ADHESIVE
MATERIALS

Raw Materials Update
Most people in business today are concerned that high oil prices and interest rates will significantly eat into US economic expansion. Others believe higher prices for basic chemicals and materials will lead to demand destruction. While feedstock costs remain volatile—with crude oil at over $60 per barrel and natural gas nearing $7 per MMBTU—the strength in these prices indeed reflects strong demand. This is especially important at this juncture since any word of a storm or hurricane causes a spike in the market for crude oil and natural gas.

The second quarter of this year has brought the lingering question: Will there be a continuous supply of oil sufficient enough to make gasoline for the driving season and at the same time begin building distillate (heating oil) stocks for the fall and winter? This concern has the barrel of oil fluctuating in the $55-$60 range, which in turn strengthens cost factors for solvents and other feedstocks, thus diminishing our hope for reduced costs.

Other materials remaining in tight supply are styrene-based rubbers and key materials used in water-based adhesives that include acrylic monomer, styrene monomer and vinyl acetate monomer. These materials are under price pressure not only because of energy but also due to the manufacturers’ ability to obtain higher margins by pursuing other options for the material.

During previous price spikes, suppliers often assumed the position of shock absorber, swallowing high raw material cost increases without fully passing on the results to their customers. In 2004 and 2005, however, they have been able to pass along feedstock cost increases as well as boost margins. In the past, suppliers were taking the hit to maintain business as a result of the imbalance in supply and demand. Looking at the present scenario, the market is much tighter in supply on many solvents, polymers and resins.

Supply and demand is still very snug in all commodities (MDI, solvents, latex.) and will remain this way for the balance of the year. However, there are some bright spots on the horizon thanks to a softening in global demand for acetone and MEK. The acetone market has been affected by the large phenol inventories being held by producers who were expecting demand from Asia/China. But an unexpected slowdown in textiles and plastic manufacturing prevented this. MEK demand has also softened worldwide with the exception of North America. Global producers with no other avenues for their material are exporting it to the U.S., which is driving the cost of material down.

There is still a concern for SIS and SBR rubber as the cost of styrene and butadiene continue to climb due to the supply/demand imbalance globally. SIS is also severely impacted by the lack of global availability of Isoprene. Domestic suppliers have been down for most of the year for maintenance or material is being funneled into different end products (such as tires). The Isoprene that is available costs 200 % more than suppliers had planned. This situation should ease going into the third quarter but pricing will remain elevated for the balance of 2005.

Solvents such as toluene and hexane continue to be volatile as the barrel of oil hovers around $60. An announced 2¢ mid-July hexane increase is requiring ITW TACC look at solutions to prevent that cost from going into its raw materials. Toluene has been a few cents below standard the past two months but appears to be trending upward in step with oil and refinery builds of gasoline.

ITW TACC has done a lot of work to take costs out of the supply chain. We are asking suppliers to pursue efficiency and reduce waste to help offset increased materials costs. Additionally, suppliers need to improve communication, remove variation from their operations and supply chain, reduce lead times, and actively pursue material substitution through innovation.

ADHESIVE
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