Price Increases in a Crashing Economy?? Why??

Almost weekly I have been getting e mails and faxes from my vendors letting me know that there will be some significant prince increases in the near future. These increases are upwards of 8%, and encompass almost all the products I sell. I found this to be extremely frustrating because now I have to pass some of those increases onto MY customers, who I am sure are also feeling the economic strain.

I am aware that the first question they ask will be the same question I asked. “Why with the economy being so volatile, when people are buying less and less should prices still go up?” My next question was “How can I pass on these increases, when I worry as it is that I will lose customers due to the economy?”

I felt that I needed to do some research before I could answer this question appropriately, but what I found was very interesting and made sense. I asked one of my vendors to send me information and below is what I got.  It wasn’t pretty, but I guess neither is anything going on in the world right now.

Changes in Material Marketplace moving into 2009

Raw Material has seen numerous increases in 2008 due to a variety of factors.  The factors mainly affecting the current increase are the unprecedented raw material cost pressures and the supply tightening into the PS industry.

The paper industry has experienced a significant reduction of capacity, driving up prices.  Key components of films and adhesives have become more scarce due to supplier consolidation, supply disruptions and strong demand in global markets. 

• New Page Kimberly’s WI mill shut down removed 500,000 tons of capacity and reduced imports to NA markets.
• Wausau shut down a large paper machine in Otis, ME, mill produced 10% of US SCK supply.
• Wausau and Thilmany have significantly reduced the production of 2.5 mil SCK liners to sell more profitable products. Liner production is one of the least lucrative materials a paper mill can produce and allocating machine time to cardboard, kraft, and other specialty papers have a better margin.
• For uncoated freesheet there has been a closure of 1.7 million tons of capacity (12% of North American supply) over the past year.
• o Domtar closed Uncoated Paper Mill in Dryden, ON
• o IP converted 350,000 tons of capacity to linerboard from uncoated freesheet in Q2-07
• o Domtar acquired Weyerhauser’s uncoated paper business to become #1 uncoated freesheet supplier (32% market share).
• NewPage also acquired North American assets of Stora Enso to become #1 coated freesheet supplier (41% market share).
• Adhesive suppliers are consolidating. Consolidation and acquisitions have reduced the number of suppliers and the increase versus demand is moving the adhesive and chemical markets into an extremely tight, unpredictable motion and allowing the remaining suppliers to leverage pricing.
• o Ashland acquired Air Products and Hercules
• o Dow Chemical acquired Rohm & Haas
• o BASF acquiring CIBA
• PET resin producers continue to raise prices in response to the need to recover raw material inflation, recent hurricanes causing serious supply disruptions and increased demand resulting in tight capacity. Allocated supplies were exasperated by the hurricanes allowing current mills to require pre-set and very strict allocation numbers for 2009.
• Decline in imports for silicone have been forced due to the weak dollar, strong Canadian dollar, global demand and newly set tariffs.

 

Main Points for Paper:

• § Over 70 paper mills have closed in North America in the last 7 years.
• § Consolidations have resulted in top companies having much larger share and significant pricing leverage.
• § Most Mills are now owned or managed by financial people; short term profitability is a key benchmark.
• § Coated freesheet imports are at lowest level in last 12 months.
• § Coated freesheet exports are at highest level in last 12 months.

 

Main Points for Adhesive:

• § Refineries are choosing to refine more profitable products than crude oil.
• § Hurricane Ike exacerbated an already difficult situation as refineries in the Gulf shut down prior to the hurricane and are still not at 100% capacity if running at all.

Allocations of some of the components are as low at some mills as 0% and as high as 95% at others

 

I know that all this information applies to the print realm, but I believe the basic theme applies to most manufacturing type industries.  I hope you found this information to be helpful.

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