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Manufacturers Reeling From Soaring Price of Natural Gas

Fuel: Some may suspend production to save money. Surging demand, low inventories and jam-packed pipelines are blamed, but some fear manipulation.

December 17, 2000|MARLA DICKERSON | TIMES STAFF WRITER

Investors and economists are watching anxiously for any hints of recession. But for textile dyer Helmut Ackermann and many other local manufacturers, economic meltdown has already arrived in the form of their natural gas bills.

This month Ackermann will pay nearly $600,000 to stoke the massive machines needed to color and dry his customers' fabric. That's 2 1/2 times more than he paid just two months ago. And he's been warned that his rates may double again in January.

Unable to pass along those costs in a hotly competitive industry, Ackermann has already shut one facility and laid off 40 employees.

"This is not a soft or hard landing, this is a wipeout," said Ackermann, president of L.A. Dye & Print Works Inc. "I'm losing money on every yard of fabric."

All eyes have been on California's fragile electric grid of late, but the real shocker for industrial users such as Ackermann is natural gas.

Surging demand, low inventories and jam-packed pipelines have Californians paying the highest prices in the nation. Last week, spot prices for natural gas at the California-Arizona border reached $60 per million British thermal units, compared with less than $3 per million BTUs a year ago. That's the equivalent of oil's costing more than $350 a barrel, according to energy analysts.

The spike is so severe that on Friday, Gov. Gray Davis asked state Atty. Gen. Bill Lockyer to launch an investigation into possible price manipulation.

That's welcome news for California's vast industrial base, where heavy users are getting scorched by high prices and watching months of hard-earned profits go up in flames. From food processors and box makers to steel mills and flower growers, California's work-a-day industries are alternating between disbelief and panic. Some are scrambling to lock in cheaper, long-term contracts. Others are considering a temporary switch to other fuels, not an easy task, given California's tough environmental laws.

A few are even looking to mothball operations until gas prices stabilize, a perilous strategy, because customers might not return when they resume work. But companies such as Castaic Brick may not have a choice. The Santa Clarita Valley firm has seen its typical monthly natural gas bill rise from $36,000 to more than $300,000 to make bricks that it can't sell for more than about 25 cents each.

Energy watchers predict that natural gas prices will dip to saner levels by spring. That's small consolation to Castaic Brick, which is contemplating shutting down its kiln and furloughing 104 employees, said controller Dave Gottschalt.

"We don't have three or four months . . . to eat losses like this," he said. "This is a disaster for the state's manufacturers."

The natural gas shock is a double whammy for local companies already reeling from California's electricity crisis. Big energy users such as Fontana-based California Steel Industries Inc. have been so focused on filling customers' orders in the midst of repeated electricity interruptions that natural gas prices have been a secondary concern. Until now.

California Steel recently projected that its December natural gas bill could top $4 million--more than four times the normal average--if the plant were running at full capacity. Instead, the firm will shut its "hot strip mill," the fiery heart of the operation, Dec. 24-31.

It's the first time in the firm's 16-year history that gas prices have derailed production. But in the topsy-turvy world of California energy, company officials say not producing steel makes more economic sense in the short run, enabling them to save on gas and take advantage of state air quality regulations that permit the company to sell excess emission credits.

"It's a completely crazy way to run a business," said Lourenco Goncalves, president and chief executive of California Steel. ". . . But we can't afford to keep paying these outrageous prices."

The rest of the country is feeling the pinch as well. Nationwide, natural gas prices have reached record levels, fed by tight supplies, cold weather and heavy demand from commercial users, particularly electric-generating plants.

But California is particularly vulnerable to market disruptions because it imports about 85% of its natural gas. Supplies were sharply reduced this summer after an explosion in one of the four major pipelines serving the state. That line is still operating below capacity, helping to boost already high prices here.

Still, with California's industrial customers paying as much as six times more for their BTUs than their counterparts in other states recently, some observers say something besides the gas just doesn't smell right.

"We're businesspeople, so we understand markets can be fluid," said Scott Edwards, president of the Assn. of Textile Dyers and Printers of Southern California. "But California is so out of whack, there has got to be something wrong."

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