Chemical Industry Faces Double Whammy from Hurricanes and High Natural Gas Prices

Strategic Insights -

The chemical industry narrowly escaped immediate damage from Hurricanes Katrina and Rita, but it faces a more formidable challenge in the form of high natural gas prices, which have been soaring since 2001. As a result, prices for chemicals and products made from them are likely to increase, affecting consumers from medicines to auto parts to computers. While some executives are optimistic that the industry will recover, analysts worry that high gas prices may curb consumer spending and end the era of constant price increases.

Key Takeaways:

  • The chemical industry has been under pressure since 2001 due to soaring natural gas prices, which have increased from $2 per million B.T.U. to over $12 in the past few years.
  • Natural gas accounts for about 60% of the value of chemicals made in the US, making it a crucial raw material for the industry.
  • The industry has passed on the costs to consumers, who can expect to pay more for products made from chemicals, such as plastics, fibers, and compounds.
  • Analysts are concerned that high gas prices may curb consumer spending, ending the era of constant price increases and affecting the industry's growth.
  • Many chemical companies have already shuttered energy-guzzling plants and installed productivity-enhancing programs, but the savings have not kept pace with the costs.
  • The industry's growth may be down a few percent this year, but it is expected to increase by the same amount in 2006, according to Klaus Peter Lobbe, chairman of BASF.
  • Nalco Holdings estimates that the effect of the storms will add $15 million to its costs, even as customers whose operations were hurt buy as much as $10 million less from them.

Statistics:

  • Natural gas prices have increased from $2 per million B.T.U. to over $12 in the past few years.
  • Natural gas accounted for 43% of Dow's costs this year, up from 29% in 2002.
  • PPG Industries uses between 60 trillion and 70 trillion B.T.U.'s of natural gas a year, so a one-dollar increase in price raises its costs by $60 or $70 million.
  • The industry might face shortages if the winter is severe, according to Kevin Swift, chief economist for the American Chemistry Council.

Sources:

  • Goldman Sachs, as cited by Robert Koort.
  • Dow Chemical Company, as cited by Andrew N. Liveris.
  • DuPont, as cited by Diane H. Gulyas.
  • American Chemistry Council, as cited by Kevin Swift.
  • PPG Industries, as cited by Jeff Worden.
  • BASF, as cited by Klaus Peter Lobbe.
  • Nalco Holdings, as cited by William H. Joyce.
  • Fulcrum Global Partners, as cited by Frank J. Mitsch.