Price Wise: Take natural gas price risk off the table

Long-term energy price and supply projections are always suspect. But for most manufacturers exposed to energy and resins price risk, it's worth asking, "How low can natural gas prices go? " Consider these recent articles:

Low Gas Prices Spur New Chemical Plants (WSJ, 12-27-11)

The boom in low-cost natural gas obtained from shale is driving investment in plants that use gas for fuel or as a raw material to make chemicals, plastics, fertilizer, steel, and other products.

Shale-gas production volumes will depend on environmental-protection rules set by state and federal regulators. Many environmentalists say that the chemicals pumped into the ground to unlock shale gas are a threat to water supplies.

Shell plans to build an ethylene plant in the Appalachian region. Ethylene, produced from ethane in natural gas, is used to make plastics and other materials that go into an array of products. Dow plans to build two new chemical plants near the U.S. Gulf coast and upgrade or reactivate others as part of a planned investment of $4 billion over the next six years. Some of the chemicals will be exported to Latin America. [Aside -- exports? Interesting, given the effort by Dow and others to prevent natural gas exports by energy producers, discussed here.]

Natural Gas Ends 2011 below $3 (WSJ, 12-31-11)

U.S. natural gas prices fell to 10-year lows, underscoring how the nation's booming energy business is becoming a victim of its own success. New drilling techniques have unlocked vast new stores of natural gas from shale formations and other so-called unconventional reservoirs

Natural gas futures

Cheap gas hurts energy company profits. "American natural gas production growth is essentially useless at this time since you can't make any profit on North American natural gas," said EOG Resources. EOG plans to direct 90% of spending to oil production in 2012, drilling for gas only where it is necessary to hold on to acreage.

Most of you processors have fixed product prices due to customer constraints, competitive pressures, or both. If you don't buy resins until 'the last minute' or manage the price risk before you buy, then you're 'short the market' through your fixed price products. [See Price Wise for 12-20-11.] How did that "strategy" work for you in 2011? How does it look in 2012?

As high price correlations and this flowchart show, crude oil prices drive resins prices, but natural gas plays an important role affecting polyethylene, ABS, PVC, and other resins prices to different degrees. Whichever resins you buy, for 2012, from a risk management perspective, now is a good time to take some or all of your gas price risk off the table.

Managing price risk is smart business, and easy once the rules are in place and you know what you're doing. Managing natural gas price risk is smart and even easier. At this time, it's also very inexpensive. Calculate your natural gas price risk in your resins or energy consumption, then mitigate or eliminate it in 2012. You'll be ahead of 2011 right off the bat.

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.