Chemical refinery operators have pulled forward many planned maintenance projects into early 2009 from later this year or even 2010 as both demand and prices for their products have dropped. Like many of the metals producers, chemical refinery operators have made the decision to idle plants now to carry out maintenance work than run at below optimum capacity.
As steel and non ferrous prices have fallen so dramatically these last four months, and stainless prices have continued their gradual fall since 2007 one would expect that service companies engaged in petrochemical plant maintenance and repair would be able to pass on much needed cost reductions to refineries, chemicals and plastics processors. But this simply has not been the case.
To the great frustration of the refiners, raw material costs for stainless tubular products, tanks, valves, fittings, pumps and so on do not appear to have fallen in line with the wider stainless and special steels market. MetalMiner has conducted several interviews within the industry and we believe a giant discrepancy exists between the refiners who now expect substantial savings for these MRO projects and the outsourced service providers such as engineering/procurement firms who are still quoting for semi-finished or finished products at peak or near-peak price levels.
To illustrate what is happening in the wider market, The Telegraph newspaper reported this week that BP has set up coordinated meetings with service suppliers to drive down costs, due to a desperate need for cost reduction in the face of falling oil prices. Other companies are looking at their metals spend more forensically to try and understand cost drivers, volatility and cost reduction opportunities such as the fall in underlying metal costs. It has not escaped even BP that the metal markets have come down along with their own oil price. Tony Hayward, BP’s chief executive, says he expects to drive some of these metals savings through BP’s supply chain and reduce their $700m/day goods and services bill.
We see two major challenges for refiners. First, refiners need to better understand the dynamics of the metal supply markets, including metal price drivers, how they can track them, and what kind of metals price indexes are available. The second challenge is to develop strategies to better manage the sourcing process and drive down costs through their supply chain.