Chemical Disaster
Prices slide steeply amid weak demand
interactive.wsj.com
By Cheryl Strauss Einhorn
AUGUST 20, 2001
Demand has been so soft that in the second quarter, discounting and rebating from published prices meant profitability in the industry was "30% worse in actuality," says Clark. "We're discounting the worst economic recession in three decades. We've never seen this before."
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Natural gas accounts for 70% of the cost of making ethylene. And while gas has declined from $10 per million British thermal units in January to a recent $3.40 per million BTUs, it is still historically expensive. Further, gas prices are now on par with the rest of the world; parity is between $3 and $3.50.
To make matters worse, U.S. producers have never been considered very efficient, apart from the long-held gas-price advantage. Now, however, gas prices are likely bottoming. Seasonally, these are the shoulder months between the tail end of the summer cooling season and the onset of the winter heating season. And the long-term bull story in gas remains intact: The U.S. is not producing gas fast enough to keep up with demand.
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The decline in exports has enlarged the glut of commodity chemicals in the U.S. "If gas prices stay where they are, we will see exports drop to 40% of our previous levels," predicts Clark. "There is huge downside to it."
All this is unhappy news for shareholders of companies such as Millennium Chemicals, Lyondell, Nova and Eastman Chemicals, which produce these goods. Clark has significantly lowered his expectations for the group's profitability and he expects 2002's results to be marginally worse than 2001's |
