News from Notch Consulting, Inc.

June 10, 2008

Columbian Chemicals Adds Surcharge to North American Carbon Black Sales

Filed under: Carbon Black — Notch @ 5:12 pm

Effective June 1, Columbian Chemicals has added a new surcharge of $0.08 per pound for all carbon black products sold in North America. Columbian announced the surcharge in a May 23 letter to customers. In the letter, Columbian’s president Jim Howard said that the surcharge was prompted by the “recent and unprecedented rise in feedstock and oil prices that have imperiled the basis for our carbon black business.” The surcharge will be reviewed monthly and, if appropriate, adjusted depending on the price of feedstock at that time.

The letter states:

With the rapid and continued escalation of energy prices, the previous methodology of quarterly pricing simply does not allow ongoing viability of our business. Columbian cannot continue to sell its products at prices that were based on oil prices that are ~$20/barrel lower than current prices. Columbian has considered alternate actions to mitigate this situation, however, we feel aligning oil costs and carbon black prices is both the best option and in the best interests of our customers and Columbian long term.

The Columbian announcement reinforces a point that I have made before, that the traditional pricing formula for annual supply contracts that govern the North American carbon black market are not appropriate to the current situation in oil prices. These contracts, which are adjusted quarterly to account for fluctuations in feedstock and natural gas costs, were developed when oil prices were considerably more stable on a quarter-to-quarter basis. As currently structured, the carbon black supplier is paying today’s prices to the feedstock supplier to keep its plants running while its pass-through to customers is based on prices from the previous quarter. During periods of steep increases in feedstock costs, the contract lag works in favor of the carbon black customer. (In his letter to customers, for instance, Mr. Howard notes that Columbian currently is paying ~$84/barrel for feedstock, compared to a second quarter average of ~$68/barrel.) When feedstock costs decline again, the contract lag works in favor of the carbon black supplier. Thus, the last five years or so has witnessed an unprecedented period where, quarter after quarter, the contract lag has worked in favor of the customers, resulting in many millions of dollars of lost revenue for carbon black suppliers.

As covered on this blog, Sid Richardson recently instituted a “True-Up” component to its quarterly contracts, whereby at the end of the quarter the price is adjusted to incorporate actual feedstock costs during the previous quarter.

Update: According to CTC International, a consultancy covering carbon black feedstocks, since the beginning of 2005, there have been only three quarters in which the contract lag worked in favor of carbon black producers (late 2006/early 2007); during all other quarters the lag benefited customers.

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