Linda Naylor, ICIS's polymers guru, has just written a market analysis that took me straight back to 1980. She described how current feedstock prices meant that 'many of Europe's cracker operators were losing money', and noted that Dow was being 'very firm' in trying to recoup these losses via higher polymer prices. However, her research suggested that other sellers were showing more 'flexibility' in their negotiations. And she quoted one buyer who forecast that 'Dow will lose an awful lot of volume'.
In 1980, I was a young sales rep, working for one of the then world majors (ICI). And I went through the same experience that Dow is now suffering. At the start of Q2, we were told to 'hold the line' on pricing, in order to recapture margin caused by rising crude prices. (Does this begin to sound familiar?). Oil prices had moved above $30/bbl, or to around $95/bbl in today's money. Competitors, of course, undercut us. By the end of the quarter, we had lost around 20% of our volume - which we had to reclaim in Q3 by lowering prices still further.
I worried back in February that 'a new generation is about to learn what some of us had the misfortune to go through in 1980-83'. And Linda's new report confirms my worst fears. The issue is very simple. Strong demand means that the industry moves to 'stand-alone pricing', where each plant in the value chain makes money. But when demand drops, the industry quickly loses its pricing power, as plants are very slow to shut down. Instead, companies operate on the basis of 'roll-through' pricing, and include upstream margins in their break-even sales price calculations.
Experience has taught me that there is no point in complaining about this. It is a fact of life in a highly integrated industry such as ours. But it does mean that industry profits are likely to take a significant hit in the second half of the year, if demand doesn't pick up soon.