PRESIDENT’S REPORT: THE ENERGY CRUNCH

As the summer of 2008 takes shape, we are all seeing and feeling the squeeze on our own finances based on the high prices for oil, gas, energy and food.  On the business side, our INDA member companies feel the pain as well. 

All of our industry members use greater and lesser amounts of energy.  This energy comes in the usual forms, but all of these forms have increased significantly in price over the last year.  While most nonwoven processes use about half the energy per unit weight as weaving or knitting, we still feel the squeeze of energy prices. 

Most of the raw materials used today are based on petroleum.  Polypropylene prices have more than doubled with no hope for retreat in sight.  A good many of these increases in price have not been passed through the value chain because of the purchasing power at the next level.  I find it interesting that the two largest companies in the United States (Wal-Mart Stores and ExxonMobil) are at opposite ends of our industry value chain.  ExxonMobil is number one in profits and Wal-Mart is number eight in profits on the Fortune 500 list.  They seem to be maintaining their margins.  What about everybody else?

The previous squeeze on margins has reduced the amount of money available for investment in Research and Development. In some segments of the industry, virtually no R&D is taking place because there is no profitability in this segment.  Now, I am worried about the current squeeze reducing the amount of money available for investment in new equipment and new processes.  A change in investment rate would have a compounding negative effect on our industry.  Technology drives this business.  Innovation drives the technologies.  Without Research & Development as well as investment in new equipment and processes, we can not sustain the enterprise.  Something will have to change. 

I have already witnessed some changes, although they may not be good.  First of all, I've heard that demand for rayon has dropped due to a drop in the apparel demand.  When people are spending most of their disposable income on gasoline and food, they have to spend less elsewhere, like in new clothes or eating out at restaurants.  Although the drop in rayon pricing will be well received, the driving forces are not very positive.

With the weak dollar, imported items will continue to be expensive.  Imported oil tops this list and we see very few signals that oil prices will drop soon.  The weak dollar does promote exports.  We see continued increases in the amount of nonwovens that are exported and this continues to be a bright spot for most manufacturers. 

As for advice, I propose that as an industry we must simply ride this slowdown out.  We are in a strange competitive environment where many of the same challenges face every member of our industry.  We must all grapple with higher oil, gas and energy prices, which inevitably are driving up the costs of manufacturing.  Perhaps these new challenges will result in innovations that make the entire industry even more competitive.   

This can be a good time for capital investment.  Equipment ordered and installed during a slowdown can be ready to catch the upswing when it ends.  Innovation can be debugged and ready for launch as demand is rising.  Plan ahead and anticipate that this too will pass.