Foam Costs Soaring

Brent Felgner, October 17, 2005

New York —Some foam products producers are incredulous over planned price increases nearing 60 percent on the core component in polyurethane foam, along with placing them on allocated delivery schedules because of shortages.

Retail price increases from at least some suppliers are likely to follow.

Dow Chemical recently announced a 50 cents per-pound increase in TDI (toluene diisocyanate) that will go into effect Nov. 1. It comes on the heels of a 10 cents per-pound increase that took effect Oct. 1. Several other increases have also taken effect during the course of this year.

“There's a lot of factors at work here,” said Dan Taylor, communications manager for Dow Chemical. “Clearly, the hurricanes exacerbated an already challenging situation on cost and raw material availability.”

Lonnie Schepps, vice president of sales and marketing for Hudson Industries, said the notice came a little more than a week after he received notification of a lesser increase.

“Then Friday morning of last week (Oct. 7), we get this notification to forget the 28 percent, (they) are now announcing a 56 percent — let me repeat that — a 56 percent increase that will be effective virtually immediately,” Schepps said.

Schepps said he believes the notice may amount to something of a trial balloon from the supplier, which he declined to identify. He was slated to meet with the company last Tuesday. HTT subsequently learned the notice had come from Dow Chemical.

Earlier, BASF, another major TDI supplier, announced a 25 cents per-pound surcharge effective Nov. 1, also following an October surcharge of 10 cents per-pound. Both will remain in effect until further notice, the company said.

“This surcharge is necessary due to the unprecedented rise in raw material costs, shortage of raw materials and disruptions in the transportation network caused by Hurricane Katrina and Hurricane Rita,” said Larry Berkowski, director of BASF's Urethane Chemicals business in North America. “Consequently, BASF is currently unable to obtain the key raw materials to produce TDI, namely natural gas and toluene, at reasonable prices.”

Dow's Taylor noted that oil and natural gas prices had risen dramatically in recent years and that demand has been increasing for the raw materials, including toluene.

“What's happening here is that their alternative value as a fuel additive is increasing,” he explained. “It's a multiple hit here.”

Shortages of those precursor materials have created new competitive pressures against other industries, Taylor said.

For example, the price of toluene has risen 135 percent since 2002, crude oil rose from $19 a barrel in 1999 to $65 recently, and natural gas rose from slightly over $2 per million BTUs in 1999 to $14.50 per million BTUs recently, according to figures cited by Taylor. He said Dow had not declared a force majeure, an act of God in contract language.

There are three primary suppliers of TDI, the primary ingredient in the manufacture of polyurethane foam, they are BASF, Dow Chemical and Bayer, according to Stan Ukevich, president of ER Carpenter Co., another foam products manufacturer. However, Bayer has recently closed TDI plants, scaling back its production.

“There's no way that we, or our competitors, can absorb this,” Schepps said.

Sleep Innovations, a large foam products supplier, did not immediately respond to requests for comment.

“They are just giving us ultimatums saying, 'Your price will be going up, and we're not even sure we can supply you at that price,'” said Hudson's Schepps.

Carpenter's Ukevich said there had been a series of price increases prior to Hurricanes Katrina and Rita. He said TDI and Polyol, another primary component in the products, are derived from “cracking” natural gas.

The prices of building block chemicals, along with others closely related, has increased substantially, he said, with increases tied to production capacity, as well as oil and gas surcharges. Fuel surcharges tied to trucking the chemicals have also been added to the equation.

Raw materials are the largest cost component of the business, Ukevich explained.

Ukevich and Schepps agreed that pass-along costs would make their way to retail, despite the risk of tamping down a high-growth consumer segment.

“You have to pass them along to your customers, you can't absorb them,” Ukevich said. “It's either accept the increases or don't get (the product). No one can afford to absorb those kinds of increases.”

A fall-off in orders isn't a serious issue, given allocation concerns, he said.

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