FlatLine_feature_USGlassMay2012

Volume 47, Issue 5 - May 2012

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Flat Line
Despite Increases in Raw Material Prices and Fuel Surcharges, Glass Prices Remain Relatively Unchanged

While the price of raw materials used to manufacture glass has gone up over the years, the Bureau of Labor Statistics (BLS) data shows that the price of float glass has not gone up proportionately. Recently, cerium oxide, one of the 17 rare earth minerals used to polish glass, also has been in short supply (see March USGlass, page 34), but the end users of glass have not been affected by the dearth.

The Producer Price Index—a U.S.-based BLS survey—for specialty glass in 2002 was 129 and in 2011 was 138.1, an increase of approximately 7 percent in 10 years. The export price index of glass and glass product manufacturing went up 0.6 percent from 2005 to 2011, while the import price index of went up 16.1 percent from 2005 to 2011.

According to industry experts, glass prices have remained the same much longer than before 2002.

“From 1967, the price of twin-ground plate glass, equivalent of float glass today, is the same price as glass is today,” says one float glass manufacturing representative who wished to remain anonymous. “The price of glass has not changed in 47 years.”

What is the reason behind this seemingly unnatural price trends? It is basic economics, professionals say.

“Our specialty glass commodity index shows an 8.7 percent increase from January 2002 to December 2011,” says Maria McLemore, industry analyst for specialty glass at Producer Price Index, BLS. “Most of this 8.7 percent comes between 2002 and 2008. The index slid in 2009, and has since recovered, albeit slowly. The preliminary December 2011 number is roughly equivalent to the November 2008 peak.”

The economic issue at play here is the housing boom and its subsequent bubble, according to McLemore. “Specialty glass products include glazed, insulated, and tempered flat glass used primarily in construction,” she explains. “Pre-crisis, strong demand for both residential and nonresidential building construction allowed for higher price levels, and the index rose quickly. This is really reflected in the 2005-2008 numbers. However, when this demand weakened, glass prices were forced down off their peak, and, without a large recovery in demand, have remained depressed since.”

Lyle Hill, managing director of Keytech North America, agrees.

“I believe it is a simple case of supply and demand,” Hill says. “Supply has continued to go up globally and demand has stagnated and/or gone down. And once you crank those float lines up, you really don’t want to shut them down.”

Michael Collins, managing director, building products, with Jordan Knauff and Co. of Chicago, says while supply and demand is one answer, there could be a few other reasons as well.

There are three primary components of the cost of goods sold: the material used in the product, the labor to assemble the product and the overhead to maintain the facility in which the product is made, Collins says. “If, as has been the case in the glass in dustry, the cost of these underlying components has gone up without an increase of the same magnitude in the final product price, there are numerous possible explanations,” he says. “The first is the possibility that increased competition in the segment has required companies to maintain pricing, despite cost increases, meaning that their profitability is lower.”

Bob Brown, principal of Robert L Brown and Associates in Martinsville, Va., is of a similar opinion and says that the first and most important reason for the depressed raw glass pricing is “the level of competition within the domestic marketplace. Numerous factories for raw glass production have ‘hatched’ in the world and also in North America,” he says.

When considering competition from around the world, influence from Chinese manufacturers is a major factor if looking at a more long-term picture beyond a decade, McLemore says. “The Chinese flat glass industry has been growing very quickly; so quickly, in fact, that they’ve had major capacity issues over the last few years,” she says. “American suppliers that formerly had large Chinese client bases have seen a large part of their business disappear as the Chinese industry has grown.”

Further contributing to the over-supply issue were the fabricators. They added to the excess competition and capacity, and consequently, helped keep prices low. Many of the fabricators’ customers also started fabricating glass and led to an excess of capacity in the lagging market, Brown says. “The number of temperers and laminators now producing and marketing products in the North American market is staggering to me,” Brown says. “And now we see mergers, acquisitions and idle equipment in many areas of our country. I expect that is true in Europe, also, [and] likely to become true elsewhere in the world. There are even producers of proven production equipment that are now gasping for new business and new products in this industry.”

History of Glass Manufacturing in the U.S.
The U.S. flat glass market was not always over-populated with suppliers, Brown says. It used to be a small group, a fraternity, of identifiable companies. “Most of the marketing was through the ‘selected’ glass dealers across the U.S., who were known as ‘jobbers’ or ‘distributors,’ the direct factory buyers,” he says. “The Flat Glass Manufacturers Association (previously known as the Flat Glass Jobbers Association) was composed of a group of these large and well-financed glass distributors. Most small or independent glass dealers in the domestic market bought their main product—flat glass—through the jobbers as they were generally not able to buy direct from the prime domestic producers, then Libby Owens Ford or PPG [Industries].”

Then, along came Ford Motor, Guardian Industries and American Saint-Gobain in the U.S. market with extra capacity to sell and the larger producers and distributors had to change their concept of marketing glass, according to Brown.

“In 1960, Guardian Industries was not a glass producer, but rather a small automotive glass fabricator,” Brown says. “AGC’s predecessor in North America was American Saint-Gobain, which had just started a new ‘plate glass’ line in Greenland, Tenn., while most of the majors had bitten the bullet and were converting to a more efficient way to produce flat glass with the Pilkington float process.”

The flat glass plants were then capable of producing larger volumes of raw glass in less time than with plate glass and with equal or better quality, Brown says.

The float glass manufacturing representative agrees on the efficiency factor and says that it has been a factor in keeping the prices down. “The process of float glass has been very efficient and the cost of entry into the business wasn’t terribly high,” he says. “The old processes of sheet glass were very inefficient. So the price of glass was stable, because it was substituting [for] inefficient glass [manufacturing].”

Reasons Other Than Economics
Competition aside, a hankering for higher efficiency and automation also has added to the lowering of glass prices, Collins says. For example, “if I am running a more energy-efficient process, however, I will be using fewer cubic feet of natural gas and may actually experience a lower energy cost,” he says. “With regard to labor, companies have implemented more electronically controlled, automated processes, which allow them to produce the same amount of glass with fewer employees. Old, inefficient plants have been closed down in favor of more efficient plants capable of producing the same output at a lower cost.”

More efficient production methods, such as reducing the amount of waste when switching from the production of one type of glass to another, would be another reason to keep prices low, Collins opines. “These aren’t mutually exclusive and the cause could be a combination of all three,” he says.

At the end of the day, “while the domestic glass industry has not been a beacon of doing things right in trying economic times, it has seen such explosive growth in capacity and diversity of producers that the pricing level for raw and fabricated products has eroded as compared to other construction industry products,” Brown says. “I believe there is always a ‘resettlement of the industry norms’ based on supply and demand for those products.”

Sahely Mukerji is the news editor of USGlass magazine. She can be reached at smukerji@glass.com.