The Trouble With Prices

When representatives from nine chemical-related enterprises gathered in Philadelphia for the third year in a row to speak to industry analysts, they weren't chomping at the bit, eagerly anticipating business growth and profits as their counterparts were just a year ago.

Instead, many of the speakers at the 3rd Annual Chemical Industry Conference, held late last month under the auspices of the Chemical Heritage Foundation, talked about the difficulties they are experiencing maintaining profit margins as they try to pass on energy and raw material price increases to their customers. The firms they represented were Nalco, RPM International, Airgas, Lubrizol, Rohm and Haas, Dow Chemical, H.B. Fuller, Cytec Industries, and Compass Minerals International.

Prospects for the industry were brighter at the time of last year's conference. Many speakers hoped then to make hay while the sun was shining, but as it turned out, rain clouds moved in as the year progressed.

Although booming demand for energy and raw materials in China and the rest of Asia was already affecting raw material prices last June, Hurricanes Katrina and Rita hadn't yet slammed the U.S. Gulf Coast. The storms hit in August and September, shutting down significant energy resources, compromising petrochemical production, and leading to further increases in oil, natural gas, and most raw material prices.

William H. Joyce, chairman and chief executive officer of Nalco, told meeting attendees that costs are up for Nalco, but that the company has been able to pass most of its raw material increases through to customers. It takes about three months to push the increases through, he said, and that one-quarter lag does hurt the bottom line.

In 2005, Nalco's raw material costs rose by $166 million. But the firm was able to pass along only $150 million of those increases to customers over the calendar year. "No one raw material price increase cripples us," Joyce added. "When all prices rise, we work hard to maintain profit margins."

At Lubrizol, Charles P. Cooley, senior vice president and chief financial officer, said that since the $1.8 billion acquisition of Noveon in 2004, the firm has successfully gotten operating expenses under control. Getting a handle on higher raw material prices, however, is another matter. The firm has pushed through 11 price hikes since 2004 just in its lubricant additives business in an attempt to recover raw material price increases.

But Lubrizol's specialty chemicals businesses, including personal care ingredients, thermoplastic urethanes, and chlorinated polyvinyl chlorides, are generating significant profits, Cooley said. Operating revenues for the segment increased 15% in the first quarter to $45 million compared with the same quarter a year ago. And the firm has made progress paying down the debt it took on to buy Noveon. With $500 million obtained from the sale of noncore businesses, the firm could take on new specialty chemical acquisitions in the $100 million to $500 million range, he said.

Energy costs have been a problem at Rohm and Haas, admitted Jacques Croisetiere, vice president and chief financial officer. But the company has effectively coped with energy and raw material price volatility over the past 18 months. He expects these prices to remain at historic levels for some time to come, and said the firm will aggressively manage prices for its own products to maintain adequate profit margins.

As Rohm and Haas has continued to generate cash from product lines including coatings resins, adhesives, sealants, and electronic materials, Croisetiere said it will keep paying dividends to shareholders, paying down debt, and repurchasing shares. The firm is also on the lookout for acquisitions to enhance its current businesses, he said.

Romeo Kreinberg, executive vice president of Dow's performance plastics and chemicals operations, said the firm's basic chemicals business would pursue a strategy of building large-scale plants in the Mideast and Asia with joint-venture partners. These partners bring cash to invest in new projects while also offering access to low-cost feedstocks. An example would be Dow's Equate ethylene glycol and polyethylene joint venture with Petrochemical Industries Co. of Kuwait.

These types of ventures, Kreinberg emphasized, are not intended to get Dow out of the basic chemicals business. Rather, they are meant to place Dow in better market or geographic positions.

Some companies at the Chemical Heritage Foundation conference saw the current round of raw material price increases as more of an opportunity than a challenge. For instance, John A. Feenan, senior vice president and chief financial officer of adhesives and sealants maker H.B. Fuller, admitted that by passing along price increases to its customers, the company had also succeeded in expanding gross margins over the past few months.

Last year, the firm made the tough decision in what Feenan described as a "highly inflationary environment" to push through a number of price increases, even if that meant giving up some business. "We decided that volume alone is not good. That is a tough thing for a 118-year-old firm to do," he said.

RPM's vice president of finance, Glenn R. Hasman, acknowledged that his firm had experienced "the sharpest increases in the cost of raw materials in recent memory." However, Hasman noted that the company, a producer of roofing, flooring systems, and coatings, sees a silver lining on the horizon. "Our pricing tends to hold even when raw material prices drop. And that is a beautiful thing," he said.