WASHINGTON—That bleary-eyed look you´ll be seeing on rubber industry executives in coming months is from more sticker shock—this time, natural gas prices.
As if continuous and enormous increases in raw material costs haven´t been enough, the price of natural gas has gone through the roof. Increasing demand and disruptions from hurricanes Katrina and Rita caused natural gas prices to rise nearly 90 percent between October 2004 and October 2005, according to Roger S. Hendriksen, director of investor relations and corporate communications at Cooper Tire & Rubber Co.
Natural gas is used extensively in the rubber industry. Both rubber product manufacturers and suppliers often use steam to power presses, dryers and other machinery—large volumes of steam generated by boilers fired with natural gas.
Additionally, natural gas has been promoted as the clean alternative to oil and coal for power plants. Some states use natural gas to run such facilities, meaning natural gas shortages and higher prices will affect all businesses in those states.
An executive at one synthetic rubber company, who requested anonymity, crunched the numbers and found that the 94-percent increase in natural gas costs over the past year translates into a 3 1/2-cents-per-pound increase in the cost of producing a pound of rubber.
Consumers are expected to see a 48-percent hike in their home heating bills this winter, according to the U.S. Department of Energy´s Energy Information Administration. Within the rubber industry, the question is: How do companies in a mature industry—dealing with production demands, higher prices from all suppliers and customer pressure to reduce per-unit product costs—handle natural gas price increases of this magnitude?
The problem defined
The problem of higher natural gas prices didn´t begin this year. It has been a problem since the beginning of this decade, and the American Chemistry Council—whose membership includes many vital suppliers to the rubber industry—has made an ongoing study of it.
"Prior to this year, most of the higher prices reflected increasing demand against a flat supply situation," said ACC Chief Economist Kevin Swift. An American Gas Association fact sheet states that although the number of producing natural gas wells has tripled since 1971—to about 300,000 from 100,000—total production has declined because most of the wells are becoming depleted.
For every $1 increase in the per-million-BTUs cost of natural gas, there is a $3.7 billion increase in costs to the chemical industry alone, according to an ACC study. That study also stated that before the hurricanes hit, capacity utilization for many petrochemical, petrochemical feedstock and polymer manufacturing facilities was in the 91- to 94-percent range. The hurricanes made as much as 60 percent of that capacity unavailable.
The U.S. already labors under a natural gas price disadvantage against the rest of the world, based on the supply-and-demand situation in each country, according to the ACC.
The council said that on Oct. 26, the U.S. price for natural gas sat at $13.90 per million BTUs. The only country that pays anywhere near as much is Canada, at $11.20. This compares with $8.20 in the United Kingdom, $4.85 in China and a mere 75 cents in Saudi Arabia.
What it does, what to do
Jim McGraw, CEO and managing director of the International Institute of Synthetic Rubber Producers, said he hasn´t heard much from his members as to the effects of higher natural gas prices on their businesses, or as to what they´re doing to try to offset those costs.
Except for acknowledging the rapid increase in natural gas prices, Goodyear declined comment on the issue. Other companies, however, were more forthcoming.
"Natural gas for us is just one more component of the ´Perfect Storm´ of higher raw materials prices you´re also seeing with petroleum, natural rubber and butadiene," said a spokeswoman for Bridgestone/Firestone. "We´re in the same boat as Goodyear, Michelin and everyone else."
Generally, Bridgestone/Firestone tries to hedge on natural gas prices, buying forward in the late spring and early fall to take advantage of lower prices during those seasons, the spokeswoman said. This fall, however, high petroleum costs caused many industries to turn to liquefied natural gas, depleting the natural gas stocks that normally would have been available.
Natural gas costs are having a significant impact on Chardon Rubber Co. in Chardon, Ohio, according to Marian Devoe, executive vice president and chief operating officer.
"Period to period, the price of natural gas has gone up 100 percent," Devoe said. "I´m certain this is affecting us internationally, simply because foreign competition in our industry couldn´t be more tough."
Paul Callitsis, Chardon Rubber director of marketing, said the company is seeing surcharges on many of its raw material purchases—including chemicals and synthetic rubber—that are directly related to higher natural gas prices.
The severity of the problem far outstrips the number of alternatives companies have to deal with it, commenters agreed.
"There´s not a hell of a lot we can do," said Daniel L. Hertz Jr., CEO and technical director of Red Bank, N.J.-based Seals Eastern Inc. "We just have to learn to live with it and try to run a little more efficiently."
Like Bridgestone/Firestone, Seals Eastern faces other problems besides high natural gas prices, according to Hertz. For example, he said, New Jersey has some of the highest business taxes in the U.S.
"The state legislature did everything possible to drive industry out, then started whining about the taxes," he said. "The only thing that´s keeping us alive is the exclusive technology we´ve developed.
"We do everything totally opposite from the way the industry is going," Hertz said. "We´re in a totally unique situation—I saw this coming in 1980, and we´ve been preparing for it since then. We´re only a $12 million company, but with our lab support we have the overhead of a $50 million or $100 million company. Yet last year we had 25-percent growth."
Alternative fuels aren´t really an option for most firms, even if petroleum and other fuels were cheap, a spokesman for the Rubber Manufacturers Association said.
No companies reported layoffs or production curtailments because of natural gas prices. Many, however, reported efforts to conserve fuel.
BFS, for example, has a worldwide program to cut its energy consumption by a total of 3 percent. The company also is starting to experiment with methane and nitrogen, the spokeswoman said.
Companies also are doing what comes naturally when their raw materials costs rise: They are raising the prices of their own products. Hendriksen, for example, noted that Cooper has announced several price increases over the past year and is raising prices again by up to 5 percent, effective Dec. 1.
Callitsis said Chardon Rubber is trying to make up for volatility in natural gas prices by hedging forward. He also said the company is raising prices.
"It´s a very, very difficult road to increase prices," he said. "But we have to do it, and we have been doing it."