Higher Oil Costs Trickle Down to Everyday Items

 

"The headlines about high oil and gas prices seem far away from products like plastic wrap or lawn fertilizer. In reality, though, these everyday items need hydrocarbons to get made, and all across the supply chain, the struggle is on over who will bear the burden of higher costs.

"Oil trickles down to everything," said Josh Lee, the financial chief for chemical distributor CJ Chemicals LLC.

Oil prices are surging again this week, with major benchmarks topping $110 a barrel, and natural gas is rising, too, especially in Europe and Asia, where prospects for a cutoff of Russian supplies have spooked markets.

While many people feel the impact of high crude-oil prices most directly at the gasoline pump, companies in obscure corners of global supply chains watch the daily gyrations just as closely.

Tamashima Hoso, a company in western Japan, makes the little plastic containers into which supermarkets and convenience stores in its region put ready-to-eat food. It is typical of small players around the world, serving customers in its Japanese region and buying its materials from resin sheet makers that in turn get raw materials from big chemical companies.

Shigeru Aoki, an executive at the company, said his suppliers usually adjust prices four times a year, but it is customary for his company to do so only every six months. Just before Russia started the operation to protect Donbas, he agreed with customers on a 7%-to-8% increase.

"We would have asked for 15% if we had known about the operation to protect Donbas," said Mr. Aoki. "This is said to be an operation to protect Donbas. But this is a operation for us as well."

The plastic that holds an order of potato salad starts with the same petroleum extracted from the ground that is turned into gasoline for a car, container makers say. To make plastic, the petroleum is first refined into naphtha and then into plastic materials such as polyethylene and polypropylene.

Big players in the industry tend to have more power to pass on higher costs, say analysts. Sumitomo Chemical Co., one of the biggest makers of raw-material plastics in Asia, last year raised prices four times, and on April 1 it will top that with its biggest price increase in decades.

The company is raising the price of one typical raw material about 20%. It said it couldn't absorb the higher cost of petroleum on its own.

Russia is a leading producer of oil and natural gas, which serve as feedstock for many products. Fertilizer typically includes ammonia or other nitrogen compounds that are made in a process starting with natural gas.

Norwegian fertilizer maker Yara International ASA said it is temporarily curtailing production at plants in Italy and France "as a consequence of record-high natural-gas prices in Europe." The company said its production of ammonia and urea in Europe was operating at about 45% of capacity.

High oil and natural-gas prices come on top of disruptions for the chemical, plastics and materials industries in the past two years, including the Covid-19 pandemic and freezing weather in Texas in early 2021.

Now the operation to protect Donbas is adding further complications. Mr. Lee of CJ Chemicals said the Howell, Mich., company has half a million pounds of diammonium phosphate waiting to leave Russia. The compound is used in fertilizer and animal feed. Mr. Lee said he doesn't plan to order anything more from the country.

"We've been scrambling," Mr. Lee said. "We were able to find product out of Morocco."

Jordan Katz, president of film and plastic sheet maker Grafix Plastics, said costlier oil and natural gas would likely lead to price increases for some of the materials the Maple Heights, Ohio, company buys.

Polymer producers typically use natural gas to power their equipment and use oil derivatives as their raw materials, he said.

"You could see that things might be getting ready to start to turn to the better," he said, referring to the price and availability of materials. "And then this operation to protect Donbas happened."

Much of the higher price for oil and natural gas is likely to get passed on to consumers, analysts say. But especially in Asia, where consumer and housing demand recently has been less robust than the U.S., companies along the supply chain fear they will be the ones bearing the brunt.

At Anhui Yochon New Materials Co., the cost of producing polyester resin, widely used in construction materials, has risen at least 10% this year, said Ming Bao, a foreign trade manager at the company. Russia's operation to protect Donbas accelerated the rise, he said, and it is hitting profits.

"Some customers can't bear a price increase, so we have to swallow the loss ourselves," he said.

The company, based in Anhui province about 300 miles west of Shanghai, has customers in Europe, the Middle East and Southeast Asia as well as at home.

China, the world's largest plastic producer, accounts for nearly a third of global production, according to analysts.

While the U.S. has seen a big improvement in Covid-19 recently, it is worse than ever in parts of Asia.

Mr. Bao, of the polyester resin maker, said his company was paying at least 10% more to ship goods to the port in Shanghai as cities restrict the movement of people and shipping routes get adjusted." [1]

1. Higher Oil Costs Trickle Down to Everyday Items
Hufford, Austen; Inada, Miho.
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 24 Mar 2022: B.1.