Fabric makers depend doubly on oil, for fuel and for raw materials.
By Marc Hequet
How are you managing in this slalom economy? Staying flexible? Not signing long-term, fixed-price contracts? Scouring your shop for efficiencies? Sourcing globally?
Those are top industry pros’ suggestions—that, and holding on for dear life as you zigzag your way through high and volatile prices for petroleum.
When oil prices spike, the specialty fabrics business is doubly at risk, because oil provides much of the sector’s raw material as well as the energy to produce and deliver the goods.
Even when oil prices drop, however, it can be bad as well. What if you price a job based on high oil prices—and subsequent competitors’ bids based on just-falling prices leave you all alone out there on the high end?
Oil prices affect raw-material costs
Oil prices may well stay on the roller coaster as the world economy lurches on. Yet only eight-tenths of one percent of all oil goes to make synthetic fibers, which puts fabrics at the tail in a global game of of crack-the-whip.
Fabric manufacturer Highland Industries Inc. of Greensboro, N.C., has seen some raw-material costs jump 40 percent since January 2008. “I can’t increase my prices fast enough to keep up with what’s going on,” laments Bret Kelley, director of sales and marketing.
Recession may slow that runup in energy and feedstock prices; but if refiners cut production, prices may well stabilize on the high side, says Patrick Bell, director of sourcing for raw materials with Glen Raven Custom Fabrics LLC, Burlington, N.C.
Raising your own prices is part of the solution—but only part. And raising prices too fast can be counterproductive. “We know we’re going to lose customers if we try to pass that through,” says Bell. So Glen Raven offsets higher costs by finding efficiencies. With 3,000 employees on three continents, it can source globally and use vertical integration to minimize costs.
Smaller organizations can’t do that to the same extent, if at all—yet small also means flexible, and flexibility is key in times like these. Here’s a summary of ideas from industry sources:
- Eat some of your higher costs. Pass others along, perhaps using surcharges.
- Don’t sign long-term deals at fixed prices. Play it month by month.
- Shop for low feedstock prices worldwide, remembering that higher shipping costs can offset lower prices from farther away.
- When you find good prices, buy and stockpile if you can.
- Plan ahead with customers. Ask their needs for several months in advance so you can arrange to have materials on hand just in time.
- If your suppliers raise prices—ask why.
Why prices are on the rise, and what to do about it
Oil and fiber prices dropped during the 1990s, notes Alasdair Carmichael, president for the Americas with PCI Fibres, a Spartanburg, S.C., market-research firm covering the petrochemical-to-fiber supply chain.
Consequently, synthetic-fiber producers and users grew comfortable with long-term contracts even if the deal didn’t include a clause to protect sellers from hikes in raw materials prices.
Then began a steady oil-price climb of 70 percent between 2000 and 2005. By mid 2008, oil prices had more than tripled over 2005, before dropping again at the start of the fourth quarter.
Raw material costs for synthetic fibers rose with oil prices, but rates varied widely. Fibers such as polypropylene that require just a few steps from oil to polymer showed the most dramatic price increases, nearly quadrupling from 2003 to mid 2008. Polyester, on the other hand, requires more processing. Its key raw materials merely doubled in price during the same period.
That all hurts, but markets adjust. Indeed, could high shipping costs shorten supply chains, boosting national or regional manufacturing? Maybe. Fuel costs won’t “dictate manufacturing geographies,” predicts Highland Industries’ Kelley, but he does see more opportunities for providers located near customers.
Glen Raven’s Bell, going further, anticipates “an increased awareness” of the benefits of manufacturing close to customers. Glen Raven already makes its Sunbrella® fabric in China for the Chinese market. As transportation costs rise, says Bell, “it pays to be where your customers are.”
It costs to be where they are, too. Hudson Awning Inc. of Bayonne, N.J., began using a fuel surcharge for its awning-cleaning services and has tried to bundle jobs in the same area to minimize fuel costs.
Hudson doesn’t want to nickel-and-dime awning buyers, including prestigious Manhattan retailers. When the company shipped a job for retail client Ralph Lauren to Dubai, Hudson ate the surcharge. “Last year at this time,” sighs Lynda Burak, Hudson vice president, “we would have been $150 richer.”
She’s out far more, of course. Burak says her mid 2008 monthly bill to fuel her own trucks was running 50 percent higher than year-earlier costs. The firm may buy more fuel-efficient vehicles to replace older trucks that get nine miles per gallon.
It’s Business 101: Pay attention to the little things such as bundling jobs, running fuel-efficient trucks, reusing fly waste and sweepings at the plant.
One other business basic: Don’t sign long-term deals at fixed prices. Your own costs might jump in the meantime, leaving you with a contractual obligation on which you’ll lose money.
Fabric suppliers became accustomed to longer-term deals based on predictable prices during the 1990s and early in this decade. “The adjustment that the industry has had to make is to resist taking long-term contracts on a fixed-price basis,” explains consultant Carmichael. Any long-term deal, he counsels, now must build in raw-material indexing clauses.
Meanwhile, are your own suppliers in the habit of jacking prices regularly? Find out why. “If raw materials prices are going up, we ask for the justification,” says Highland’s Kelley. “We make sure our raw materials suppliers are being fair and equitable with us.
Your own customers may well do the same. At least everybody expects price bumps these days. “The information is fairly transparent,” Kelley says. “In some cases customers know about it before we do. It doesn’t make it easier to do, but it makes it easier to explain.”
If nothing else, it’s an opportunity for building customer relations. Invite your customers to forecast, suggests Glen Raven’s Bell, so you can have their goods ready when they want it. Such planning also helps with shipping costs. If you know where it’s going well in advance, you can piggyback shipments.
Glen Raven, with locations in the U.S., Asia and Europe, can source where prices are best “as quick as a plane flight or phone call,” says Bell. In what he calls a “three-continent weave,” Bell may buy on one and ship to another.
Smaller organizations may not straddle the world, but, says Bell, they needn’t be “stuck with one supply chain.”
Small firms can also nose around for efficiencies. One example is buying and stockpiling raw material when prices are low—if you can find the storage space, and if you have enough cash on hand to lock up some of that cash in inventory.
Nevertheless, Bell sees an industrywide silver lining in the high-price gloom: Awnings save money by reducing air-conditioning costs. That actually makes rising energy costs a selling point. Maybe it took $4 a gallon gas in the U.S. to bring energy savings back to the forefront of the public’s mind, but now that it’s there, it’s likely to stay there for a while.
Finally, firms of any size can try to get out front of the curve by raising prices even before costs justify the move. But that can be a risky tactic.
Kelley says his firm tends to be such a price leader. “The problem comes,” he warns, “if the market doesn’t follow you” … in which case, says Kelley, “you’re just kind of standing out there by yourself.”