Manufacturers likely not benefiting from the collapse in oil prices

—Sponsored article by NACC

Aside from being a trader speculating on oil’s collapse, or a major refiner or supplier buying direct, it’s likely you’ve only benefited slightly—if at all—from oil’s super slide. Why is that?

It really makes no sense. For years we’ve been told how important oil is and its scarcity threatens our way of life. We first learned of peak oil from Marion King Hubbert in 1970, and we’ve been told that oil is in essentially every product that we use.

We’ve learned that pipeline supply interruptions 10,000 kilometres away immediately increase our domestic rates for petroleum products derived from oil.

All these great and exciting things we learned prepared us for oil’s continued resilience and determination to reach $140 per barrel. But then almost instantly, in June 2008, we all decided oil was worthless because we were unfortunately dealing with a financial crisis.
Back then, oil dropped all the way to $40 per barrel.

We were a smaller firm back then but had a number of large clients and they were all asking us the same question: “How long does it take for this cheap oil to be refined and delivered to us?”

Many of our customers use lots of products that derive from oil and were expecting a significant cost reduction. Unfortunately, as in the most recent super slide, the cost reduction came way too late was nominal compared to oil’s overall collapse.

Oil prices dropped 85 per cent and oil-derived products were down 15 per cent and by the time these cost reductions reached our customers’ invoices, a stimulus package was introduced and everybody jumped on the growth bandwagon. Oil rebounded to more than $100 per barrel once again.

The retail factor
We learned a number of things from the 2008 collapse and began tracking the daily trades of all oil-derived products as well as all consumable products associated with natural gas and oil drilling, such as propane and ethane.

The key takeaway, and the main reason you’re not likely benefiting from the low prices is the media and government agencies such as EIA (Energy Information Agency) in the US and NEB (National Energy Board) in Canada mainly report on wholesale prices, but not retail.

There is no transparency from when your supplier picks up the product from its terminal, hub, rack or gate, delivers it to you and sends an invoice for what you assume is the delivery of the commodity.

What we’ve found from our thorough analysis of the North American markets is retail suppliers are essentially free to charge whatever they want for the product they deliver. There are no laws limiting what they’re allowed to charge. It’s up to the consumer to negotiate a fair price.

We’ve also found many of our customers are paying well below market rates but have additional line items on their bill that make absolutely no sense. Tracking costs and following markets is a full-time job and having access to information and tens of thousands of indices ensures our clients pay the best and most consistent rates in the market.

We’ve mostly found the mid-market is overpaying the most and at random times during the year. It’s typically companies that are very top-heavy with little infrastructure.

Price taker versus price maker
If your buying strategy is to find a local supplier and compare quotes, you’re a “price taker” and are basically telling the suppler to give a great price for the first month and then do whatever you want after that.

If you want to ensure you’re paying fair market prices you need to know what the daily prices are and re-engineer the cost for the commodity to be delivered to you. You’ve then become a “price maker” and essentially tell the supplier what you’re willing to pay.

Each supplier will have a different cost associated with the delivery, depending on the jurisdiction you operate in and environmental rules associated with the particular commodity. In each case, we need to use a different metric.

We’ve also found companies in the mid-market are being extorted with tank rental fess and threats such as this: “If you change suppliers your tanks must be brought up to code at a significant expense.”

We hear this all the time from our clients when we first start discussions. Some companies almost have a mild case of Stockholm Syndrome when it comes to their supplier—they’re afraid to switch or even threaten to switch and are willing to pay out-of-the market prices.

Our advice is always work with current suppliers and become more informed. If your company doesn’t have the resources to follow these indicators, consider outside consultants. The cost reductions you will enjoy will long pay for any outside costs.

Most consulting companies can work on a shared savings basis so there is no up-front cost to you. In many cases though, you’re better off agreeing to a monthly fee, as you’ll likely be shocked at how much you’ve been overpaying.

We know oil is cheap, and we know it’s used in everything, so if you truly want to know where your money is; it’s hiding between wholesale to retail, and all you need to do is look.

Murray Sheehan is senior director of North American Commodity Consultants Group Inc. in Whitby, Ont. He can be reached at (416) 333-6012 or via email. For more information visit www.naccgroup.com

This article is part of the Financial Management Success Centre, which showcases leading strategies for cost control and preservation of working capital in manufacturing.