Increased Oil Prices Could Lead to Raw Material Inflation
Charlotte, NC, September 22, 2023-"A recent spike in crude oil is raising diesel prices and, if sustained, could lead to raw material inflation,” reports Truist. “The historical magnitude of input increases has varied based on supply and demand of intermediate products, but we probably won't see spikes like the last several years. Industries that could best offset this with selling price increases include: aggregates/cement, roofing and decking. The mattress industry has seen varied linkage with crude. Others could struggle without a pickup in demand, notably MHK (Mohawk) and TILE (Interface).
“Crude Oil Has Seen A Substantial Increase. A rally continues in crude oil prices, with elevated prices closing around $90/bbl over the past two weeks. This is a notable move of the most recent trough price of $68/bbl, or roughly a 30% increase.
“Direct Price Relationship Never Seen…… Give the relationship above, we rarely see a direct relationship where crude oil moves 30% and inputs then also rise 30% as the input increases are usually lower than the crude move. In addition, we have not found a reliable divisor to use as every cycle is different. Remember that supply and demand of intermediate goods also play a role in both inflation and deflation scenarios.
“….But Directionally Similar Increases Seen in Many Areas. Sustained increases in crude have usually resulted in increases in products that are petrochemical in nature. These include: polyethylene, carpet inputs (nylon and polyester), PVC and asphalt.
“Diesel Prices Already Moving Up. Diesel has seen prices moving up with crude in recent weeks and are now running at parity with last year. The key moving forward is whether prices remain elevated, resulting in y/y gains in 2024.
“Foams Have Had Least and Lowest Correlation. These products, primarily used in mattress and furniture production, have in general seen the lowest inflation periods and in fact have seen little inflation in past crude run-ups. We have never heard a great reason why this happens, but it is not a one-time occurrence.
“Natural Gas Not Moving Much. The above discussion is primarily on raw material inputs for manufacturers, but almost all our companies use natural gas for production of their products. These tend to run as a single-digit percentage of cost of goods sold (ceramic tile is more like double-digits) and thus exposure is far smaller. Regardless, natural gas prices have not increased like crude oil.”