No conspiracy on raw materials pricing – the business model has changed

Chemical companies

FTThe Financial Times kindly prints my letter this morning on pricing policies for polyethylene.

Sir, Conspiracy theories are always good fun, and Robert Bateman’s views on the polyethylene market are no exception (Letters, December 29). But there is a much more prosaic explanation for the pricing structures he describes.

The key issue is that until recently, lowest unit cost was the key driver for industry profitability. Soaring demand from the baby boomers rewarded business models based on the theme of “If you build it, they will come”, as highlighted in Field of Dreams, the blockbuster baseball movie of the late 1980s. In turn, this led companies to build ever-larger plants, and to develop a shrewd appreciation of the difference between full and variable costs. Local customers paid full price, to reward the investment made. Foreign customers were then supplied with anything left over on the basis of marginal cost economics. Not for nothing were these markets often known as “Rest of World”. It was this dynamic, rather than any conspiracy, which led prices in far-off emerging markets such as Asia to be much lower than in the home markets of the major producers.

Today, however, this business model is long past its sell-by date, as concepts of sustainability and the circular economy come to the fore. Asian countries are also rapidly becoming self-sufficient and no longer depend on low-cost imports from the west. Yet old habits die hard. The excitement over shale gas economics has blinded many North American producers to the outlook for future demand growth and encouraged them to sanction major capacity expansions. Mr Bateman and his fellow manufacturers can therefore look forward to receiving increasingly attractive prices as 2017 progresses, without any need to lobby for new antitrust legislation.

Paul Hodges, Chairman, International eChem

 

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