Budnick Converting ^®

Chances are that somewhere along the way you’ve encountered a price increase from your tape suppliers or manufacturers - or, yes, even Budnick. Often times these increases come with little or no explanation about the root cause other than that they’re being passed through from another link in the supply chain. At Budnick we wanted to take a moment to try and shed some light on not just what’s causing these increases, but what effect our industry has on the overall pricing process.

A little background

Before we can get into the increases, I feel the need to go over where the elements of tape come from. A large portion of tape elements (ethylene, propylene, tackifiers, etc.) come as byproducts of the oil refining process. For every one barrel of crude oil, 77% is refined into fuels and heating oils. Only 7% of that barrel becomes feedstocks – the petrochemicals refined into various byproducts. Some main products made from these feedstocks are propylene and ethylene, but a very small portion becomes isoprene, a byproduct of ethylene – and only 0.6% of that ethylene is made into tackifiers, or .042% of the barrel.

Raw materials

It’s no secret that there’s been a very rapid inflation in the raw materials market with crude oil pricing reaching highs never seen before. Some analysts are predicting oil prices to continue to climb, potentially reaching prices as high as $130 per barrel in 2012. This inflation in price has led huge portions of the energy market to shift from oil to natural gas as it is exponentially cheaper than oil and exhibits a lower rate of price inflation. In 1996 the ratio of the price of oil to gas was 6:1 – in just 15 years that ratio has ballooned to 25:1. Seeing the raw numbers helps the switch from oil to natural gas make sense – but the downside is that very little of the byproducts of the natural gas “cracking” process can be used to create the elements of adhesives. 

The economics of supply and demand

All these numbers and rationales boil down to a simple case of supply vs. demand. Currently we’re seeing constraints on the usable supply as unprofitable grades of oil products are being rationalized in order to increase the supply of the more profitable grades. Large economies such as China are seeing an increase in automobiles and gasoline consumption, naturally seeing supply shift in their direction to accommodate for the increased usage. The 7% of a barrel that gets refined into ethylene which gets refined into isoprene, of which a tiny portion eventually becomes a tackifier is working its way down to being a smaller percentage as the need for more profitable oil products rises. Unfortunately, despite decreased production for these products, demand has not decreased. While everything from facilities to SKUs had been condensed or eliminated during the height of the recession period, new capacity expansions are not keeping pace with the market – creating overwhelming demand for a product that is less and less available every day.

So what’s on the horizon?

While we’re seeing a shift in energy markets from oil to natural gas, we’re also seeing a change in feedstocks. The industry will adapt, but it takes time for this adaptation to take place. It’s akin to back in the late 90’s when it was shocking to see $1.00/gallon gas – when spending $2.89 a gallon was unheard of. The other day when driving home, gas was $2.89. I didn’t need to stop – I still had ¾ of a tank – but the sight of $2.89 gas amazed me, and I wanted to take advantage of it while it was there. I drive 60 miles a day; $2.89 gas is a miracle. I could buy one of those fancy electric cars, but I don’t have anywhere to plug it in – so the thought stops there. As the price of gas keeps going up, becoming more expensive to drive every day, and the infrastructure for electric vehicles has improved, I may consider putting a plug outside to accommodate the electric car. For now, though, I’ll continue to just pay for the gas.

No one likes change - especially not entire industries that depend so heavily on one specific raw material. The unfortunate news is that, until the industry can determine how to better harness the resources from natural gas or even the continued development of synthetic materials, we will continue to see the prices increase. The thing to remember is that change may take time, but it does come.