Nary a day went by during 2005 when at least one material supplier didn't issue a news release raising prices for one reason or another.
The impact on the rubber industry was obvious. Consider some of these anecdotes, which represent just a little of what occurred on the pricing front during the year:
* Goodyear said its North American Tire operation had to deal with an estimated $80 million in raw material costs, with its foreign tire units having to handle roughly another $60 million;
* Rising material costs for Bridgestone Americas Holding Inc. amounted to more than $500 million from 2003 through 2005, according to Chairman and CEO Mark Emkes;
* All major tire makers, facing material and other cost pressures, instituted multiple rounds of price increases of their own, with most reporting success in getting the higher prices to stick; and
* Other rubber product makers, from hose and belt makers to a variety of other goods, also tried to recoup some of the increased costs for materials through price hikes.
Industrial hose maker Titan Industries hadn't raised prices for several years, but bumped them up twice during 2005, once each in January and December, according to President Buddy Pepp.
Still, the hikes haven't helped Titan's margin much, he said, with sales increasing substantially and earnings remaining flat.
``We can't pass all of our costs on to the customer,'' Pepp said. ``But our bottom line has remained steady because of the infrastructure we've put in for the last several years.''
The energy factor
Some of the spike in material costs can be blamed on energy-related factors, including the price of oil and natural gas-issues exacerbated by the hurricanes that hit the Gulf Coast region in 2005.
Synthetic rubber costs rose as oil-derived feedstocks butadiene and styrene reached new highs during the year, said a Bridgestone/Firestone purchasing spokesman. Carbon black and rubber chemical feedstocks also presented cost pressures related to oil and energy factors.
In addition, many butadiene makers suffered major operational problems, said Bill Hyde, a consultant with Chemical Market Associates Inc. Temporary plant shutdowns to repair the problems were followed by the hurricanes, which led to further difficulties.
A number of material suppliers also have been adding temporary energy or transportation surcharges as one way to resolve energy-related cost increases, said Frank Schlegel, Chemtura Corp. business director for rubber chemicals.
Andrew Liveris, Dow Chemical Co. president and CEO, even testified in November before a House Appropriations joint subcommittee, calling volatile natural gas prices in the U.S. ``one of the worst energy crises in American history.''
He said recent U.S. natural gas price spikes have been caused by government policies that increased demand for domestic natural gas yet limited access to the country's natural gas supplies.
Good old supply and demand
Besides the impact of costs related to energy, the laws of supply and demand impacted both the availability and price of materials. Some of this was caused by increased consumption by China, while the material suppliers themselves played a role by not adding capacity over the years because they weren't making enough of a profit.
For example, butadiene demand has outpaced production since 2004, Hyde said. There was a strong pull to ship butadiene to Asia, especially China, as companies there were willing to pay more than anyone else. Higher spot pricing in Asia resulted in bigger profits than regular customers' contracts.
Butadiene-a key ingredient in synthetic rubber-demand began to exceed capacity, supplies dwindled and some customers were left scrounging for the by-then very costly raw material.
``But market leverage tends to cycle back and fourth,'' Hyde said. ``Butadiene was soft in 2001, '02, and early '03. There was plenty available. By the end of 2004 it really got tight. ...Producers had more leverage six months to a year ago. Now it's becoming a more balanced situation. Alternative sources are beginning to surface.''
Demand from China certainly has affected the rubber industry, as well as other industries, the BFS purchasing spokesman said. ``By their shear volume they can impact the supply/demand ratio, and short-term spikes in demand can create supply issues. Over time this works itself out as supply will always follow demand.''
The supplier community must commit to making these investments to reinvest for the future by improving productivity and reducing costs, he said.
``Historic increases in demand of 3 to 4 percent a year add up over time, thus removing excess capacity,'' he said. ``Suppliers need to develop their plans accordingly to execute and survive.''
Titan Industries' Pepp said some raw material suppliers candidly acknowledge margins had been slim or nonexistent, and when supply outpaced demand they finally were able to raise prices. One contributing factor was that some producers shut down lines and plants, so supply decreased as demand went up.
A number of material suppliers openly have said they needed to make up for years of unprofitability, and change their business models.
``We've addressed this very aggressively,'' said Schlegel. ``Chemtura needed to address the state of the business. We were behind the eight ball in 2004.''
Steve Tranguch, business director for Chemtura's Royalene EPDM unit, said prior to 2005 the company often had to absorb cost increases. ``We couldn't do that anymore,'' he said. ``There was just an erosion of profitability and margin. I think that's changing now.''
Tranguch also said that supply and demand now is not just a regional issue. For example, when North American automobile production declined in the third and fourth quarter, some people automatically thought that meant materials would be available.
``The problem is that now supply and demand is more on a global market,'' he said.
Outlook for 2006
The Chemtura officials said they still are evaluating costs going into 2006, which is why they're currently using surcharges to temporarily address the situation.
``We're ending 2005 at a high place,'' Schlegel said. ``We're still trying to figure out where it will be in 2006.''
Others at least see some optimism heading into the new year.
``We don't have a crystal ball, but I think things will moderate substantially next year in terms of pricing,'' Pepp said. ``We can't have what we had this year. It doesn't do anybody any good.''
Hyde said global energy prices are slowly declining. ``If that continues to happen, I see prices trending down, not rapidly, certainly not as fast as they went up,'' he said.
While hoping that most of the unplanned problems at chemical plants are in the past, he noted there are some planned maintenance shutdowns that could impact pricing next year. ``We're still not out of the woods,'' he said.