Oil prices have dropped a lot over the past year, so why isn’t there a corresponding decrease in cooling tower fill price? The answer is that raw material costs have not decreased by 50%. Gas prices at the pump, maybe. However, our raw material is not directly tied to crude oil pricing on a 1 to 1 basis, which is a common misconception. PVC is made from vinyl chloride monomer (VCM) which is produced from Ethylene. In some parts of the world Ethylene originates from oil but in the US Ethylene originates from natural gas. As oil prices have increased dramatically over the past 10 years (excluding the past 6 months), natural gas prices have remained relatively flat. As a result natural gas is now the feedstock for PVC production in the US. With that said PVC is approximately 57% chlorine. And as such chlorine prices have as much or more to do with raw material prices then the petrochemical component.
General Purpose (GP) product (which is what our industry uses) saw our forecasted increase over the first 3 quarters of 2014 with a flat 4Q. GP cost is expected to remain relatively flat through 2Q with increases in 3Q and 4Q15. With that, the raw material cost is only a fraction of what we see in the market–remember, we have multiple people employed just to analyze, forecast and buy raw material all over the world. Plastic buying is based on many variables and is not immune to the basics of supply and demand. If China or India decides that it wants to buy up all of the PVC post-industrial grade then our costing goes up, or if there a few large projects that eat up a large portion of the GP grade market then the price increases. If there is a fire at one of the domestic supplier plants, our costing goes up. If freight pricing increases, our cost goes up. If labor costs go up, those costs are passed through to us by suppliers in addition to our own labor costs going up.
While I understand the thought that PVC is produced from petro products and crude oil has gone down (as I thought the same when I was selling cooling towers!), the truth is that there is only a slight correlation between the two with many other factors that play into our product pricing. Even with a decrease in crude oil pricing, general purpose PVC has remained relatively flat and is forecasted to increase through 4Q15.