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Sid Richardson Adds “True-Up” Cost to Quarterly Carbon Black Pricing Formula

Sid Richardson Carbon today made a major announcement regarding the structure of its quarterly pricing formulation. Below is the announcement in its entirety.

Sid Richardson Carbon and Energy expresses need for change in price structure as feedstock costs continue to rise. Oil prices continue to reach record highs almost daily, creating unsustainable cost pressures for carbon black production under the current quarterly pricing formula. Despite recent cost controlling investments, current market conditions require Sid Richardson to move its customers to a “true-up” formula that more fairly accounts for these cost increases. Under the true-up, actual feedstock costs are tracked during the quarter, and a debit or credit is issued at the quarter’s end to match that quarter’s formula prices to the true feedstock costs. The time is right for Sid Richardson to change its pricing formulas in order to make our operations economical in the wake of spiraling oil prices. Without this move, Sid Richardson may be forced to idle production units in order to avoid losing further money on each pound of production.

In related news, I recently heard from another domestic carbon black producer that suppliers were considering or in some cases already implementing “off-contract” price increases to compensate for higher feedstock costs.

Last month, in discussing Cabot’s most recent earnings report, I highlighted the fact that Cabot was altering its contracts to focus on margins rather than volumes. During the conference call, Cabot’s President and CEO, Patrick Prevost, responded to a question on contracts by saying, “Clearly, some of these contracts were negotiated at a time when oil prices and raw material prices were much more stable and they did not create the types of effects we’re seeing today. So we’re in the process of looking at how we’re going to deal with the situation, contracts will come up for renewal and we will consider ways to mitigate the lag and work with our customers to make sure both sides can actually live with a perhaps improved contract structure.”

Taken together, these developments suggest that the carbon black industry is now addressing the reality that traditional quarterly pricing formulas are not adequate to the current situation of steadily rising oil prices. The contract lag has become too large to be absorbed every quarter by the producer.

Note: Cabot is holding an Analysts Day tomorrow, May 29. I’m sure this topic will be discussed in greater detail.

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