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50 not out
As we approach the $50 per barrel figure for oil, do OP companies around the globe need to have a strategy in place to ride out the storm?Three months Ago we predicted it. Now it looks like happening. Although the oil price has slowly started to fall again after peaking at around the $45 mark in the second week of August, it will only require a minor shock to send it shooting through the psychologically significant barrier of $50. From there of course, it becomes a question of who knows. (see ‘hold your breath’, page 34 OPI June 2004)
It has all led to a shift in perceptions of what a high oil price is. Before the war in Iraq began in March 2003, the price was around the $20 mark and even the most pessimistic of forecasts did not anticipate anything much above $30 before the price settled down again.
Hindsight makes those hopes look foolish. CSFB now expects prices to stay in a $50-60 range between now and the end of the year and similar predictions are prevalent among various market experts.
But, and this is the most important question, does it really matter to the OP industry?
The answer to that may well depend on the type of your business you are involved in.
Speak to a wholesaler and they will automatically tell you that the rise in petrol prices will hit their bottom line. In the UK for example, an AA (the national UK motorist organisation) spokesperson says: “If oil reaches $50 per barrel as some people think it might, then the cost of petrol has to go above 85p per litre.”
The implications of that for any of the UK wholesalers need no elaboration and that is a scenario likely to be mirrored by wholesalers throughout the continent and in the US. Manufacturers meanwhile face a different concern.
squeeze
Eric Huang, VP of Taiwanese manufacturer Beautone, says: “The primary material of our products is Polypropylene, which is a by-product of petroleum refining. The Polypropylene bead price has doubled during these two years and it keeps going up.
“It is apparently correlated to the oil price and what’s more notable is that its price increase in percentage terms is even higher than that of oil.”
That inevitably will lead to costs passing on to the consumer as HP’s VP US supplies sales organisation Steve Sakumoto points out. He says: “Oil prices worry us because a lot of our products, be it the plastic that goes into printers, or the toner that goes into toner, or any other manufacturing components, is heavily petroleum based.
“So as these world crude prices start to flow through the manufacturing value chain, eventually higher costs trickle up through the system and ultimately hit the end-user.
“We’re concerned from an end-user perspective that those higher prices will eventually trickle through. From a competitive standpoint – be it Canon, Epson or Lexmark – it’s less of a problem as we all face the same rising costs.
“We don’t lose competitive stakes, but you lose the ability to continue to drive customer value.”
That is of course a major worry. With the market already shaky and savvy customers around the globe looking to squeeze the best deals out of suppliers everywhere, the pressure on margins will only worsen.
It is not difficult to imagine a scenario in which oil prices burst through the $50 a barrel mark. Global terrorism, the ever constant threat to supply lines in Iraq, and the voracious appetite of the Chinese for oil as well as raw materials that depend on oil products are one side of the equation. Ally those to the approach to winter when oil consumption automatically cranks up and a potential nightmare scenario could be on the way.
Efforts to alleviate the situation have also been relatively unsuccessful. Indeed, even when the Organisation for Petroleum Exporting Countries (OPEC) tried to crank up production in the second week of August, it had only a minimal impact on the oil price before it began to rise again. And, with the Russian government continuing to lock horns with Yukos president Mikhail Khodorkovsky in a battle that has some way to run, it too cannot be expected to bail the globe out of its current supply crisis.
The Eurozone’s economic recovery – if recovery is the correct moniker for its moribund performance in the last few years – is perhaps most obviously at risk.
Global manufacturer GBC, which has major western European markets and is also increasingly focused on the central and Eastern European market, watches anything that affects the continent very closely. Director of marketing and communications Mike Wright says: “It goes without saying that any threat to the recovery here in Europe should be viewed negatively. The only upside is that we would all be in the same boat.”
He adds: “Any increase in the raw product price will of course in some way filter its way through to the manufacturing cost which in turn may affect our profitability. Not surprisingly this is not welcome in a period here in Europe of relatively soft demand for OP products.”
volatile
No doubt his sentiments will be echoed by hundreds of dealers and manufacturers in the European heartlands of France and Germany where the struggle of driving profitability in the last few years has been well-documented.
It is indeed a big concern for resellers. Washington, US-based independent dealer Chuckals is typical. CEO Al Lynden says: “We have a system set up within our operations that monitor all of our outside costs. As they rise, we must pass that on to the consumer to maintain our necessary profitability. About two or three years ago, when the fuel costs were so volatile, we instituted a fuel fee to all our invoices of 1.75 per cent.
“With the recent flurry we have had to raise that fee to 2.25 per cent. Our customers are not blind, they are paying at the pumps just like we are, and are very supportive. As a selling organisation, we basically evaluate all costs, mark up accordingly and sell it for a profit. If those costs increase, survival dictates that those costs be passed on.”
That is all well and good. But what happens if the price continues to stay high? Santiago Bilinkis, CEO of Officenet in Argentina and Brazil paints a grimmer picture.
“The key area where oil prices can affect our business in the mid term is through the indirect impact generated by a drastic slowdown in the world economy that could result from an ‘energy shock’.
“Right now, the World economy is basically driven by American demand and Chinese supply.
“On the one hand, higher oil prices paired with a tightening monetary policy from the US are both factors pointing towards an American slowdown. At the same time, an increase in Chinese austerity is also an early sign that a gradual slowdown may be coming there too. If that ends up being the case, a slower world economy would affect OP business on a global scale.”
That is the worry. And like all good business models, OP companies need to account for worst case scenarios if they are to ride out the potential storm.
* Post was edited: 2004-09-17 10:02:00
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