NGI The Weekly Gas Market Report
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 last week that the continued “relentless rise” in costs is forcing it to raise the price of its products by as much as an additional 25% in July. The company also urged Congress to rein in energy markets and focus on sound energy policy going forward.
Dow said it also will implement a freight surcharge of $300 per shipment by truck and $600 per shipment by rail, effective Aug. 1. The surcharge applies to North American customers buying chemicals, hydrocarbons and plastics where Dow absorbs the freight currently. Later this year a freight surcharge will be implemented in other geographic regions as appropriate, the company said.
Furthermore, in an effort to deal with the continuing increase in the cost of energy and hydrocarbon feedstocks, the company is moving ahead with plans to temporarily idle or reduce production at a number of plants. Dow has reduced its ethylene oxide production worldwide by 25% and idled 30% of its North American acrylic acid production. The company also will idle 40% of its European styrene production capacity and has reduced its European polystyrene production rate by 15%. These actions are due to the slowdown in the U.S. and European economies, as well as the recent surge in hydrocarbon feedstock costs.
In its automotive division, Dow, citing a serious decline in North American auto sales, is announcing a series of cost reductions covering facilities, people and external spending. In addition, the business is in the process of divesting its paint shop sealer business and is implementing plant consolidations resulting in the closure of three production units.
In addition, Dow Building Solutions temporarily idled 20% of its European capacity for producing Styrofoam insulation. Earlier this month the company announced plans to idle three Dow Emulsion Polymers plants representing 25% of North American capacity and 10% of European capacity. These reductions were directly related to declines in the housing and consumer sectors, as well as rising costs.
Dow CEO Andrew N. Liveris described the steps as “extremely unwelcome but entirely unavoidable” as the global cost of oil, natural gas and hydrocarbon derivatives surge ever higher.
In late May, Liveris, in announcing the first round of price increases that went into effect June 1, noted that the company’s first quarter feedstock and energy bill leaped 42% year over year, and that trajectory was continuing with the cost of oil and natural gas continuing to climb (see NGI, June 2). Following Dow’s late May lead, Huntsman Corp. said it was raising prices for all of its chemical products, some by as much as 25%, and also imposing an energy surcharge across a wide range of products.
In a year-over-year comparison, front-month crude oil futures prices have almost doubled from $69.14/bbl for the week ended June 22, 2007 to $134.62/bbl for the week ended June 20, 2008. Likewise, front-month natural gas futures prices have vaulted higher from $7.130/MMBtu during the 2007 week to $12.994/MMBtu for the 2008 week.
“The price increases we announced on May 28 helped, but they were not enough to fully cover the additional costs we are now facing,” said Liveris. “For the first half of 2008, our feedstock and energy costs are up more than 40% compared with the same six months of last year. Even since our last announcement, the cost of hydrocarbons has continued to rise, and that trajectory shows no sign of changing. We must restore margins in our businesses, both through price increases and the reduction of operating costs at certain production facilities.
“We’re continuing to do all that we can to tackle this issue on multiple fronts. We improved energy efficiency by 22% from 1995 to 2005 and are targeting another 25% by 2015. We’re cutting costs significantly. We have an array of efforts around alternative energy and alternative feedstocks. We’re making great progress in the implementation of a strategy that will address the issue over the medium to long term. But the staggering increases in our costs over the past few months have forced us to take these further measures in order to restore our margins.”
Over the past five years, Dow’s bill for hydrocarbon feedstocks and energy has surged four-fold, from $8 billion in 2002 to an estimated $32 billion-plus this year.
“It is encouraging to finally see a growing number of voices in Washington and the state capitols that are calling for rapid action to address the U.S. energy issue,” said Liveris. “As the price of oil and natural gas climbs higher, and gasoline continues its journey north from $4 a gallon, consumers are hurting, industry is hurting and our nation’s status as a global economic leader is being seriously eroded. We can no longer allow the energy debate to be mired in politics. It is time for Congress to show true bi-partisan leadership, by opening domestic supplies of oil and natural gas, assuring transparency in our energy markets, encouraging even greater energy conservation, and by placing all forms of alternative energy on the table — including solar and wind, as well as nuclear, clean coal, and biomass — all the while being mindful of the need to slow, stop and reverse the growth of greenhouse gas emissions.”
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