24 June 2008 21:46 [Source: ICIS news]
By Al Greenwood
HOUSTON (ICIS news)--A new round of across-the-board price increases and fuel surcharges will likely follow Tuesday's announcement by Dow Chemical, as the industry struggles with nominal margins, a consultant said on Tuesday.
"You have to have a margin in this business to continue both to produce and to reinvest," said Robert Bauman, vice president of polymers for Nexant. "The profitability of the business has been lousy."
A such, other producers will follow Dow's lead, he said.
Within hours of Dow's announcement, International Specialty Products (ISP), said it would increase prices by up to 20% for polymers, vinyl monomers and other products, effective on 1 July.
ISP's increase comes on top of the 5-10% hikes it announced on 28 May - soon after Dow announced its first across-the-board increase.
The same trend that led to Dow's first increase has shown no signs of slowing down, Bauman said. Costs for natural gas, fuel and oil have all increased since 28 May, and they show no signs of weakening.
"No one that I know of is expecting oil prices to decline below $100 (€64)," Bauman said.
US producers are willing to lose domestic customers to regain margins, since they expect to offset the loss with foreign sales, he said.
The weak US dollar and the naphtha prices have all boosted US exports, he said.
In addition, time is running out for US producers to successfully increase prices, Bauman said. Within two years, new Middle Eastern capacity will start coming online.
That new capacity will rely on cheap natural gas feedstock.
"This, to me, is a real narrow window of opportunity that every company should be supporting," he said.
"Everything in the business has been driven by the fact that the monomers are increasing rapidly," Bauman said. "You cannot sell the derivative and expect to eat that price increase."
Kevin McCarthy, an analyst with Bank of America, said Dow's latest increases are necessary to fight stagflationary pressure.
"Today's move provides further evidence of a new sense of urgency at Dow, and among its competitors, to pass along escalating and volatile costs in an environment of decelerating demand," McCarthy wrote in a research note.
Regardless, Deutsche Bank dropped its second-quarter earnings estimate for Dow.
Deutsche Bank lowered its estimate for Dow's second-quarter earnings by 5 cents/share to 80 cents. Deutsche Bank lowered its full year estimate by 15 cents to $3.25/share.
Shares of Dow were trading at $36.58 on the New York Stock Exchange, down 2.6%.
($1 = €0.64)
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