While plummeting oil prices over the last month have led to relief for consumers at the pump, the news has been mixed for West Michigan manufacturers, particularly for suppliers of the oil-and-gas industry.
Global oversupply has caused crude oil prices to trend downward since mid-2015, but the commodity took a sharp dive in early January before bottoming out at roughly $28 per barrel on Jan. 20.
While industry experts say that West Michigan manufacturers have by and large benefited from the oil price drop through cheaper raw materials and lower transportation costs, it’s forced some companies to adapt their business models to the shifting commodity.
Otsego-based Prime Solutions Inc., a manufacturer of dewatering and filtration products, was forced to delay talks with oil companies as a result of them taking production offline, said President and CEO Joe Dendel. That shift in strategy led the company to lower its 2016 sales forecast by 10 percent to $9 million, he said.
Despite the setback, Dendel believes that when production does come back online, oil companies will be more accepting of Prime Solutions’ cost-saving technology.
“When times are good, (oil companies are) willing to spend a lot of money on things that aren’t cost-effective to get the job done,” Dendel said. “Now they’re looking at getting the cost per well down. Though it’s a delay, hopefully in the long-run, it will help us because they’re more willing to look at different technology.”
Even for companies not tied directly to the oil-and-gas industry, shifting prices have challenged manufacturers when it comes to making accurate sales and revenue forecasts.
“We see more volatility in our forecast evaluations than we have over the past few years,” said Scott Zylstra, general manager of automotive and commercial product lines at Grand Rapids-based Cascade Engineering Inc. “In almost all industries we serve, we see a widening range of sales volume projections, making capacity and labor planning more challenging.”
On the positive side, while Cascade Engineering has noted a dip in demand for its compressed natural gas (CNG) storage tanks as a result of plunging oil prices, it’s been outweighed by reductions in raw material costs, particularly for plastic resins, Zylstra said.
In fact, reductions in the cost of plastic resins have been a “boon” for injection molders in particular, since those companies had budgeted for higher raw material prices prior to the oil price decline, said Brian Long, director of supply chain management at the Grand Valley State University Seidman College of Business.
Going forward, Long doesn’t expect to see the $20-barrel of oil that some experts predicted when prices initially dipped below $30 per barrel. Instead, barring a global incident, Long forecasts that oil prices will gradually increase over time as production slows and inventories are consumed.
“If everything remains stable right now, we’ll exhaust the inventories and the report will come out that we’re at the break-even and we’ll see (prices) edge back up,” he said. “If there’s a catastrophic event, then we’ll see it jump up.”