Price-cost squeeze

Scope Scientific discoveries New molecules Upscale from laboratory to production Emergence of polymers Substitution Internationalization Broadening of product range Global competition Restructuring Price-cost squeeze Focus on financial returns Ongoing price-cost squeeze... 

Finally, another and much less positive constant of the chemical industry is the price-cost squeeze, which we expect to remain in the range of approximately two to three percent of sales annually as it has been for the past 20 years, driven by labor and other factor cost increases and by ongoing price pressure, resulting from productivity increases that are passed on to the customers. 

On a global level, the industry is likely to remain stable despite a continuing price-cost squeeze. 

These structural cost disadvantages place Western players under increasing pressure. Beyond feedstock disadvantages, they also suffer from poor productivity improvements, having exhausted most of their cost-cutting options in the 1990s, expensive workforces, and subscale assets. This means they will have a hard time coping as the price-cost squeeze accelerates. 

Source VC I, Stat. Bundesamt. Mrneralolwiiischaltsverband, Qastatis, Dt. Bundesbank, BMA, BMG, VDR Fig. 8.3 Development of the price-cost squeeze in the German chemical industry. 

The Price-cost Squeeze Is Getting Tighter and Demand Is Maturing... 

Despite a continuing price-cost squeeze as well as maturing and saturated end markets keeping specialty producers under performance pressure, the best performing specialty companies achieve very impressive results across segments. 

Other trends have remained unchanged, such as the eternal pressure to increase productivity to compensate for the price-cost squeeze, or to compensate for the ongoing commoditization of many of the industry s products and services by introducing innovations. In addition, we can see a continuing high level of... 

Nevertheless, top managers often tend to give operational excellence a low priority. This has led to a situation where the average level of performance improvement over the last 15 years has been, on average, only sufficient to compensate for the industry s price/cost squeeze. 

Virtually every chemical production unit will improve its productivity and reduce costs to some extent over time. Typically in such cases, a number of more or less obvious improvement ideas are generated and implemented by a highly motivated but small part of the workforce. In addition, targets are mostly low, and the level of improvement that is typically reached is insufficient to compensate for the price-cost squeeze. Furthermore, the creeping improvement in performance is overlaid by segment-specific price cycles, making consistent tracking of the improvement activities almost impossible. 

An improved cost position. Technological innovation and operational improvements mean that gross margins for petrochemical products will probably deteriorate over the long term, leading to a relentless price-cost squeeze. It is therefore very important for companies to improve their cost positions. This is particularly true for European players, which face increasing volumes of imports from the Middle East - imports that could threaten the viabihty of one-third of the European asset base. The history of most petrochemical sub-sectors shows that only players with first- or second-quartile cost positions have covered their cost of capital across the business cycle. This situation will not improve in the future. 

We also find that customers in the low-price, low cost-to-serve quadrant, although typically not the largest ones, are most likely to share costs. They are also the most difficult to satisfy, are equally satisfied with their other vendors performances, and are unprofitable. It is possible that these customers share costs with vendors and jointiy work with them to reduce the overall procurement costs. But rather than mutually share the gains from cost reductions, it appears that these customers might squeeze margins beyond the cost reductions that accrue to the vendors. 

As import prices often cap selling prices, margins will be squeezed as costs rise. .. we expect no change in current cement prices. 

Contending with the cost-price squeeze was last on the list although by no means the least. 

One of the results of actual or threatened overcapacity is the cost-price squeeze that the chemical industry is now experiencing. Not that this is the only cause of this ill, but it is certainly one of them. Even in the face of rising costs, the existence of idle capacity seriously deters a corresponding price increase. 

Many economists in this field predict a rise of 75% in the output of industrial chemicals during the next decade. Thus, while we will enter the sixties with overcapacity in many chemicals, the expected rise in consumption during the period will require further expansions. Because those in the business will seek to maintain or improve their position, and undoubtedly there will be some newcomers in many fields, the new expansions will probably precede actual demand and again give overcapacity. Because of the time required for construction of facilities, usually 12 to 24 months, and the necessity for building large economic-sized plants, successful companies must commit themselves to expansion before the actual new demand is realized. Many factors in our economy point to continued inflation. Cost of raw materials, labor, and services will rise. Most of the chemicals in this field are now produced on such a tonnage scale and have had so many years of intensive technical work on the processes that further cost reductions will be hard to realize. If inflation does then continue, the cost-price squeeze will continue to exert extreme pressure. 

A large compare gets a new vice president of prrrchasing who warrts to make a name for himself qrrickly. His predecessor had been squeezing the suppliers to reduce costs for five years. The new vice presiderrt warrts all existing corrtracts tom up and rebid to get lower prices. The corrtracts are... 

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