Ed Martin asks who is really paying the price for increased raw material costs
The rising oil price over the past 12 months has been welcomed by many, but a higher crude price means higher costs for producers of downstream products, and the tank coatings market is no exception.
In recent months Norway-based Jotun, US-based PPG and Denmark-based Hempel have posted notices of price increases, all citing continuing raw material costs as a justification. Epoxy resins, titanium and zinc are all being blamed for rising costs, as all have experienced particularly noteworthy price increases.
Jotun’s products will increase in price by up to 20%, depending on composition, and the company noted that rises in the prices of titanium, polyester and epoxies in 2017 - combined with further increases in epoxies and pigments in the first quarter of 2018 – have all contributed to its decision to increase prices.
PPG cites inflation in the prices of epoxy resins, zinc powders, titanium dioxide and solvents, as well as “a steep increase in freight and logistics costs, primarily due to increasing oil prices” as the reasoning for its price rises. The company said it had previously attempted to bear the increasing costs but, according to senior vice president Ram Vadlamannati: “Unfortunately, our supply chain-related inflation can no longer be offset solely by ongoing productivity improvements and cost-saving initiatives.”
Hempel’s price increases have been driven by similar factors; it noted that according to ICIS Pricing and Technon Orbichem, the price of epoxy has risen by 20% in North America and up to 58% in the Middle East and South and East Asia, while the cost of zinc has risen by nearly 15% globally, reaching a 10-year high at the start of 2018, according to the London Metal Exchange.
Hempel executive vice president Michael Hansen said: “There are regional differences, but overall global prices are clearly rising. “We have done our best over the past months to absorb these price increases and limit the effect on our customers. We are working closely with our suppliers, our R&D and our manufacturing set up, but increasing prices is a reality and the trend is clearly continuing.”
With coatings potentially representing as much as 10%-15% of the cost of a newbuild VLCC – depending on who you speak to – and these price increases likely to be permanent, one might expect shipbuilders to try and pass their costs on to the end customers, but this does not appear to be happening.
VesselsValue.com data indicates that newbuild prices for VLCCs are low and forecast to remain so. Any small price increases are consistent across size classes and are not in 10%-15% range. This begs the question, who then is bearing the brunt of these cost increases?
Maritime Strategies International managing director Adam Kent believes that when additional building costs are incurred, yards will tend to take the hit in the interests of keeping orders coming in:
“Historically, even with capex-intensive regulations, e.g. double hulls, common structural rules, ballast water treatment systems, it is difficult to map changes in newbuilding prices to the precise time the regulation has been implemented.
“Shipyards, more often than not, appear to absorb these additional headline costs, to the detriment to their bottom line, in an effort to remain competitive and attract new orders.”
He added “Over time, this incremental cost of production will naturally erode as the yards and manufacturers develop their production lines and increase their efficiency.”