Price Wise: Don't just complain, manage

With the caveat that I have no information on risk management activities at Dow Chemical or other chemical companies ... based on the following articles, for Dow to simply complain about potentially higher natural gas prices rather than manage them is astonishing, particularly given the ease with which Dow (or anyone else) could manage them while prices are at historical lows. Consider --

Natural Gas: Manufacturers Fear Higher Costs

(Wall St. Journal, 12-22-11)

U.S. officials will soon weigh in on a fight between companies that want to export some of America's fast-growing supply of natural gas and big manufacturers that oppose the exports because they rely on cheap domestic gas.

The battle, which pits manufacturers such as Dow Chemical Co. against energy producers like ConocoPhillips, shows how the boom in U.S. fossil-fuel production is upending markets and forcing policy makers into decisions they didn't imagine facing just a few years ago.

Once seen as a likely significant importer of natural gas-before the boom in domestic shale-gas production provided enough to meet demand-the U.S. is now emerging as a potential supplier of the fuel to nations overseas thanks to the newly tapped sources in shale.

Companies are setting their sights on markets in Europe and Asia where natural gas fetches three to four times the price in the U.S. But Dow Chemical and others say allowing exports will crimp the supply available to U.S. users and drive up prices here.

To send natural gas across the oceans, companies must supercool the fuel to minus 260 degrees and convert it to liquid form so it can be loaded onto tankers. Building massive coastal facilities to make liquefied natural gas requires multiple permits from Washington.

The Energy Department is looking at whether exports will drain U.S. supplies and inflate domestic prices. The Energy Information Administration, part of the department, is expected to deliver its analysis in a few weeks.

Among those taking a hit would be chemical companies, which use natural gas as a raw material in car parts, bottles, cleaners, mattresses and other products. Dow Chemical, one of the most outspoken critics of the export proposals, says the U.S. would be better off using its cheap natural gas for domestic manufacturing instead of exports.

"When natural gas is used as a chemical raw material, it creates eight times the value compared to other uses, and fuels higher-paying jobs, exports of finished goods and the vitality of the manufacturing sector," Dow spokeswoman Kasey Anderson said.

Energy companies say there is plenty of natural gas in the U.S. to meet domestic demand and support exports at the same time. They say building the giant export facilities would create construction jobs and boost long-term employment by encouraging a faster rise in U.S. natural-gas output.

The Coal Age Nears Its End

(Wall St. Journal, 12-23-11)

After burning coal to light up Cincinnati for six decades, the Walter C. Beckjord Generating Station will go dark soon-a fate that will be shared by dozens of aging coal-fired power plants across the U.S. in coming years.

Their owners cite a raft of new air-pollution regulations from the Environmental Protection Agency, including a rule released Wednesday that limits mercury and other emissions, for the shut-downs.

But energy experts say there is an even bigger reason coal plants are losing out: cheap and abundant natural gas, which is booming thanks to a surge in production from shale-rock formations in the U.S.

"Inexpensive natural gas is the biggest threat to coal," says Jone-Lin Wang, head of global power research for IHS CERA, a research company. "Nothing else even comes close."

For decades, coal produced more electricity than all other fuels combined, and as recently as 2003 accounted for almost 51% of net electricity generation, according to the U.S. Energy Information Administration. But its share has dropped sharply in the last couple of years. It fell to 43% for the first nine months of 2011, as natural gas's share has jumped to almost 25% from under 17% in 2003. Despite that, gas prices have fallen.

Natural-gas plants are springing up around the country, from Connecticut to California. More are expected to crop up along natural-gas pipelines, especially in places like Texas where demand for power is outstripping supplies.

With energy markets flooded with cheap natural gas from shale rock, utilities have been idling coal capacity and running gas-fired plants harder. New EPA rules are also significant. Last Wednesday, the agency released its latest rule, requiring power plants to slash emissions of mercury, arsenic and other toxic pollutants within three to four years.

EPA's Power Play

(Wall St. Journal, 12-22-11)

The new rule may be the most expensive the EPA has ever issued, and it represents the triumph of the Obama Administration's green agenda over economic growth and job creation. The rule requires power plants to install "maximum achievable control technology" to reduce mercury emissions and other trace gases. But the true goal of the rule's 1,117 pages is to harm coal-fired power plants and force large parts of the fleet-the U.S. power system workhorse-to shut down in the name of climate change. The EPA figures the rule will cost $9.6 billion, which is a gross, deliberate underestimate.

The economic harm here is vast, and the utility rule saga-from the EPA's reckless endangerment to the White House's failure to temper Ms. Jackson-has been a disgrace.

For most people and companies, it's easier to complain than actually do something positive about the thing that bothers you. Are you like that when it comes to resin price volatility? The overwhelming evidence (e.g. the uniqueness of Sunny Delight's risk management program) says yes. Why? I believe most processors are more than capable of learning and applying risk management tools. So the hurdle isn't aptitude; it's attitude.

I suppose if a company chooses to complain about, rather than manage, natural gas prices - which are easier to manage than resins prices - processors have more room to complain. But complaining doesn't solve anything, and it's really lame when the solution is right in front of you. Don't just complain; change your attitude, and win.

About the author: Tom Langan dba WTL Trading is a risk management consultant helping processors control resins and others commodities costs, increase sales, and secure profit margins.