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July 2, 2021
INSIGHT: Surging chemical prices pressure construction costs
Author: Al Greenwood
HOUSTON (ICIS)–Rising prices for chemicals and plastics used in construction are raising costs in that sector, and more increases could arrive later in the year.
The US Producer Price Index (PPI) for final demand in construction rose by 0.6% from April to May, according to the US Bureau of Labor Statistics. That compares with 0.8% for the US economy as a whole.
The Associated General Contractors of America (AGC), a trade group that represents contractors, conducted its own analysis based in the PPI figures released by the US. The AGC figures shows a much higher increase in prices for construction materials.
“The increase in producer prices for construction materials over the past year far outstrips contractors’ ability to charge more for projects,” said Ken Simonson, the association’s chief economist. “That gap means contractors are being hit with huge costs that they did not anticipate and cannot pass on.”
US-based adhesives producer HB Fuller is planning price increases worth $75m in August and September, on top of the $150m that took effect on 1 March through 15 July.
The price increases are in response to costs. HB Fuller expects its raw-material costs to rise by more than 10%, much larger than its earlier forecast of 5-8%.
HB Fuller is the first of the major US-based chemical companies to release their earnings. Its comments could presage more acknowledgements of cost pressure among other coatings, adhesives and sealants producers as they release their quarterly results later in the month.
Adhesives are made with vinyl acetate monomer (VAM), and ICIS assessed US spot export prices at an all-time high. On 22 June, ICIS assessments were up by more than 200% from the same time in 2020 and more than 175% from the same time in 2019.
Other chemicals and plastics used in construction are also at or near all-time highs.
– US spot prices for liquid epoxy resins (LER) rose by nearly 170% from the same time in 2020 and nearly 130% from the same time in 2019, based on ICIS’s assessment on 22 June. Epoxy resins are among the few chemicals for which June 2020 prices were lower than those in June 2019.
– US contract prices reached all-time highs for polyvinyl chloride (PVC), a plastic used to make pipes profiles and sidings.
– PVC products are made with plasticizers, and domestic producers still do not have enough supplies of plasticizers to meet demand, according to buyers. As a result, producers should maintain order controls in the near term.
– Polyurethanes are used in coatings, adhesives, sealants and insulation. One of the main polyurethanes feedstock, methylene diphenyl diisocycanate (MDI), is near previous record highs.
– Expandable polystyrene (EPS), another insulator, is near the record high set in May, according to ICIS. On 22 June, US spot prices for block EPS were up 84% year on year and 35% versus 2019.
– Quarterly US contracts for titanium dioxide (TiO2) hit record highs, although they are not much higher than in 2020 or 2019. TiO2 is a pigment used to make paints opaque.
TiO2 – and hence paints – could come under additional cost pressure because of the suspension of operations at a South African mine, which produces ilmenite and rutile ores used to make the pigment.
Rio Tinto, which operates Richards Bay Minerals, declared force majeure after the murder of the site’s general manager.
WHY ARE PRICES RISING
Several factors have contributed to the increase in prices for chemicals used in construction.
For unsaturated polyester resins (UPR), demand is high for boats and recreational vehicles (RV) as well as for construction.
For polyurethanes, both isocyanates and polyols are seeing increased demand from applications beyond construction, such as automobiles, appliances and mattresses.
For construction chemicals in general, homeowners took on do-it-yourself (DIY) projects while they were under coronavirus quarantines.
In the US, an active hurricane season caused many plants along the Gulf Coast to shut down.
Inventories were still recovering when Gulf Coast petrochemical plants suffered widespread outages in mid-February because of winter storm Uri.
Because inventories were already tight, many companies maintained force majeures and sales allocations for several weeks after they restored normal operations at their plants.
Fires and outages unrelated to bad weather have also shut down plants and further tightened supplies.
The shipping constraints and container shortages disrupting supply chains for other industries is restricting supplies for the petrochemical market.
Demand in general is high because of the opening of economy and government spending.
Markets could become more balanced in the upcoming weeks as companies lift the last force majeures and sales allocations.
Dow recently lifted its force majeure on VAM, which it declared in February after the winter storm.
US production of PVC continues to rise while weekly US PVC export prices have been falling.
US contract prices for ethylene have fallen to pre-storm levels, which should remove cost pressure on downstream producers.
If chemical plants can operate without any significant outages, they should be able to rebuild inventories, making supply chains more resilient against sudden disruptions.
The problem is that the petrochemical industry will remain vulnerable to shutdowns until the hurricane season ends on 30 November.
Meteorologists are predicting an above-average hurricane season. Already, a tropical storm made landfall in Louisiana, home to several petrochemical plants and refineries.
If a hurricane does damage plants, companies could need more time to resume operations. The same factors that have led to petrochemical shortages have lengthened lead times to make replacement parts for petrochemical plants.
Additional reporting by Stefan Baumgarten and Bill Bowen
By Al Greenwood