Higher costs for oil, natural gas and electricity are being felt by consumers across the board as companies are forced to pass on to customers the higher prices they pay for energy. In the chemicals and forest products industries, high energy commodity costs are reshaping company strategies, notes Standard & Poor’s (S&P) in a new report.

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.”

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 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 (see Daily GPI, June 25). 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. Huntsman blamed speculators in the energy commodities futures market for running up prices (see Daily GPI, May 30).

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.”

Taking a different strategy is German chemical giant BASF, which “has actively shifted is portfolio in the past decade by investing in more value-added businesses that follow different cycles and selling its more commodity and heavily energy-intensive businesses,” noted S&P. “Over the next three years, we expect BASF to largely compensate the weakening petrochemicals part of its portfolio through the strong performance of its agrochemicals and oil and gas businesses. The group’s long-term strategy to have a natural hedge against its key gas- and oil-related feedstocks is paying off in the current environment.”

S&P noted that hedging of energy commodity costs is one strategy industrials are continuing to embrace. Forest products producer International Paper (IP) had 70% of its 2008 natural gas requirements hedged at March 31, 2008, S&P noted.

“IP is also redirecting its capital budget toward efforts to reduce energy consumption and enable fuel mix changes,” S&P said. “Similar past initiatives have reduced total purchased energy consumption by 27% per ton of paper since 2001 for annual savings of $285 million. IP has also been working on supply chain initiatives for several years, with a substantial effort focused on managing transportation costs in its containerboard segment.”

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