London-Polyols producer Stepan Co. says it will have to 'dramatically' increase prices of its aromatic polyester polyols (APPs)-by 30 percent-in Q4 2006.
US-based Stepan is being forced to take this step by price rises in the two main raw materials that go into making its polyols, DEG (diethylene glycol) and OX (orthoxylene), said Roger Stubbs, European manager for Stepan's polymers business.
The graph shows the rise in DEG (dark blue) and OX (pink) prices to August 2006, with the average of these in pale blue.
These prices affect all APP manufacturers, so this is not a 'Stepan' problem, but one that is affecting the whole industry, Stubbs pointed out, in an 18 Aug statement to Urethanes Technology.
"Basically the DEG story is that earlier this year the market was convinced that DEG would go 'long' when two new plants came on stream-one in Saudi Arabia and one in Iran-leading to falling prices," Stubbs continued.
But start up of the Saudi plant was delayed, restricting output, and the Iranian plant has yet to commence production, with September now its aim. Meanwhile manufacturers in Europe suffered reduced output as a result of the hot weather, and unscheduled as well as scheduled maintenance outages at four sites spanning August to October.
Demand, however, has risen with the buoyant construction industry and also strong demand from UPR (unsaturated polyester resin), Stubbs pointed out. As a result, he continued, these high DEG prices are predicted to continue until the end of the year.
Xylene prices have followed the price of oil, but been exaggerated by strong global demand, boosted by factors such as the US eliminating MTBE from gasoline, leading to the need for alternative octane boosters. Xylene is one option for such an alternative, so that demand, particularly during the 'driving season,' has increased rapidly, the Stepan executive commented.
Such high demand for mixed xylenes pushes up prices for both para- and ortho-xylene. Orthoxylene is used to make pure phthalic anhydride, which Stepan reacts with DEG to make its APPs.
Stubbs said the average price of DEG and OX, adjusted to reflect the proportion of each in the polyol, is now, in August 2006, 41 percent higher than in August 2005. The forecast for September is for prices to move even higher, Stubbs added.
Raw materials form "a significant part of the polyol cost … it is clear that we need to move prices a minimum 30 percent higher than they were a year ago, leading to selling prices of Euros 1.30 - 1.50/kg, depending on the grade, in October 2006," Stubbs said.
Stepan is "acutely aware that an increase of this magnitude will have a significant impact on our customers unless they can pass on these higher costs and so we have been attempting to ensure that the message has been communicated as early as possible to assist the necessary action.
Both the speed and magnitude of current changes in raw material prices means that, with the low margins experienced by polyol producers, there is no ability to absorb the increases. Stubbs said there is a clear need for more flexibility, that is shorter contract periods, to reflect the volatility of the raw materials prices.
He cited Stepan's increase for Q3 as "a perfect example. Prices were negotiated in May with a 10 percent increase but this has been totally absorbed and overtaken by the continuing raw material increases and will lead to particular hardship in August and September." But Stepan recognizes that its customers have to offer lead times of 6 months or more, and "clearly don't want to work with one month price validity. Somewhere, someone has to give......." said Stubbs.
In these challenging times for the polyester polyol industry, Stepan is keen not to damage the PIR industry long term, Stubbs commented, but pointed out that " unless we can run a profitable business there is no point in any further investment, which will also ultimately harm the progress of the PU insulation market."