario is rare and there are numerous opportunities for processors to cut costs even when both factors occur.
Business 101 logic is simplistic. Feedstock and polymer costs sometimes run in tandem, but at other times are decoupled altogether.
In 1996, even PE producers admitted that pre-buying by processors in advance of price hikes
fueled increases in demand that producers then cited to raise prices further. Processors actually contributed to the ballooning price picture.
In contrast, PVC processors did not prebuy. Their volumes were strong and steady all year, and they successfully squelched all but one price increase last year despite healthy demand growth of 11 percent in 1996. And processors were well aware that in the next three years, capacity additions will increase domestic supply by 7 percent in 1997, 5 percent in 1998, and 6 percent in 1999.
So, statistics about feedstock prices and processor demand, although true, are not the whole truth. They don't take into account important factors like suppliers' vulnerability in times of expansions, processor size and resin grade price differentials.
They also neglect market information that processors may see more clearly than suppliers, like end market trends and their own inventories.
What are some opportunities in rising and falling markets? Consider some of these options:
Some companies will discount material from underutilized or expanding plant sites, even if they are farther from you.
Some expanding companies require an infusion of cash or have a strong desire to grow market share. Look at the annual reports and decide. If a company needs to generate cash, processors can sometimes get a discount for paying promptly; if it wants to grow market share or commit pounds, consider signing a long-term contract at favorable rates.
Sole-sourcing has to be a very careful decision in commodity plastics, because of both supply and information vulnerability. But some customers can derive generous pricing terms from grateful sole suppliers.
If you tie contracts to an independent index, be grade-specific. Expansions, seasonal and annual demand, consumer size, number of suppliers, degree of vertical integration, intermaterial competition, and size of export market all vary from grade to grade.
Off-grade material is useful in two ways. Off-grade price movement can serve as a leading indicator of prime pricing. Second, calling prime material ``off-grade'' or ``pencilled prime'' is a face-saving method for suppliers to discount prime product.
Test material discounts won't last forever, but desirable customers in certain markets seem able to sustain a lengthy test period, especially if suppliers sense an opportunity for growth.
Size is a relative thing. Volume considered small in a film or pipe market is often enormous to other processors. For example, 86 percent of 1,900 polystyrene-consuming sites in the United States buy less than 1 million pounds per year.
Volume-oriented price negotiations take on a different slant when you see this, don't they? A purchasing agent who paid more because he thought he ``only'' bought 1.5 million pounds a year of high-impact PS is a bigger catch than he thought.
Agrons is responsible for business development for Phillip Townsend Associates Inc. in Houston. Her presentation, ``Truth and Fiction in Pricing'' is scheduled for Tuesday in Session VII, to be held 1:30-5 p.m. in Room S404ABC.