Executive summary: Prices of poly/eps foams and resins will be going up.
Storm-Related Shortages Grip
Sofa, Tire and Golf-Ball Makers By MARY ELLEN LLOYD, TIMOTHY AEPPEL and KEMBA J. DUNHAM
Staff Reporters of THE WALL STREET JOURNAL
October 6, 2005
The recent hurricanes are sending aftershocks through manufacturers who depend on materials derived from petroleum and natural gas, such as foam and resin. Producers of furniture, building materials, tires and even golf balls are feeling the pain of storm-related shortages and soaring prices for key raw materials.
August’s Hurricane Katrina and September’s Hurricane Rita shut down most offshore Gulf of Mexico production of oil and natural gas, both of which serve as a feedstock for chemicals and plastics. The hurricanes also hindered chemical factories and refineries and have bogged down key transportation routes in an era of thin, just-in-time inventories at many companies.
Rita, which struck near major chemical factories along the Texas coast, didn’t do as much damage as feared. Still, the storms brought down already limited production of a key chemical used to make the foam in upholstered furniture and bedding. The price of polyfoam had already risen 15% from a year earlier because of high oil prices, according to a report by BB&T Capital Markets, which expects near-term prices to rise further.
On Tuesday, Citigroup slashed its rating on shares of auto-parts supplier Lear Corp. to “sell” from “hold,” and cut its price target to $28, citing headwinds from higher resin prices and potential near-term shortages of foam for seats. Andrea Puchalsky, a spokeswoman for Lear in Southfield, Mich., said, “There is tremendous price pressure on foam products because of the run-up in resin prices, but we are not currently experiencing any supply issues.”
Lear shares were down more than 5%, or $1.71, at $31.20 as of 4 p.m. yesterday in New York Stock Exchange composite trading.
Furniture makers La-Z-Boy Inc. and Select Comfort Corp. said their operations were being hurt by shortages of foam, raising concerns about higher costs and delayed deliveries at other home-furnishings producers. BB&T said foam represents about 10% of the selling cost of upholstered furniture.
The share prices of those companies also took a hit. La-Z-Boy fell 93 cents, or 7%, to $12.37. Select Comfort dropped $1.25, or 6.3%, to $18.65 in Nasdaq Stock Market composite trading.
Furniture Brands International Inc. is receiving foam shipments as scheduled for its upholstery operations, Chief Administrative Officer Lynn Chipperfield said. “But clearly there is some talk of price increases, surcharges and that sort of thing,” by foam suppliers to Furniture Brands’ operating companies, which include Broyhill, Lane and Thomasville, he said. He said the company could pass along some price increases to customers.
Rising energy prices also will be a major concern for the building industry. Petroleum and natural gas are key ingredients in asphalt, roofing materials, plastic pipe and insulations. The industry already faces tight supplies of other key building materials, including wood and cement.
Tire makers have slashed production due to tight supplies of carbon black and synthetic rubber, two important raw materials. Goodyear Tire & Rubber Co., Akron, Ohio, said earlier this week that it reduced production 30% at its North American tire plants. Cooper Tire & Rubber Co., based in Findlay, Ohio, said about 30,000 tires a day will be taken out of production until raw-material supply, affected by Hurricane Rita, is normalized.
Carbon black is made by burning heavy residual oil at very high temperatures, creating a material that looks like soot and is used in a range of products such as tires, printing ink, plastics and adhesives. The supply problems result from a mix of factors, including flooding of some carbon-black plants as well as disruptions in utilities and transportation bottlenecks.
Aad van Heijden, a vice president at Cabot Corp., the world’s largest maker of carbon black, said that two of the company’s five plants in North America were affected by the hurricane, both of them in Louisiana. One of the plants was shut down only during the storm and is now back in full operation, but the other was flooded and still isn’t back on line. Cabot declared force majeure – the contract clause that kicks in following acts of God or unavoidable accidents – and has had to slow deliveries to some customers, said Mr. van Heijden. “Because we have long-term contracts, we have to make sure our customers understand that there might be a problem.”
Praxair Inc., Danbury, Conn., which supplies gases to the chemical industry and other areas, raised its prices for industrial and specialty medical gases by as much as 15%. The company cited sustained high energy and transportation costs.
Acushnet Co. had to lay off about 210 workers last week at its factory that makes Pinnacle golf balls, because of the disruption in the supply of Surlyn from DuPont Co. The company says all of DuPont’s U.S. supply of Surlyn is made and warehoused at its Orange, Texas, plant. Surlyn also is used in the automotive and food-packaging industries.
Joe Gomes, a spokesman for Acushnet, a unit of Fortune Brands Inc., said there has been some good news in the meantime: A shipment of Surlyn housed in the warehouse in Orange has since been delivered to the company’s plant in Massachusetts, allowing it to recall about 60 of the laid-off workers as of next Tuesday. The company hopes to recall more near the end of October.