Ok silly question...

here is the problem with riding crude oil price up and down as though it was parallel to Coatings Raw Materials (RMs) Cost movement…

It is not. Why?

Because the RMs are impacted by Oil and Natural Gas price… in terms of base constituents but many times the impact of the oil and gas swing is overridden by the supply and demand curves of the actual raw material or the raw materials upstream between that RM and oil or natural gas.

It should be noted the supply (capacity) of certain coatings RMs in NA has been steady for a couple decades with more capacity than demand. In 2004 that changed as the global NA, Europe, SA and Asia economies heated up in conjunction with the falling dollar. As Asia’s requirements in particular for RMs increased due to tremendous growth, they needed to feed that demand. This growth happened in the other regions as well but not to the same extent as in Asia. Since NA had capacity and the dollar was weak they came here and took our RM supply to other regions. This impacted MANY supply demand curves and in many cases took the demand to a higher level than NA supply. When that happens RM prices skyrocket until demand changes or substitutes are found.

In addition the chemicals industry that supports coatings RMs had performed horribly financially for decades due to the overcapacity in NA. All the coating suppliers used this to play all the RM suppliers against each other and drive price lower and lower for many years. When the tables turned in 2004 these RM suppliers were not bashful about raising price even higher than one would expect (profiteering) to make up for years of financial famine… They hide behind additional cost increases caused by things we know well such as new �government regulation on Chemicals manufacturing facilities.

Now let’s talk about choices… Oil and Gas are primary constituents of many coatings RM. When the RM suppliers “crack” the Oil and Gas molecule they have choices on where to feed the downstream molecules… gasoline, diesel or industrial chemicals feed stocks to name three choices for just crude oil. They select the stream based on its profitability. Many times this creates shortages of particular RM until the profit of the coatings RM stream equals the other options. The chain can be very long and complicated between oil and the final Coating formula RMs, as many chemical intermediates and their individual supply chains are normally involved.

Another issue impacting the long term equations is the fact that most chemicals plant capacity additions are HUGE Capital investments with 2-4 year plant installation timelines. The Chemicals company CEO and his Board must decide 2-4 years in advance what demand will look like, if they miss… they and their company’s financials are dead. No decision is better than a bad decision. So new capacity installations are therefore few and far between. Right now the RM suppliers are loving it no matter what oil does. They see this as their day in the sun.

Lastly it should again be noted…

Oil and Gas price

Molecule cracking profit stream choices

Lack of industrial chemicals capacity

Asian growth

Weak dollar

All affect Intermediate RM supply demand curves and that drives price.

These factors have changed the game between the coatings suppliers and RM suppliers.

The bad news is the RM suppliers have learned their lesson and even when crude has fallen they have so far stuck together in terms of price discipline and no new capacity additions. They missed badly in the eighties and over built capacity. They paid dearly for decades. Right now they are loving it no matter what oil does.

to assume that because Oil and Natural gas have dropped, RM pricing will fall in parallel any time soon is just not true.

Maybe the recent R & D�award for Soy based powder is the answer.

If not I guess we all better go back and read Daniel Quinn's novel Ishmael.

Regards,

Bill�