Challenges & Solutions In Raw Materials
The adhesives industry is facing tightening supply and growing demand. With capacity rationalization and under investment in the chemical industry over the past ten years, the supply of raw materials has not kept pace with demand growth. All industry indicators point to tighter supply and strong demand for 2005 and beyond.

The fortunes of the chemical industry began to change in late 2003 and grew rapidly in 2004. With strong demand domestically and globally, and increasing operating rates at a limited number of manufacturing facilities, the power to control prices switches from the buyer to the producer.

Phil Cook, Sr. VP for Performance Chemicals and Thermosets at Dow Chemical: Across the board operating rates are increasing and supply/demand is getting tighter. This has a direct effect on pricing and product availability. Product prices are affected when any part of the value chain becomes constricted. In fact, when intermediates go short, downstream derivatives compete on margin delivered for the limited supply.

The rapid price escalation in benzene and propylene, two key feedstocks for many adhesive raw materials, has made producers of these feedstocks reluctant to enter into long-term supply arrangements, preferring to offer only month-to-month contracts. This lack of commitment increases the pressure on the procurement side.

Higher natural gas prices continue to be a problem for chemical manufacturers that use natural gas both as a raw material as well as an energy source. Due to restrictions on accessing domestic natural gas reserves chemical producers in North America have lost any advantage as other parts of the globe have natural gas costs up to 75% less.

The continued weakness of the dollar also has set the stage for increases, because oil is based on the dollar and a weaker dollar means less revenue per barrel for oil producers. This fact combined with still growing economies of China and India continues to push the price of a barrel of crude even higher.

In an attempt to hold off on the magnitude of raw material increases, Purchasing has taken three steps to strengthen its relationship with suppliers. First, in order to provide better flexibility and forecasting stability, ITW TACC has begun to use price indexing on applicable raw materials (solvents and latex). Second, in a tight supply/demand market it is important to negotiate pricing and just as critical to negotiate capacity to guarantee product availability. As we mentioned in a previous newsletter, alternate value of feed stocks (oil, natural gas, toluene) is still a concern and should not be taken lightly. Third, when possible we will keep strategic reserves of raw material and finished goods both at our plant and at supplier sites.