Chemical Prices Tell the Inflation Story: It Will Be Massive

I recently discussed what is happening in the chemical market with two very capable people in that industry: my brothers.

Both have worked for a small chemical distribution company in the Chicago suburbs for over a decade.

They are seeing price increases that are beyond even the “norm”. It is simply beyond the beyond.

As my older brother, Tim, told me: “The markets are ready to crack” under the price pressures.

Every month this year has seen price increases on a host of products. And that is continuing into June. There are three different scenarios pushing up chemical prices.

1. The chemical is actually a crude derivative, such as toluene, which is made directly from crude, and is therefore tied to the price of crude. As crude goes up, so does the price of toluene and the other crude derivative products.

2. Or the chemical needs natural gas in order to get to the product- such as the ketone solvents. You need incredible heat provided by natural gas in order to produce the chemical. As natural gas prices go up, so does the cost of producing the chemical.

3. The third category of chemicals are related to potash- the same chemical in demand as a fertilizer. There is true pricing power here as demand exceeds supply. Potash (POT) is the largest producer in the world and is flexing its muscle. It is raising prices without a care in the world.

What’s happening in the potash category?

Caustic potash is rising from 12 cents a pound to 24 cents a pound in early June. Yes- DOUBLE what it was. For customers, this is just massive.

Phosphoric Acid, another potash chemical, has risen from 40 cents to 83 cents a pound in the last three months. Who uses Phosphoric Acid? Beverage companies like Coca-Cola.

These are staggering increases for anyone in that industry in a short amount of time.

Even for a fairly common, mundane chemical like caustic soda- the price has tripled. In the last few years it has gone from 5 cents to 16.5 cents a pound. Caustic soda is a key ingredient in cleaners for beverage companies and meat producers (among others.)

It’s all about China

China is a big producer of many chemicals including citric acid, which is also used in many beverages. According to my younger brother, Mike, the Chinese have stopped exporting it due to the Olympic games. Basically, all resources are being diverted to the Olympics. And now, with the earthquake? He says it will likely be even worse. There are shortages as the domestic companies aren’t producing it and now the Chinese aren’t shipping it.

What do shortages and rapid price increases lead to?

Instability in the market. Hoarding. Insufficient distribution.

And the energy costs are pushing up freight charges - which leads to more price increases.

For those who believe that the high energy prices can be “contained” or that inflation isn’t really an issue in the world economy- talk to those in the chemical industry. They see the writing on the wall and it isn’t pretty.

And there is no end in sight to the price increases.