Detailed Analysis of Resin Cost Calculation Method


 The resin cost calculation method is based on understanding the various stages of the manufacturing process, from crude oil to polypropylene (PP) or other resin products. This approach helps develop a more realistic price negotiation strategy by analyzing the actual costs at each stage, rather than simply accepting the market index price.

1. Key Components of Resin Cost Calculation

The cost of resin is primarily determined by crude oil price, processing costs, and efficiency at each stage. The calculation follows these steps:

  • Crude Oil Price: The production of PP and many other resin products starts with crude oil. The crude oil price is converted to naphtha, which is the key raw material for resin production. Global crude oil benchmarks, like Dubai Crude, are used to determine the price of crude oil, making it the most fundamental variable in cost calculation.

  • Naphtha Conversion Rate: The conversion rate from crude oil to naphtha typically ranges between 7% and 10%. This rate represents the efficiency of converting crude oil into naphtha, which plays an important role in cost calculation. For instance, if the crude oil price is $100 per barrel, approximately $7 to $10 worth is used for naphtha.

  • Conversion from Naphtha to PP: Naphtha is the key feedstock for converting into polypropylene. This involves complex chemical processes such as cracking, which incur additional energy costs. The cost of converting naphtha to PP depends not only on crude oil prices but also on energy efficiency and the state-of-the-art nature of the facility.

  • Processing Costs and Additional Expenses: The conversion process from naphtha to PP includes additional processing costs, such as energy usage, labor costs, and maintenance. These factors significantly contribute to determining production costs and should be carefully considered in the cost calculation.

2. Comparison with Market Index

The market index price generally reflects the demand and supply situation. However, this price can be affected by factors like imbalances in supply and demand, logistics issues, and inventory levels at a specific point in time. For example, even if crude oil prices decrease, the PP index price might increase due to supply issues in a particular region.

  • Limitations of Market Index: The market index is useful as an indicator of price trends, but it has limitations in reflecting the actual cost. For instance, if the market index price for PP is $1.82/kg, while the crude oil price is $77 per barrel, the actual calculated cost could be between $1.73/kg and $1.33/kg. In this case, a difference of about $0.5/kg can be observed, indicating that the market index reflects a higher price than the actual cost.

  • Importance of Price Tunnel: Setting a price tunnel between the worst-case and best-case scenarios through cost calculation is important. This tunnel establishes a realistic range for price negotiations with suppliers and helps assess how much the market index deviates from the actual cost.

3. Application in Price Negotiation Strategies

  • Cost-Based Negotiation: Instead of simply accepting the market index during price negotiations, it is crucial to calculate the actual cost based on crude oil price, naphtha conversion rate, and processing costs, and present this as a basis for negotiations. When a supplier demands a price increase based on the market index, cost-based data serves as a powerful negotiation tool.

  • Utilizing Worst/Best Price Tunnel: Using the price tunnel between the worst and best-case scenarios helps evaluate whether the supplier's proposed price is within a reasonable range or if it includes an excessive margin. If the supplier offers a price closer to the worst-case scenario, this provides grounds to request a price reduction.

4. Perspective on the Market

  • Risk Management: The market index reflects market risks. Factors like crude oil price spikes, supply chain issues, and global economic uncertainties can all influence index prices. Therefore, continuously monitoring these risk factors and preparing for negotiations accordingly is essential.

  • Long-Term Contract Strategy: The market index primarily reflects short-term price fluctuations, so a cost-based approach is more advantageous when establishing long-term contracts. Particularly for long-term supply agreements (LTA), it is better to set prices based on actual costs and appropriate margins rather than relying solely on the market index.

  • Data-Driven Decision Making: Continuously monitoring and quantifying the difference between costs and the market index allows for analyzing price trends and negotiating favorable conditions in the future. Such a data-driven approach contributes to stable cost management and negotiation strategies, despite short-term market volatility.

In conclusion, the resin cost calculation method requires a strategic approach that carefully analyzes the cost elements at each production stage and effectively uses this information in price negotiations, rather than simply relying on the market index. This contributes to cost savings and helps maintain more reasonable pricing in relationships with suppliers.

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