Commodity Management Blog

Innovative Ideas and Thought Leadership for Volatile Commodity Marketplace

Michael SchwartzChemical companies reported mixed results for the 2nd quarter 2011.  Some organizations, such as Dow, disclosed excellent results.  Andrew N. Liveris, Dow’s chairman and chief executive officer, stated “this marked another quarter of tremendous progress for Dow. We delivered significant and broad-based top-line growth, and reached a new quarterly sales record in emerging geographies.”  On the other hand, some businesses were not as thrilled with their reported results.  AkzoNobel’s CEO, Hans Wijers, said “I am not satisfied with our performance in the quarter, despite positive volume and pricing developments.”

Despite mixed results, there was a common theme across all chemical company earnings releases – they all took pricing actions to manage the rising cost of raw materials.  Dow noted rising raw material prices in its Coatings and Infrastructure, Performance Systems, Performance Products and Plastics businesses.  For example, in Performance Systems Dow cited a 17 percent increase in price, “reflecting actions taken in response to higher raw material costs.”  Hans-Ulrich Engel, BASF’s CFO, hit on the same theme, “We successfully increased prices in many product lines in order to offset higher raw material costs.”

Chemical companies have a large exposure to commodities.  They convert raw materials (oil, natural gas, air, water, metals, and minerals) into more than 70,000 different products that are central to the modern world economy. Management of raw material price volatility is key to their business health.

Passing rising raw material costs to customers through price increases is obviously an important part of a strategy to protect EBITDA.  But how high can a company raise prices before demand destruction starts to take place?  Better commodity management has to also be a key element of any strategy to manage raw material price volatility.  Chemical companies must implement commodity management best practices to optimize margins. Traditional Purchasing Department strategies and processes such as “buy to budget” must be revamped to a more proactive “market-based” procurement and risk management program.