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More Industrials Adopt Energy Surcharges in High-Price Era

July 7, 2008
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Add two more industrial end-users to the list of companies passing high energy commodity prices on to customers in the form of surcharges. Kaiser Aluminum and packaging company Sonoco both said last week that they can no longer bear higher energy costs on their own.

Kaiser, based in Foothill Ranch, CA, said that beginning July 1 it will incorporate surcharges for all new orders of fabricated aluminum products to reduce exposure to rising costs for natural gas, electricity and diesel fuel. Global packaging company Sonoco of Hartsville, SC, said it will implement an energy surcharge for all of its tube and core products shipped in the United States and Canada.

"These surcharges are essential to mitigate the extraordinary rise in costs related to energy that we have been absorbing for several years," said Kaiser CEO Jack A. Hockema. "Commodity prices for natural gas and diesel fuel leaped roughly 60% in May compared to the 2007 average. These energy prices are spiraling and highly volatile, so we've elected to introduce a surcharge as the most transparent method to recover these costs."

The Kaiser surcharges are based on a calculation tied to indices provided by the U.S. Department of Energy and will be updated on a monthly basis. The formulas for calculating surcharges can be viewed at www.kaiseraluminum.com.

"We're currently evaluating methods to address the significant increases in the costs of alloying materials, such as magnesium and copper," Hockema said. "We also continue our aggressive pursuit of cost reduction initiatives designed to offset other inflationary cost pressures."

Sonoco's surcharge will be added as a separate line item to all shipments beginning July 14. The charge will be based on the shipping distance between Sonoco's converting plants and the customer's location and will apply to all customers who are not currently paying energy surcharges or who do not have contracted energy-related provisions. "The unprecedented escalation in the cost of diesel fuel and natural gas has significantly increased our energy costs beyond what we are able to continue to absorb," said Sonoco Vice President John Colyer. "We will continue to monitor our diesel fuel, natural gas prices and freight costs and make appropriate adjustments to reflect changes in our costs."

Less than a month after announcing that skyrocketing energy, feedstock and transportation costs were forcing the company to raise the price of all of its products by up to 20%, chemical manufacturing giant Dow Chemical Co. said recently the continued "relentless rise" in costs was forcing it to raise the price of its products by as much as an additional 25% in July. Huntsman Corp. also recently raised prices for all products, some by as much as 25%, and imposed an energy surcharge across a wide range of products (see NGI, June 2). Huntsman blamed speculators in the energy commodities futures market for running up prices.

In a report out last week, Standard & Poor's (S&P) outlined how chemical companies are being forced to address high energy prices. "With the onset of increasingly elevated and volatile energy costs, almost all chemical companies have implemented strategies to mitigate this key issue, bringing renewed focus to customer pricing strategies, restructurings and strategic actions that will affect this industry for years to come," S&P said.

"While chemical companies have been mostly successful at passing through rising energy costs to customers in recent years, the extent to which these businesses can continue to recoup increased costs is a growing concern, particularly as the economy weakens."

Some chemical companies are mothballing older/less efficient plants and targeting most new growth capital to operations and geographic regions that offer higher growth potential or better access to low-cost energy, S&P said.

"While Dow's business profile will enable it to ride out the current soaring energy costs, for many less diversified U.S. chemical companies, the issue of energy inflation remains a key factor with negative implications for credit quality," S&P said. "For some producers, particularly those that have aggressively leveraged financial profiles, energy inflation has become an increasingly challenging issue as the economy weakens."

S&P noted that hedging of energy commodity costs is one strategy industrials are continuing to embrace.

At GasMart 2008 in Chicago last May, a panel of industrial end-users lamented high energy commodity prices but noted that that they are not powerless when it comes to putting a lid on their costs. For instance, commodity price hedging is one option, and conservation is another. And some end-users, such as Guy Ausmus, manager of base metals and energy for steel producer ArcelorMittal USA Inc., say that prices of their own products are rising, which helps to preserve the spread between energy costs and what they can sell their products for (see NGI, May 26).

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