Raw facts: Material costs drive up prices

Posted on Written by Reagan Haynes

28_rawfacts_01Builders and accessory makers find themselves squeezed while trying to keep prices low for consumers

Builders are struggling to keep boat prices stable in the face of a bruised economy and past increases that some believe have outpaced inflation. But fluctuating raw material and commodity prices are making that challenge a tough one.

“One place we don’t want to push price increases is onto the consumer, if possible,” Correct Craft CEO Bill Yeargin says. “But I think we’re all at the point where we’ve absorbed what we can and we have to pass it on. Unfortunately, with a lot of these commodities, they’re only going in one direction.”

Costs of inputs have been rising, and that makes it challenging to keep boat prices down, says Thom Dammrich, president of the National Marine Manufacturers Association.

Since the beginning of the Great Recession in 2008, boatbuilders have tried to provide the same amenities — and in some cases improve them — without raising the price of the end product. As orders dried up after the financial collapse in October 2008, companies made large internal cutbacks immediately. Factories were closed, workers laid off and companies tried to do business more efficiently. Most also moved to “just-in-time” manufacturing practices to reduce the amount of stored inventory. Many powered through, convinced that they would be more profitable when the economy bounced back.

28_rawfacts_02“Manufacturers have adopted lean manufacturing processes that offset increases in the cost of raw materials through greater efficiencies and less waste,” Dammrich says. “All are working to keep costs low, and many have made great strides in re-engineering their manufacturing processes to reduce costs in the face of increasing costs of inputs.”

Double-digit percentage increases in some raw materials in 2011 have made pricing challenges even more daunting. “Our strategy is we absolutely want to keep our cost and price increases minimal,” Yeargin says. “Margins have already been spread thin … and there are very few builders who are not in the same spot. There are very few people who can absorb 3 to 5 percent price increases every year.”

“To a point, builders can offset increases, but at some point, costs will rise unless you engineer or design cost out,” Dammrich says.

The recession not only makes increases more challenging, but it also is likely the cause of dramatic inflation in some commodities, says Ed Metka, vice president of supply chain operations at Taylor Made Group, the parent company of two major industry suppliers, Taylor Made Systems and Ameritex Fabric Systems. “As the economy has begun to recover, we see more and more suppliers trying to recoup some of their losses [sustained] over the last two or three years,” Metka says. “I think a lot of it is supply-and-demand related. A lot of companies went out of business or consolidated, so you’re not seeing as much of the capacity in a lot of these materials as you would have prior to 2008.”

Many vendors postponed price increases in 2009, fearing that they would put some builders out of business, Metka says. In mid-to-late 2010, suppliers decided that they could no longer absorb rising prices of their own materials and passed along increases all at once. “In a lot of cases we hadn’t given increases in materials for two to three years — in some cases, not all cases, not our core products,” Metka says. “But we continued to get a lot of increases from our suppliers.”

Trickling down

Last summer, Boston Whaler product development manager Ron Berman told Soundings Trade Only that oil prices had contributed to near-record inflation on some raw materials. Because so many suppliers had kept prices steady, even as their own costs rose, they were catching up all at once. Although spikes have begun to stabilize for some products, Metka says he sees no end in sight for others, such as solution-dyed acrylics and polyesters.

“It’s very challenging to maintain a stable business when you’re hit with so many different fluctuations in commodities and so many different price pressures,” says Michael Oathout, vice president of sales and marketing for Gloversville, N.Y.-based Taylor Made and Ameritex.

29_rawfacts_03“Last year was one of the worst years I’ve seen in the industry,” says Metka, who has been in the marine field for 12 years. Although Metka says 2005 and 2006 were also record-setting years for raw material inflation, the industry was healthier and price increases weren’t as difficult to manage.

Consolidation in the aluminum and float glass industries has caused supply shortages, which drive up prices, Metka says. Taylor Made regularly communicates with its customer base, largely OEMs, so they understand why prices are rising, he says. In a presentation last summer, Metka pointed out that aluminum tubing and glass had risen between 10 and 15 percent in the year prior. Aluminum rose 15 percent, and acrylic and polyester climbed between 4 and 8 percent. Metka attributes those increases to rising prices for petroleum, diesel fuel, fabrics, aluminum and shipping, as well as supply shortages in float glass.

“Our customers today, they want to see and understand the details of pricing,” Metka says. “It’s an open-book environment we live in here, and many of our suppliers are doing the same for us. I think the days of going in and saying, ‘We’re getting an extra 5 percent for our product’ are over. People want to see the details and, in certain situations, we’ll share those with key customers.”

Oil and production

Petroleum-based materials such as PVC resins, acrylics and vinyls are more prone to fluctuation when oil prices spike, as they did through much of 2011. The price of oil as the year ended was about 19 percent higher than the year’s average, according to the U.S. Department of Energy.

“It’s very energy-intensive for our suppliers to manufacture float glass, and then for us to mold the glass,” Oathout says. “We get a fuel surcharge from our glass suppliers and that can have a big burden on our product as well.”

Composites One, a distributor based in Illinois, sells raw materials that go into making fiberglass-reinforced plastics, says marketing vice president Greg Shymske. Although Shymske points out that he’s not an expert on price fluctuations, the fact that his company primarily sells resins, gelcoats, catalysts that harden resin, core materials and glass reinforcement gives him some insight. “The glass component was very stable, so what you’re talking about is a lot of the increase on the chemical side — or the resin, gelcoat and catalyst side — because they are all reliant on oil,” he says.

There were monthly increases of 3 to 6 percent in those chemicals between November 2010 and August 2011, Shymske says, resulting in “dramatic increases.” Things began to stabilize as the price of oil dropped below $80 a barrel in September, but they were on the rise again as 2011 came to a close.

Natural gas prices have come down in the last couple of years, helping to offset that potential surcharge, Metka says. But diesel rose significantly during the period, adding other surcharges.

Capacity and freight

Reduced plant capacities and dramatically higher freight costs that don’t come from fuel surcharges also have compounded the rising prices of raw materials.

“Another factor that really contributed to the increases on the chemical side of the fiberglass-reinforced plastic equation was that during the downturn, between 2008 and 2009, a lot of chemical plants had to reduce capacity in order to right-size for demand in the marketplace,” Shymske says. “When those chemical companies shut down plants or shut down lines, they don’t bring those back easily and quickly. They wait to make sure there’s plenty of demand to offset the costly process of bringing things online.”

In 2010 and 2011, when demand and production began to pick up a bit, there were often shortages of the specific ingredients that go into making materials such as fiberglass-reinforced plastics, Shymske says. Other materials, such as maleic anhydrides, used to make polyester resins, were in short supply as chemical companies slowly increased capacity, he says, and in many cases that process occurred slower than demand increased.

“So there was a lot of scrambling going on, from the United States to Europe and Europe to the United States, and that also caused some higher prices,” Shymske says.

29_rawfacts_04A lot of the so-called ISO containers used to ship these chemicals had been parked, he says. Transportation costs had dropped so low in 2009 that many shipping companies sought to recover their costs and edge their prices back up after they crashed, Shymske says. “As demand started to creep up, they didn’t automatically bring them all back. They did it slowly,” he says. “Think of an airline. They would rather park a plane than fly half-empty. So we went through that process in 2010 and 2011.”

Companies also were reluctant to rush back to capacity, fearing the recovery might founder, Shymske says. “Skeptics might say that prices were being manipulated,” he says. “Pragmatists might say they suffered greatly in 2009 because they had all this capacity and no demand. Then prices were dropping like stones back in that time where people lost a lot of money, so as things come back up they want to try and recoup part of that. It’s all according to perspective.”

When some commodities peaked in July, Reichhold announced an increase of 5 cents a pound on unsaturated polyester resins, 7 cents a pound on vinylester and modified vinylester resins, and as much as 75 cents a pound for flame-retardant resins.

Also in July, Cook Composites and Polymers announced a 7-cents-a-pound increase on unsaturated polyester resins and gelcoats. The company cited rising prices for resin and gelcoat feedstocks as demand increased. “DCPD, styrene, glycols, maleic anhydride, epoxy and Ti02 are among the major raw materials that are at or near an all-time high,” the company said in a statement issued in late July.

In July, AOC, a Collierville,Tenn.-based supplier of resins, gelcoats and related materials, increased prices by 7 cents a pound on all products with shipments. “This price announcement is driven by continuing price increases for several key ingredients,” the company announced at the time.

Both companies declined to comment further.

Chemical companies were bringing more online as 2011 closed, but were still cautious amid economic and political uncertainty, Shymske says. Although Composites One is seeing its own business improve, it’s nowhere near what it was in 2007, he adds. “But the marine industry has been somewhat of a surprise; it’s recovered quite well,” says Shymske, whose company also serves the construction industry. “By industry, there’s a dramatic difference.”

Copper prices, which had spiked after the tsunami in Japan, began to drop last fall and continued to decline through January, according to the London Metal Exchange and metal analysts.

OEMs, vendors and suppliers are hopeful that things are improving, particularly because rising prices could seriously harm already flailing manufacturers. “We recognize the entire industry is in trouble,” Oathout says. “Manufacturers are trying to take costs out, we’re trying to take costs out, and the difficult part of that is maintaining quality and standards we’ve come to know. We’re not going to use cheap products.”

At some point you have to recoup the rising costs, Metka says.

“It’s impossible to squeeze the margins anymore,” Yeargin says. “Companies have squeezed and squeezed the margins, and at some point you’ve just got to stay in business.”

This article originally appeared in the February 2012 issue.

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