Given the nature of the competitive forces prevailing in the market for water tanks, the prices of particular competing sized tanks from different manufacturers should, and do, converge. However, if we analyse the prices of all of the round tanks within a particular polyethylene manufacturer’s range, and convert these prices to a price per litre we discover significant variations across the range as shown in the chart below.
The main trends are that:
- The price per litre of capacity initially declines quite quickly as the size of the tank increases from 1000 litres to 5000 litres. For a 1500 litre tank the price per litre is 51 cents per litre, reducing to 17 cents per litre for a 5000 litre tank.
- It then increases to as high as 22 cents per litre for the tanks in the range between 5500 and 9000 litres before declining to 16 cents per litre for tanks of 10000 litres.
- The price per litre of capacity then resumes its decline as the size of the tanks increases and bottoms out at 10 cents per litre for tanks of 22500 to 24000 litres.
- Then the price per litre does an about turn and rather than continue downwards as might be expected, it then begins to increase as the tanks increase in size.
Having analysed the trends in capacity pricing, the next thing is to understand what are the main factors which cause manufacturers to price this way. Our research has lead us to believe that there are several causes of this capacity pricing behaviour as we have summarised them below.
We need to start with how polyethylene tanks are made. They are made by a rotomoulding process which involves the use of a steel or aluminium mould which is loaded with the required volume of polyethylene powder and then this mould is placed into a gas fired oven and rotated. So we can see from this that there are some relatively fixed elements involved in the manufacturing process such as the need to get the right amount and colour of powder, the time taken to load that powder into the moulds and the time to place the mould into the oven. So its bit like cooking a meal. The preparation time is disproportionately high for small tanks (or meals) compared with bigger tanks (or bigger meals).
Then having loaded the mould with powder and placed it in the oven, there is the time taken to cook the tank. Bigger tanks take longer than smaller ones but the time is not directly proportionate to size. Of significance is also what can be described as the opportunity cost involved and by that we mean that while a small tank is being cooked, the oven can’t be used to cook a larger, higher revenue tank. As a consequence, the manufacturer needs a higher percentage margin on smaller tanks to cover these costs.
If these were the only factors which determined the cost of manufacturing tanks, the price per litre curve should continue to decline as the size of the tanks increased. As we showed above that tends to happen up to tanks of around 5000 to 5400 gallons (22500 to 24500 litres) in size. So why does the price per litre curve then turn upwards? As it turns out, there are two very different factors at work.
The first one relates to the demand for tanks of different sizes. About 60% of this manufacturer’s tanks sold are between 22500 and 24500 litres in capacity. So they can put these moulds in production and get long runs of tanks before they have to stop production to change over the mould to make a tank of a different size. As the other tanks in there range generate relatively small volumes, to manufacture their full range involves quite a lot of lost production time because every time there is a mould change, about 2 hours production is lost on one of the rotomoulding ovens.
The second reason relates to transporting tanks. In most states, tanks in excess of 24500 litres are over size loads which are subject to various restrictions. These restrictions increase the costs of delivery and this increased cost needs to be recovered through higher pricing.