Special Report: The power draw

There’s an irony in the fact that energy costs should be an issue at Qualicase. After all, the custom injection molder is situated in the heart of Oil Country, where fuel is sucked out of the land.

Then you consider the price of electricity.

“I’m paying just over $3,000 per month, and I’m a small plant,” company owner Bruce Borstmayer said from Calgary. “I’m probably running about 14 hours a day, and running three machines on an ongoing basis.” A 176-ton Sumitomo, for example, is molding heating manifolds; a 275-ton Engel is regularly used to make nylon gaskets for tractor-trailer wheels. And there’s no avoiding the reality that injection molding requires a lot of heat.

Yet it’s not the only energy cost that will affect the plastics industry in 2003. Threats of higher resin prices have been linked to a spike in the price of natural gas, which is the primary feedstock to make propylene and ethylene, the latter of which is the foundation for everything from styrene to polyvinyl chloride.

Dow Chemical specifically cited the higher feedstock costs — along with a general drop in demand — when announcing this August that it was idling about 885 million pounds of polyethylene manufacturing capacity. “We’re preparing for another period of volatility in gas prices during the remaining months of 2003 and into 2004,” said Romeo Kreinberg, president of Dow’s polyolefins and elastomers group. The company and its Union Carbide subsidiary had already cut 600 million pounds of capacity since mid-2001.

The reduced supply is expected to lead to higher prices for linear low-density polyethylene (LLDPE).

Meanwhile, the price of low-density polyethylene (LDPE) is artificially low because of a drop in demand, adds Lori Loria of Townsend’s Polymer Service and Information, which tracks resin prices. That price buffer could disappear when the market recovers.

“But nobody ever knows which way the prices are going,” says Howard Sandys, vice-president of Richards Packaging, referring to this year’s notices of polyethylene (PE) price increases that haven’t come to fruition. “It makes it very difficult to plan because you don’t know which increase is real.”

Suppliers, for example, have been forced to delay an announced five-cent-per-pound increase in the price of High-Density Polyethylene (HDPE) because of the struggling market for products ranging from toys to pallets, which are built with the material. Through July, North American HDPE resin sales were 4.3% lower than 2002 levels.

“You usually see 4% growth on an annual basis,” says Townsend’s Frances Moore-Jones. As such, the price increase announced in March was delayed at least three times. But producers were pushing for it by October.

Companies that need to source natural gas, meanwhile, are left with a decision of whether to gamble that current feedstock prices will drop, or to lock in to a pre-determined rate through a hedging option.

Future spikes in natural gas prices can depend on the size of North American reserves and the impact of weather, says Duncan Robertson, a managing partner with SBM Inc., which tracks the fuel that is also used to fire furnaces and generating plants.

“We see some softening of natural gas prices through 2004,” he says. “But if we get a cold winter, you’re going to see some more spikes… we treat weather as something we call a wildcat event.”

For its part, resin producer AT Plastics Inc. continues to look at hedging as the best way to deal with cyclical natural gas prices, says executive VP and CFO James Gingerich. “When it was $9 or $10 (per MMbtu) back in the late winter last year, those call options kicked in and were really disaster insurance for us.”

Hedging, though, isn’t for everyone, says Todd Kostal, director of purchasing and logistics at Atlantic Packaging Products Ltd., which makes plastic bags within its product line. “The question is how significant is energy to your profitability? If it’s two per cent of my cost, I’m a lot less concerned than if it’s 30% of my cost.”

The decision to adopt a fixed price also has to be based on an educated guess as to whether the prices will rise or fall — a gamble at the best of times. “I think this gas market has a lot of room to go down over the next couple of months,” he says. “But don’t beat yourself up when you’re on the wrong side, because it’s going to happen.”CPL

“We see some softening of natural gas prices through 2004. But if we get a cold winter, you’re going to see some more spikes… we treat weather as something we call a wildcat event.” – Duncan Robertson, SBM Inc.