Tough negotiations and even tougher decisions are ahead for plastics processors fighting to stay afloat in a stormy and volatile economy where, in lieu of life preservers, these companies are being tossed anvils in the form of resin price hikes.
Dow Chemical Co. officials estimate they will increase polyethylene resin prices about 30 percent between June and August.
But domestic processors are unable to take even a 10 percent hit in today's economy, said analyst Jeff Mengel, a partner with Plante & Moran PLLC in Southfield, Mich.
About half of all domestic plastics processors are spending 35 percent of their sales revenue on resin, Mengel said, with net profit margins of less than 5 percent.
It is a bad combination, he said.
``These processors cannot accept a 10 percent price increase — 3.5 percent of sales — and stay in business,'' he said in an e-mail response to questions. ``They need at least 3 percent to pay for debt and new equipment. One thing about the plastics industry is that you need to constantly improve to stay even with your competitors. Denying yourself to pay for resin is a slow death.''
One of the biggest keys for plastics manufacturers is to understand the true cost of resin production, said Greg Smith, global business director for engineering resins, PVC and polystyrene for Fort Worth, Texas-based Resin Technology Inc., in a telephone interview.
``Resin [prices] in this kind of market, where there's generally enough supply in most cases and demand for resin is not strong … should really move no more than cost increases would move,'' Smith said. ``If you understand the actual cost increase to make the materials, along with transportation and other cost increases that your supplier is seeing, then that's something you can potentially use in your negotiation.''
Another key is competition.
``If you cannot use any resin other than what your supplier is selling you, and your supplier knows it, they can say, `Here's your price — take it or leave it,' '' Smith said. ``Multiple approved sources of resin is what gets you the best price.''
A company's ability to absorb a price increase or pass it through to customers is determined on a case-by-case basis.
Mengel said processors will not accept the cost increases quietly.
``Many of the companies that I talk to cannot or will not accept this price increase without reopening many of the customer's purchase agreements,'' Mengel said.
``The increases this time are too high and coming too frequently for most plastics processors to accept as gospel. For those that do not have long-term agreements, there will be gnashing of teeth and hard bargaining.''