Chemical Industry Also Affected by Rising Natural Gas Prices

Recent spikes in U.S. natural gas prices aren't just affecting residential customers, they are raising costs at companies, too -- especially those in the chemical industry.

Bob Clausen, vice chairman and chief financial officer at Solutia Inc., said many chemical companies are particularly vulnerable to natural gas prices, because they use it as both a fuel to heat their plants and furnaces and as a raw material to make products.

Solutia, for example, uses large quantities of natural gas and its derivatives to make plastics and nylons used for things such as carpet fibers, corrosion-resistant materials and interlayers for laminated glass, such as windshields.

While natural gas prices are drawing national attention because futures and spot prices hit record levels last week, chemical companies have felt the squeeze coming for a while, Clausen said.

In early March 2002, natural gas futures were trading for about $2.90 per 1 million British thermal units on the New York Mercantile Exchange. By the end of October, prices were $4.15 per 1 million Btu, and a week ago, gas for March delivery closed at $9.58 per million Btu, the highest price in two years.

The last year's increases mean Solutia has had to carry higher costs of manufacturing plastic and nylon, Clausen said. For instance, prices of propylene and cyclohexane, two major natural gas derivatives used to make nylon and plastic, have increased dramatically in recent months along with the rise in natural gas prices.

On Feb. 20, Solutia raised the prices by 13 percent of the nylon carpet fibers it manufactures, citing the high costs of raw materials and energy.

In a statement Brad Hill, Solutia's vice president of marketing and business management, said sustained increases in the cost of energy and raw materials left the company with "little choice but to raise prices to partially offset the impact."

Greg Lebedev, president of the American Chemistry Council, an industry trade group, said high natural-gas prices are hurting companies and have forced some to shut down operations.

U.S. chemical companies have long been able to compete globally because they have had access to relatively cheap natural gas, compared to many European companies that use crude oil as a fuel and raw material. But that edge is disappearing as natural gas prices close in on the cost of oil, Lebedev said.

While natural gas prices have begun to fall -- gas for April delivery closed at $7.16 on Monday, down 93.9 cents -- as the weather warms up and demand drops, the days of cheap gas may be history, said Bill O'Grady, vice president of futures research at A.G. Edwards & Sons Inc. That's because production has fallen, and U.S. supplies are dwindling.

Unlike a large percentage of oil, which is imported from other countries, natural gas is a regional commodity produced in the United States and Canada. The United States produced about 9.2 million barrels of natural gas a day in 1967, but that has fallen to about 4.5 million barrels a day because many wells have been depleted and few new ones are being drilled, O'Grady said.

"What has happened is that the industry is facing a persistent supply problem," he said. "We have found all the easy, cheap gas, and we have reduced supplies."

A few years ago, the nation had good inventory levels, but consumption of natural gas now seems to be overtaking production, O'Grady said.

In the last week, the U.S. Energy Department said gas inventories had fallen by 154 billion cubic feet, or 13 percent, to 1.014 trillion cubic feet. That's 48 percent below last year's level.

"We've been poking holes around this country since the 1850s, looking for gas," said O'Grady. "What has happened now is ... they can find gas, but the wells deplete faster."

Last week the American Chemistry Council urged the federal government to help boost natural gas supplies by allowing more drilling for gas in Alaska, the Rocky Mountains and the eastern Gulf of Mexico.

The council, whose member companies include Solutia, BASF Corp. and Dow Chemical Co., also asked the government to allow licensing and construction of more pipelines.

600450 Chemical Industry Also Affected by Rising Natural Gas Prices
Date: 6 March 2003

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