High natural gas prices create downstream woes
Tom Stundza -- Purchasing, 7/17/2003 2:00:00 AM
Most pricing problems for buyers surveyed by PURCHASING in June centered on natural gas—either the skyrocketing cost of the fuel itself or the prices of products dependent on natural gas as a component of their manufacturing processes.
"Natural gas is the biggest buying problem this month for many manufacturing firms," says the purchasing manager for a Pennsylvania-based forgings company. "Many firms are trying to implement gas surcharges due to high natural gas prices."
PURCHASING's monthly Business Survey for June finds buyers reporting supply problems, as well, because some chemical plants have curtailed production due to the high cost of natural gas. The fertilizer industry has been particularly hard hit, since natural gas accounts for 90% of the cost of ammonia, the building block for nitrogen fertilizers. Ammonia manufacturers are not faring any better, with factory closings also being reported.
Buyers blame high gas costs for price increases for an undefined group of chemicals as well as methanol, caustic soda, titanium dioxide, aluminum oxide and various solvents.
Price increases already are hitting industrial companies, which account for more than 40% of natural gas consumption—and which compete with companies abroad that pay far lower prices. That's probably why comments from purchasing and supply managers say numerous producers are attempting to offset downstream pressure from natural gas costs by boosting market prices on an undefined set of resins as well as various grades of polypropylene, polyvinyl chloride and polyethylene resins.
The purchasing manager for a producer of coated films and laminates in Rhode Island cites: "Price increases on plastic resin-based products, specifically olefins," noting also that, "such feedstock cost pressures are squeezing margins in markets where obtaining price increases is unlikely."
Buyers such as the materials manager for a plastics processing company in Terre Haute, Ind., report higher market prices in June for some extruded and blow-molded plastic parts.
"There have been many price increase requests related to products derived from natural gas," adds the purchasing manager for a maker of automotive interiors.
In fact, plastics used in everything from grocery bags to molded injection parts for toys and cars are being affected, according to buyers, who support the view of market researcher Graham Copley of Sanford C. Bernstein & Co. in New York. That's why industry shutdowns in the fertilizer chemicals and petrochemical industries are likely to continue: "There is a proportion of U.S. capacity that will not be competitive," Copley contends.
Buyers see high prices ahead
The buyers polled by PURCHASING believe the natural gas pricing likely will remain high as the year progresses because their suppliers can't keep up with growing demand, particularly from utilities using the fuel to generate electricity.
Natural gas supplies are 29% below their five-year average and 39% lower than a year ago. It's not just the cold weather that's to blame. Demand has been rising steadily for years, and supplies are lagging. Demand rose 12% from 1992-2002, far outpacing the 5% increase in supplies. That trend is expected to continue.
Natural gas prices traded below $4 per million British thermal units (BTUs) for much of 2002 before starting a steep ascent at the end of the year, ahead of the war in Iraq. Although natural gas tags tumbled after the war, the respite was brief and the commodity was trading in mid-June around $6 per million BTUs.
A warm summer, sparking increased demand for air conditioning, followed by a cold winter, could bring the year-end price past $7.50 per million BTUs, according to the U.S. Energy Department. That's because, while domestic natural gas supplies in storage were 1.3 trillion cubic feet in mid-June, these inventories were 718 billion cubic feet below the year-ago level and more than 25% below the five-year average inventory level.
The effects of this latest surge in prices have led to renewed calls from the gas industry for the loosening of environmental restrictions on drilling and pipeline construction in the U.S. Overall, about 23% of the nation's energy needs are met by natural gas. The U.S. is a large producer of natural gas, second to Russia, and 85% of the gas used here comes from domestic wells. But, many parts of the country remain off limits for drilling for environmental reasons. Gaining access to these areas is a top priority of the energy industry, foreshadowing a more intense struggle between conservationists and natural gas companies.
Canada, with large reserves and geographic proximity, provides more than 90% of the natural gas exported to the U.S. But Canadian exports to the U.S. are slowing as home-market demand is growing; many power generators are switching their plants from such other fuels as oil or coal. That leaves the U.S. with the alternative of importing liquefied natural gas from other countries. Such gas, condensed into a liquid by chilling it, is transported by ship, and currently accounts for only 1% of the nation's gas imports.
Yet even raising today's imports to 3% of the total isn't expected to happen anytime soon, because only a handful of terminals are capable of processing liquefied natural gas. The largest are in Everett, Mass., near Boston, and Lake Charles, La. And the costs involved in building the terminals, and the reluctance in many coastal areas to have large gasification installations in their vicinity, have kept many such projects from getting off the ground. So have fears that terminals could become targets for terrorists.
"In the power industry, we have seen a definite conservative approach to building new power plants," says Donald Butman, purchasing manager at energy counselor Stone Webster Consultants Inc. in Centennial, Colo. "The competition is extremely tough, and very few plants are expected to be built until 2004."
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