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BUSINESS
The chemical industry is reeling from last month's record run-up in natural gas prices. Chemical makers have throttled back output and are trying to pass costs along to customers. Wall Street and industry groups, meanwhile, are warning of deteriorating business conditions.
Two weeks ago, severe cold--as well as low inventories and production--pushed spot month futures prices for gas at the Henry Hub in Louisiana to as high as $11.90 per million Btu. They have since eased to about $7.00 per million Btu. Daily spot prices had traded at more than $18.00 per million Btu. Natural gas prices aren't the only problem. International turmoil related to Iraq and Venezuela is pushing up petroleum prices as well, increasing costs for naphtha and gas oil feedstocks. According to the Energy Information Administration, spot prices for West Texas intermediate crude oil were $36.76 per barrel at the end of February. As happened two years ago when natural gas prices hit $10 per million Btu, chemical makers have responded by shutting down capacity. BP is idling a 500,000-metric-ton-per-year a-olefins unit in Pasadena, Texas, citing "dramatic increases in production costs." Terra Industries shut down production at its Blytheville, Ark., unit--which makes ammonia and urea--and at its ammonia, urea, and methanol facility in Woodward, Okla. Mississippi Chemical says it has indefinitely idled an ammonia plant in Donaldsonville, La. Many of the ethylene plants that were shut down two years ago are still down because of oversupply. Because of the gas cost, Dow Chemical has throttled back half its Seadrift, Texas, ethylene capacity. Earl H. Armstrong, a consultant with DeWitt & Co., doesn't think more plants will be idled other than Dow's and that those already down won't restart. The chemical industry is trying to pass the higher production costs down the supply chain, putting price increases on the table for products as diverse as ethylene, propylene, polyurethanes, carpet latexes, engineering polymers, vinyl acetate, propylene oxide, chlorine, and caustic soda. Wall Street is worried. Merrill Lynch chemical analyst Donald D. Carson has reduced his first-quarter outlook for Dow, Lyondell, Millennium Chemicals, and Nova Chemicals because of the run-up in energy prices, and he expects losses at all four firms. "While we believe that natural gas and ethane prices are not sustainable at current levels, we expect average ethylene chain margins to be squeezed as surging hydrocarbon costs offset realized price increases this quarter," Carson says. The American Chemistry Council is also speaking out about natural gas prices. In testimony to the Senate Committee on Energy & Natural Resources, ACC suggested the federal government encourage new supplies of natural gas as well as alternative power generation fuels such as clean coal. "If the U.S. chemistry business is to remain competitive in today's global market and continue to contribute revenue, jobs, research, and other benefits to the U.S. economy, natural gas prices must come down," ACC said.
TROUBLED TIMES Ethylene plants like BP's Chocolate Bayou, Texas, cracker have been hit hard by rising prices for feedstocks. |
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