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Naturally the production cost of a product is a key determiner of the price it will be sold at, and this has never be more true than today. As Dr. Andrea Maessen, Chemicals Industry specialist at the strategy and marketing consultancy, Simon-Kucher & partners, said “Capacity utilization and innovation were historically considered the major determinants of costs, volumes and profit in the chemical industry. In more recent times the volatility of input costs and increased competitive intensity has underlined the importance and potential of pricing in top and bottom-line results.”

But the question becomes trickier when your feedstock or energy prices change. If you were selling a product at a steady rate (because of high production costs), what should you do if the production costs drop? Should you pass on the benefit to your customers immediately? Should you pass on the benefits at all?

This is a question highlighted by Joanne Smith, former Corporate Head of Marketing, Pricing and Customer loyalty at DuPont, she is now president of Price to Profits Consulting, who says on the topic that, “You do not want to instantly pass along price relief or pass it along any faster than is fair to you. The fact is that you may NOT need to (nor should you) drop prices just because oil and energy prices have fallen. You must do a deep evaluation of your market and competitive dynamics as well as your cost structure to decide on the best appropriate course of action.”

Arthur Weiss, managing director of industrial consultants Aware, agrees that passing on the benefits or disadvantages of feedstock price changes should be considered carefully. His company are experts at helping businesses gain competitive intelligence. He agrees that price changes must be questioned fully, asking, “Is the price drop of your raw material only temporary? Is it just for you or for your competitors too? If it’s just you, then you have a competitive edge. It will depend on your customer base as to whether you want to pass it on or not. If your base is stable and you have a long term relationship/ binding commitment then it may be best not to pass on the benefit. However, if you are looking for new business, then it may be best to use this advantage to stand out on price against your competitors.”

Clearly every pricing decision is different, and there are many factors to be considered, but at some point each trader will need to ask themselves, ‘Do I want to price for profit now, or price for a long-term business relationship?’

One of the most important and dangerous tasks in the work of a chemicals trader is deciding what is the right price for a product. Industrial chemical trading is a riddle. Unlike other world commodities, industrial chemicals are both a niche market AND a vast global industry. They are traded by few people, and yet are a vital component of the global economy. The public doesn’t want to buy them, and yet everyone needs them. The trade is global and yet location and logistics are essential.

As a rule, supply rates of products change slowly, as building and closing mines and production plants takes time and planning. Demand changes are also slow, caused by shifting trends for new materials following public demand. Yet despite this, prices can rise and fall rapidly in the space of weeks.

This complexity may be one reason why the issue of pricing has been overlooked by many in the industry. Indeed experts on chemical pricing at global consultants Wipro believe that, “Evaluating the pricing function has largely been ignored and undervalued in chemicals and plastics. Massive over-discounting, inefficiencies due to lack of standardization, and lack of awareness into profit leaks remain prevalent in the industry, preventing organizations from realizing the large margin gains possible with next generation pricing systems.”

These experts further state how badly many industry traders are valuing their products by stating, “Price is the largest lever available to improve organizational profitability. Small improvements in pricing can have significant impact to operating profit, but the pricing function is often under-managed or too widely dispersed to be effective. Organizations must find ways to elevate the pricing function, gain control over their discounting structures and better understand their customer segments.”

Finding the right price for your products is clearly an important, yet delicate and tactical business. Whilst it is important that prices are set to maximize profit, the general rule of business is that the customer must always be placed foremost. How can the competent chemicals trader balance these two tasks?

One expert who may have the answers is Joanne Smith, former Corporate Head of Marketing, Pricing and Customer loyalty at DuPont, she is now president of Price to Profits Consulting and author of The Pricing and Profit Playbook. When asked about the role of pricing in the chemicals industry, Joanne said, “At the core of good pricing is the fair treatment of the customer base and trust with the market. On one hand, passing along price decreases may appear to be the best move for long-term customer loyalty and/or growth with your customers. On the other hand, good pricing also means that you capture your fair share of the value you deliver relative to competitors.”

So it seems that there is a balance to be struck between passing value on to customers whilst being fair to yourself in taking due profits. But beyond the obvious supply and demand formula, your price depends on three main factors:  your costs, your competitors’ prices and your long-term business plan. With the help of chemicals pricing experts, we will look at each of these in turn over the next issues of this blog.

As discussed in previous chapters of this blog, there are a number of new problems facing the sealant, adhesive and resin industries. Regulations are getting stricter, and are changing more frequently as consumer awareness of health and the environment becomes more prominent. Globalization is a new factor affecting countless industries in an ever smaller world, whilst mergers and acquisitions are becoming more frequent, having an effect not only on those directly involved, but across whole markets.

So which of these challenges do industry heads believe will have the biggest impact on business in the coming years?

Patricia C. Souza thinks that regulatory changes may cause the most problems for the industry. As Market Segment Manager at Lanxess Corp. she is well placed to see the affect of these laws, stating, “Regulatory affairs compliance is one of the main challenges of biocide producers serving the adhesives and sealants industry. The effects of globalization directly impact the regulations that apply to our products. For example, if a Lanxess customer is manufacturing an adhesive in the U.S. but exporting its products overseas, additional regulations on the country of destination may apply. As a supplier, we need to ensure that our raw materials are Registration Authority compliant not only in North America (federal and state registrations), but in most cases also in others regions (e.g., Asia, Europe, etc.). It is crucial to work together with our customers to understand their process and channels to market to properly support them from both a logistical and regulatory point of view.”

Julie O. Vaughn, Vice President, Marketing and Business Development at Emerald Performance Materials, agrees, stating that, “The regulatory landscape is a significant challenge faced by the industry. We have seen that agencies such as the U.S. Environmental Protection Agency have taken a different stance with industry, placing more hurdles and restrictions on manufacturers. This could dampen creativity and the development of new materials and put regions with high regulatory hurdles at a disadvantage in this global market.”

JP Kuijpers, Business Unit Director of Adhesives at Eastman Chemical Co. is aware of these challenges, but believes that bigger problems are faced with feedstock supply. He notes the impact recent changes have had on his business, stating, “Raw material supply is a continual challenge for global manufacturers, and Eastman is no exception. The global use of lighter cracker feeds has led to more constrained availability of raw materials for tackifier resins, which in turn has led to a tightening of the hydrocarbons market.”

But he also believes that his company has the right resources and strategy to resolve these problems. He continues by explaining how the advantages are three pronged, stating, “Firstly, in many of our businesses, we are an integrated manufacturer, which gives the company an enviable cost position. Secondly, with the expectation that market prices for commodity products, raw materials, and energy costs will continue to be volatile, feedstock flexibility on what kind of raw material can be used provide mitigation to these changes. Finally, Eastman’s global manufacturing footprint enables efficient delivery of finished products where our customers need them, including in some cases delivering product molten instead of pelletized to reduce conversion costs for our customers.”

Keith Olesen, Field Marketing Manager at Arkema Coating Resins, also sees problems ahead for purchasing managers and supply chains, pointing out that, “Volatility in raw materials has been and likely will remain a key challenge for the foreseeable future. As a downstream consumer of petrochemicals, we must work closely with our customers to manage this volatility in a way that is practical and fair for both parties.”

He notes how his firm is limiting these challenges, by stating that, “For Arkema, acrylic resins are an important product line that we offer to the adhesives and sealants market. Here we have been investing in our upstream integration on acrylic monomers to enhance the cost control and reliability of supply for the products we offer to our customers. Our recent investment in Sunke, an acrylic acid manufacturing JV in partnership with Jurong Chemical in China, is a good example of this commitment.”

Dan Marvin, Director of Technical Services, MAPEI Americas, is also conscious of sourcing challenges, noting that, “As the U.S. economy picks up steam, the availability of certain materials will be spotty and prices high compared to historical levels.”

But he is also convinced that the greatest challenge remains in minimizing costs, particularly the cost of transportation. He writes that, “Increases in transportation costs are looming as the industry struggles to find qualified drivers. MAPEI has a dedicated transportation team that can find the best routes, rates and backhauls. Pulling from a supplier base that circles the world, logistics is a huge part of supply chain management.

Other pricing pressures come from suppliers of packaging, from pallets to buckets to bags. Again, our purchasing department is constantly working with our vendors to ensure a reliable supply. A variety of techniques is used, such as long-term contracts vs. spot market buying, consignment agreements, and constantly qualifying backup sources.”

There certainly are great challenges ahead for the industry, if for no other reason than the sheer diversity and quantity of products being produced. The figures for European production alone are immense, as FEICA, the Association of the European Adhesive & Sealant Industry notes, “More than 2,300,000 tonnes of adhesives and sealants are produced and used in Europe each year and this volume is on the increase. Adhesive manufacturers offer more than 250,000 different products for the most diverse applications – and these products are customized for virtually every purpose.”

Analysts from the consultancy firm, Research and Markets in their report entitled ‘Concise Analysis of the International Adhesives and Sealants Industry – Forecasts to 2018’ agree that the industry is both large and expanding. They write in one recent report that, “The global adhesive and sealants industry is expected to witness moderate growth and reach an estimated $58.14 billion by 2018.”

Evidently, whilst the industries do face many challenges, there is good cause to be positive. In fact there is growing cause to be positive, as the list of usages for these products is growing. As the recent Research and Markets report notes, “The adhesive and sealants market is primarily boosted by the emerging economies, technological advancement, globalization, and increased usage of adhesives and sealants to seal and protect materials in an environmentally friendly manner. Packaging, automotive, construction, and furniture industries are the major drivers of the adhesive and sealant industry. Sealants are mainly driven by the construction, electronics, and automotive industries.”

The report is even more upbeat about the future, noting that, “From the analysis presented, adhesives and sealants’ raw material suppliers as well as producers will recognize that valuable opportunities exist in the industry due to impressive trends in demand quantity and growth.”

The future is always full of challenges, and for sealants, adhesives and resins, they include tightening regulations, globalization, feedstock sourcing, M&A’s and rising costs, but surpassing these hurdles will only make the industry stronger. Ultimately, the future is bright; the future needs sealants, resins and adhesives.