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From glass to aluminum, energy prices wreak havoc
Thursday, October 06, 2005

High oil and natural gas prices continue to ripple through the economy, affecting everything from chemical producers and glass makers to delivery charges, air fares and office rents.

 
 
 
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Even the cushions you sit on will cost more.

Furniture maker La-Z-Boy Inc. is warning that sales and earnings will significantly miss estimates because of limited supplies of a key chemical used in polyurethane foam used in upholstery and bedding. And a higher-end competitor, Ethan Allen, is considering switching to products made with more expensive natural fibers.

The moves come amid potential shortages for oil-based materials as well as soaring prices for natural gas, the fuel that makes so many industrial plants run.

Natural gas prices for industrial and commercial consumers have jumped from less than $8 per thousand cubic feet a year ago to more than $14 on the spot market, crimping not only household budgets but also businesses' bottom lines.

U.S. Steel and Alcoa, for example, are among metals producers warning that the higher natural gas prices will take a bite out of third quarter earnings -- and possibly beyond.

"This natural gas thing is much more serious than people are focusing on," said Charles Bradford of Bradford Research in New York.

Even before Hurricanes Katrina and Rita disrupted oil and natural gas production in the Gulf of Mexico, rising natural gas prices were raising alarms in the glass industry.

Higher furnace fuel prices were blamed in part for the closures last year of the Anchor Container glass bottle plant in Connellsville and Glenshaw Glass in Shaler, and a work force reduction at the Anchor Hocking glass plant in Monaca.

Prices have only gone higher since then, forcing William Kelman, a Pittsburgh businessman who bought Glenshaw's assets in bankruptcy court this week, to re-evaluate his initial business plans and perhaps delay restarting glass-making furnaces that have been idle for about a year.

The rapidly rising natural gas prices are hurting both big producers such as Downtown-based PPG Industries and smaller companies such as Kopp Glass, a specialty glass maker in Swissvale.

"There's been a massive increase lately in the market. Unfortunately you can only pass some of it on to your customers," said Lawrence R. Jackson, Kopp's executive vice president and chief financial officer.

"This is the [highest price] I've ever seen. It's close to a crisis," he said.

Higher prices are causing problems not just for companies but also for energy sellers who worry about getting squeezed on both the buying and selling ends of transactions.

"People tend to think that gas suppliers and marketers who buy and resell natural gas benefit when the price goes up like this," said Kevin Shannon, president of the Open Flow Gas Supply Corp., a buyer and reseller based in Dubois, Clearfield County. "The only thing that increases for us when prices climb to this magnitude is the risk."

The pricing storm has been brewing for some time, Mr. Shannon said.

The electric power generation industry in the United States has met growing demand from consumers in large part by turning to natural gas-fired generation plants rather than using coal or nuclear power.

"People think nothing of cooling their homes more frequently. Very few coal plants have been built and no nuclear capacity," Mr. Shannon said. "The vast majority of the incremental generation increase over the last decade or two has been natural-gas fired."

Natural gas prices were rising in sympathy with oil prices through the spring and early part of summer, Mr. Shannon said. But extremely hot summer weather then diverted natural gas to electric generation that might otherwise have gone into storage for use this winter.

"Throughout the summer the oil market had been strong. It was hotter than hell and we've been putting less [natural gas] in storage. Then Katrina hit," said Mr. Shannon.

With prices so high, Mr. Shannon is asking customers whether demand will follow basic rules of Economics 101 and drop with the rising prices.

For companies such as U.S. Steel and Alcoa, the demand for energy can't shift all that much as long as the economy continues to grow, forcing them to continue to produce.

U.S. Steel last month said third-quarter earnings will fall shy of analyst estimates because of higher prices for natural gas and scrap metal and slightly lower prices for sheet steel, its biggest product. And Alcoa lowered its third quarter earnings forecast 30 percent, citing higher natural gas prices as well as rising raw materials costs and lower aluminum prices.

Mr. Bradford, the metals industry analyst, noted that natural gas accounted for about 30 percent of the estimated $2.6 billion Alcoa spent on energy last year.

He expects prices to remain high through the end of the year before receding next year, leading him to lower his forecast of what he expects the aluminum producer to earn this year and next. Other analysts have followed suit.

Forecasts of lower earnings have sent stocks of metals producers lower as well. U.S. Steel's stock has fallen 16 percent since it lowered its third quarter outlook Sept. 20 while Alcoa shares are off 11 percent.

One of the dilemmas confronting the metals companies is that passing on the costs in the wake of global competition isn't easy -- though it can be done.

FedEx Corp., parent of Moon-based FedEx Ground, yesterday said it would increase shipping rates for its FedEx Express Service by an average of 3.5 percent effective Jan. 2, and that it also will raise a delivery surcharge for certain postal codes by up to 10 cents per package.

But for many companies, passing on the higher costs just isn't an option.

Whirley Industries, a manufacturer of plastic mugs and cups in Warren, said its profit margins are under pressure because it's having to eat the rising costs of the petroleum-based resins it uses.

"Our resin prices have gone up sharply," said Kevin Weigel, controller for the company.

"You may try and increase your pricing, or with others you might tie your pricing to the resin index," he said. "But because of foreign competition, it's a tough market to pass those price increases along."

First published on October 6, 2005 at 12:00 am
Jim McKay can be reached at jmckay@post-gazette.com or 412-263-1322. Post-Gazette staff writers Len Boselovic, Dan Fitzpatrick, Elwin Green and Christopher Snowbeck contributed to this report.
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