Axalta shows a helpful picture below of how pricing and costs are moving. All coatings producers are seeing the same cost inflation, some of it energy/hydrocarbon input related and some of it supply chain-related – either for inputs such as pigments or higher costs of getting products to markets. How pricing looks relative to costs is very customer dependent, as shown in the chart below. Auto OEM customers have long lead times on price adjustments and this is why Axalta is signaling the end of the year before prices will be aligned with costs. This of course assumes that costs do not rise again in 2H 2022 as they will also drive a lag in price increases and create a further gap as shown in the “Mobility” bar below. In the more consumer-facing coatings, it is easier to raise prices more quickly and Axalta and others have managed to keep pace with costs. We see the pricing versus costs issue as a much greater headwind for the specialty chemical companies than for the commodity companies and the industrial gas companies – the commodity chemical companies can raise prices more quickly and most industrial gas pricing is on a cost pass-through basis.
Shipping rates are falling steeply but we are not out of the logistic woods yet with the Ports of Los Angeles and Long Beach proposing very punitive charges for containers that are not collected quickly enough. The initiative is intended to decrease bottlenecks at the ports by clearing the docksides more quickly, but the reason why there are delays is often out of the shippers' and buyers’ hands as it is a lack of truck drivers and rail capacity that is at issue. The penalty rates proposed are steep and might discourage some shipments – especially of polymers and other low-value products. If it takes you an extra 20 days to offload a container from the port the cost of shipping polymers from Asia would double – very few importers would take that risk given the small margin opportunity that exists in the trade already. The penalties might encourage trucking companies to increase driver compensation to attract more drivers, but only if they can pass the potential penalty through to their customers. While this move proposed for containers may help drive down some of the port congestion times it is not a good sign for inflation as someone will have to pay – either pay the fines or pay up to improve resources to clear the containers more quickly.
Even with the inflated container rates, the vast price difference between US and Asia polypropylene prices makes the opportunity too great to ignore. Even at their highest levels, container rates, and inland transport costs likely total no more than 35 cents per pound today, and as shown in the Exhibit below, you have plenty of room to maneuver. This is not the case with polyethylene or other polymers where the price delta between the regions, while high, does not cover the costs and the added risk of delays to sourcing. For more see today's daily.
We discuss recent historic highs reached in China to US container freight rates in our daily research today, and (absent Ida) we note that freight charges remain a major component in favor of US polymer price support. With current container rates so high, it is difficult for US consumers to get access to cheaper material from Asia, even if they are willing to try the untested grades in their equipment. Absent the freight extremes today, we would be much more definitive in declaring that the US's record spot/contract polyethylene price difference was unsustainable and would be corrected quickly. While there appear to be some surpluses of US polyethylene today, such that producers are testing the incremental export market, the same producers can hide behind the freight barrier as they make arguments to support domestic pricing. Some US buyers may be getting pricing relief because they have price mechanisms that partly reflect the spot price. It is also possible that large buyer discounts have risen through this period of very high pricing (this has happened before).