Oil price drop to help industry but it might take awhile

Transportation and high fuel users to benefit directly, but market forces could limit gains for others.

October 12, 2006 09:20
3 minute read.
Oil price drop to help industry but it might take awhile

oil 88. (photo credit: )


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The recent drop in petroleum prices is expected, in the long-term, to benefit plastics and other industrial sectors but the short-term impact will be negative, since companies are not able to complete required adjustments in their inventories necessitated by the price drop in time. "The greater the distance in the production chain from the edge of the [oil] well, the lesser the knock-on and impact of the price of petroleum and the price of the raw material produced from it," economists at Pia mutual fund management company said Wednesday. The price of oil has dropped 22 percent to about $60 per barrel from a peak of $77 in mid-July. Plastics companies and manufactures of related products figure prominently on the Tel Aviv Stock Exchange - including Plasson Industries, Golan Plastic Products, Plastro Irrigation, Polysack, Kafrit Industries - many of which have issued within the past two years. Of nine Israeli companies surveyed for the Pia study, only plastic mold maker Rimoni Industries Ltd. has not suffer a drop in raw and operational profits since 2004. Since it operates as a sub-contractor, Rimoni is less exposed to changes in the price of raw materials, Pia noted. "There is high variability between companies according to the business environment in which they operate and the way they handle this threat," the analysts said, adding that "this is reflected not only in the financial results of the companies, but also in the performance of stocks on the bourse." The most significant factor determining the degree of the companies' exposure to the petroleum price is the proportion of each company's added value in the product they sell, Pia said. "The higher the added value, the weaker the damage. A product with a high added value enables the company to carry out adjustments in the prices that can compensate it on changes in the prices of raw materials, whether the prices rise or fall," the analysts said. Generally dependent on exports for a large percentage of sales, however, many plastics companies' profits are also expected to suffer from the dollar's depreciation, they added. A source at a leading plastic furniture maker said the price of plastics actually had not fallen for the industry since lower oil prices were offset by a drops in petrochemical refinery operations and in production due to the war in the North. Infrastructure contractor representative Moshe Toporovsky, of the Manufacturers Association of Israel, said the rise in petroleum prices affected those in the road-laying business doubly through the rise in the price of diesel, which is consumed in large amounts by mechanical and engineering equipment, as well as the rise in the price of bitumen used for asphalt roads. The recent drop in petroleum prices "at most reduces the damage - not more," he said. Bitumen prices have risen "well over 100%" over the past two years, he noted, adding that the problem was compounded by rises in the costs of concrete, aluminum and labor. Road contractors are particularly sensitive to the rise in bitumen prices since, on average, about 18 to 24 months elapse between the pricing of a road project used to compete in tenders and the laying of the upper layer of the asphalt pavement, in which the thick black bitumen is used. While a mechanism is built in to tenders to compensate contractors for such rises by tacking payment to an index of inputs, it was insufficient to prevent losses in the sector caused by the rising prices, Toporovsky said, calling it a "catastrophe." Contractors had no way of foreseeing that the rise in oil prices would reach such levels when tenders were signed, he said. "The contractor is just a contractor, not a speculator on the price of inputs, and he isn't supposed to be one," Toporovsky said. In terms of petroleum's use as a fuel in industry, Leader & Co. sector analyst Ori Hershkovitz said that, while "there is no doubt" that lower petroleum prices are "a blessing" for chemicals producers but that they only would contribute "a few loan percentage points" to profits. Rather, he said, basic trends of supply and demand - alongside the rising prices of potash and bromine - would have a more significant impact. Petroleum prices primarily would affect chemical industries through fuel prices, not as a raw material in itself. Israel Chemicals is the second largest energy input consumer in the country after Israel Electric Company, noted Hershkovitz. A source in the chemical industry said that magnesium is particularly sensitive to oil prices due to the large amount of fuel needed to process the material. Transportation is another key economic sector expected to benefit from cheaper fuel. "Of course for El Al [the drop in oil prices] is very good news, like air to breathe," said Hershkovitz.

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