Where are price reductions heading?

It had been long overdue but in July we saw a substantial drop in material pricing and it is likely that we will see another drop in August too. The question with all of these things is how long will the price correction last for?

This adjustment has been caused by several factors, high shipping rates, Ramadan, reducing oil prices, growing self sufficiency in certain parts of Asia and European environmental legislation.

Currently container shipping rates sit at circa $2500 per box and this is putting real downward price pressure on the end user. If we take paper as an example, for the end user to pay over 100 pt for the product and 100 pt for shipping just makes the whole exercise unaffordable. The knock on effect of this market distortion is to increase the available supply into the European market which has now reached saturation point and prices have inevitably come down. The shipping rates will stay high until consumerism increases in the euro zone and demand for finished products will increase the availability of shipping and drive competitive container pricing.

The plastics market, particularly bottles, has also been heavily affected as Asia has grown in capacity in the production of virgin flake to such an extent that they just do not need the level of recycled bottles that they once did. With shipping rates high and oil prices reducing, virgin polymer produced on home soil becomes economically very attractive.

Quality

We have also seen in recent weeks higher quality thresholds required by end users and the usual reports of containers being returned from the Far East as they were at the end of 2008 is also fuelling the slowing down of the market. In July Indonesia also introduced a pre-shipping quality protocol similar to that of the Chinese inspection process (CCIC). This is a mark of the growing requirements of the Asia market not only to drive up the quality of material they are importing but to be seen to be setting standards in line with the rest of the world.

The other major factor that will continue to be an issue in the market is the effect of environmental legislation in Europe. With landfill bans, taxes and legal requirements for recycling the end users know that the flow will not switch off. It does not make economic sense to pay high prices for material that legally has to be collected and recycled anyway. This is one of the major issues of direct government intervention in the free market economy which due to the increased requirements of the Asian market over the last ten years has not really been felt.

It is important to understand that this is a price reduction exercise driven by the factors highlighted above. This is not a demand failure situation. The market still exists for all major products but the higher prices are just not achievable in the short term as the market seeks to correct itself.