Rising Natural Gas Prices Hurting Manufacturers

June 5, 2002
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GRAND RAPIDS—The National Association of Manufacturers (NAM) reported earlier this year that manufacturing firms were being jolted by price hikes for natural gas, and called for immediate tax relief and a long-tern national energy policy.

NAM estimated that price increases over the last year for oil and gas cost the economy $115 billion, and that the higher costs have reduced profits for manufacturers by 14 percent.

“Manufacturers consume more than a quarter of the energy used in our economy, which means they’re being hard-hit by escalating natural gas prices,” said NAM President Jerry Jasinowski.

Those figures and that dire situation came from the results of a study NAM did with 737 manufacturing firms of all sizes.

“Two-thirds of the survey respondents say they rely on natural gas as a significant source of energy. According to the Department of Energy, the price of natural gas in the first quarter of 2001 will be 139 percent higher than during the same period one year ago,” added Jasinowski.

Not only were these companies paying 139 percent more for natural gas, but prices for fuel substitutes cost these firms even more. All reported they used a substitute, and nearly sixty percent said it was oil. The average oil price hike for these users was 167 percent.

But ninety percent of the respondents reported that they have only passed on about a quarter of that energy increase to their customers, while 13 percent said they had to curtail part of their operations because of the higher prices. Almost half of those who did cutback also laid-off workers.

Of the survey respondents, 36 percent were small firms with fewer than fifty employees, while another 23 percent had from 50 to 99 workers. Only 9 percent had more than 500.

Local manufacturers fared better than their counterparts across the country last year as natural gas prices were restricted in the state. But that situation changed on April 1 when the restriction was lifted. And rising energy costs have been a hot topic of conversation at the Manufacturers Council, one of three industrial voices of The Right Place Program.

“Companies that have large ovens and things like that are really just going to suffer terribly. They’re talking about a 30-percent increase in round numbers here in Michigan for natural gas,” said Carl Brown, who heads the council.

“All the companies that are members of the Manufacturers Council are very concerned at this being another significant cost increase that we have to deal with,” he added.

Paint companies and firms that use gas to heat-treat parts are expected to be among the hardest hit. Other than conserve or find an alternative, there isn’t much these industrial consumers can do to ground the soaring price of natural gas. Like the firms in the survey, local companies can’t simply pass it on to their clients, either.

“When they talk about passing that on to your customers, that’s not the real world any more. So you have to find ways to reduce costs elsewhere because customers, as a general rule, don’t accept price increases these days.”

Brown is also executive vice president and COO of Nicholas Plastics Inc., an Allendale-based maker of plastic extrusions and moldings that doesn’t use a lot of natural gas.

“We use a good deal more electricity than we do gas to heat machines with, and so our usage of natural gas is limited to heating the buildings. That’s our biggest single use and, of course, that’s a significant thing,” said Brown.

Still, the cost for electricity is also rising and increasing the company’s fixed expenses. Brown said he expects an even higher electrical bill in the coming months and noted that electric rates in Michigan are roughly 30 percent higher than in neighboring states.

“I have been told that a big reason for that is because the state is basically a peninsula and the only way they can get electricity in is from the south coming north, which is a long way to transmit,” said Brown. “We, as manufacturers, are already at a significant disadvantage in the Midwest when it comes to electric costs.”

As for the future, in January NAM recommended that changes should be made to global monetary policies and national tax procedures to fuel economic growth.

Last month, its request for another half-point cut in the country’s prime lending rate took place. The association went on to suggest that the Fed shouldn’t be shy about making yet another half-point cut, if necessary.

NAM also said that overseas monetary policies were too tight, and suggested that these be loosened. It recommended that the European Central Bank cut lending rates by 50 basis points and that the Bank of Japan buy government debt and raise liquidity.

Regarding tax policy, NAM wants a rate cut, rather than a rebate, of $60 to $85 billion and the association wants it retroactive to the beginning of the year. A cut is preferred over a rebate because NAM feels it will raise consumer demand faster and give smaller businesses more liquidity.

“The advantage of a rate cut, as opposed to a rebate, is that it is permanent, and changes behavior in a more lasting way,” said Jasinowski. “With a rate cut, taxpayers can anticipate the gain in income, and plan their spending decisions on this basis.”

In addition to changes in monetary and tax policies, NAM has also called for the federal government to develop an energy plan.

“Unless the Administration and Congress act soon, we’ll begin to see additional layoffs in the manufacturing sector, higher prices for consumer goods and slower economic growth. Given the sudden downturn, lawmakers must quickly enact effective short- and long-term remedies to our energy problems in coming weeks,” said Jasinowski.

May natural gas futures traded at $4.98 per thousand cubic feet in late April. BJ

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