Is cheaper oil good for print?

Author: HH Global Marketing
Oil refinery at dusk

Is cheaper oil good for print?

Measuring the impact to the print and POS industry

Tumbling oil prices have led many organizations to look at how a sustained period of lower oil prices would affect numerous industries around the world.

As a specialist in cost optimization, HH Global is pro-actively monitoring this situation to ensure we have strong control over our cost base. Initial estimates from manufacturers suggest a reduction across both print and POS is possible, but is highly dependent on what happens to the market over the next few months, and dependent on the product the impact could be negligible or significant.

As justification, market forces over the past six to seven years have demanded low pricing due to reduced demand and supplier saturation. And while the price per barrel of oil has seen a dramatic fall in recent months, oil is an input into component parts of print and POS production such as inks and plastics, but not a direct input. Therefore any reductions could take a significant length of time to filter through to prices and are dependent on the longevity of advanced purchasing for that particular component. To protect against increases, our suppliers are reporting that inks and plastics are purchased as far in advance as possible. Therefore it will take quite some time for any reduction (if any) to filter through.

The dramatic fall in oil prices has left those in print questioning its wider industrial impact

In addition, consensus suggests there is a large degree of uncertainty in the market regarding how long the price per barrel will remain low. This uncertainty is particularly prevalent to European suppliers and those from countries purchasing in currencies performing poorly against the U.S. dollar  such as Mexico, Brazil, and Australia, all of which have both seen decreases in currency value over the past few months. The crude oil price has seen a sharp decline in a relatively short period of time, presenting the potential for significant fluctuations, and while we expect very few suppliers to want to move prices downward due to the uncertainty, we expect this will happen as markets forces take control after a period of stability in the price of crude. There is also a clear global perception by suppliers that the reduction in oil price is a short term strategy by OPEC to lever the U.S. shale oil producers out of the market place, and prices will quickly return to previous levels once OPEC regains pricing control.

The area most likely to see savings in the print and POS production cycle is the resultant freight costs. HH Global estimates that on average this equates to nine percent of a total print price. Lower prices incurred by logistics companies, by what is a direct cost (rather than indirect), should in theory facilitate lower prices to manufacturers, and in-turn end-user organizations. Some suppliers have suggested that the falling oil price, which is not yet fully reflected in retail diesel and petrol pricing, will likely reduce freight and logistics costs. Potentially this may led to a one percent decrease in the price of delivered print.

For the paper market, we expect that the oil price reduction will counter the potential pulp increases expected in Q2 2015, leading to a period of price stability rather than reduction. Another factor is how the oil price can be mitigated by currency rates, for example with the Australian dollar performing poorly against the U.S. dollar, the Australian market is likely to see more increases to paper that could easily negate any savings from oil price reduction.

Logistics will reap the benefits of the falling oil-prices

With China as the biggest oil importer in the world, that market will realize billion dollar savings enabling it to become a more buoyant market, with a positive impact for exporters: particularly for those countries with favorable exchange rates. We expect this to then have the knock-on effect of increasing demand for marketing print and packaging in Southeast Asia – print volumes increase, and competition intensifies for work, driving lower print prices. U.S. based plastic POS suppliers have suggested there has as of yet been no appreciable impact on pricing for the various types of plastics due to changes in oil prices, with prices remaining relatively steady over the last year.

In summary, it is important to point out that while there is no definitive index, measure, or calculation that can answer this question, a strong sense of the impact can come from the supply chain. As the print and POS ’ manufacturing base is relatively unsophisticated in its control and management of costs, pricing will be driven by market forces, rather than a “bottom-up” analysis of their cost base, given that the impact, if any, is relatively small.