HAROLD M. CODY Executive Editor
Pulp & Paper

Energy prices push costs up

The impact of rapidly rising energy prices since last year really became apparent during the summer in portions of the U.S. Sticker shock occurred in many regions as consumers made their normal trips to fill up the family car or SUV. Gas prices went through the roof in some areas, notably in the upper Midwest, where the price of a gallon of regular gas reached record highs in June, peaking at over $2/gal.. Since then, gasoline prices have eased considerably.

Similarly, the costs of key paper mill chemicals, notably coating binders and pigments, have also surged, driven in part by higher oil prices, but also in combination with other factors.

Energy costs are an essential component in the manufacture of paper chemicals. For example, feed stocks such as styrene and butadiene, used as raw materials to produce latex acrylic and styrene-butadiene (SBR) coating binders and plastic pigments, are oil byproducts. For products derived from natural sources, such as starch, the impact of energy prices is more limited. It mainly affects transportation costs, which are important of course, but a smaller component. In addition, mills burn oil and other products to produce heat and to run trucks and trains.

The price of a barrel of oil jumped from about $10/barrel in early 1999 to more than $20/barrel in mid-1999, and finally hitting $30/barrel in early 2000. In response, feed stock costs skyrocketed.

The cost of styrene and butadiene rose about 50% and 35%, respectively, in first quarter 2000. Other binders, such as latex acrylic binders, mainly used in coated bleached board and recycled board, have seen similar raw material increases. Styrene spot prices rose dramatically in March due to heavy demand, snug supplies, and availability concerns. Spot styrene prices rose to $0.47 to $0.48/lb compared with mid-February levels of $0.35 to $0.37/lb. Spot prices have retreated from these levels, but further increases have moved contract prices up to the $0.43 to $0.45/lb level. In response, major SBR producers raised prices by $0.03/lb, with the effective dates ranging from April 1 to May 1. The increase seen at the mill level varies widely depending on volume, contract, etc.

SUPPLY AND DEMAND. However, for products such as latex binders, raw material costs are not the only factor influencing prices. The supply and demand situation for these feed stocks is also having a major impact. Limits on the supply of styrene and butadiene, due to unplanned equipment outages and other factors, have also directly contributed to the escalation in prices. These pressures aren’t expected to end anytime soon, and thus even if oil prices were to fall, prices for latex coating binders aren’t likely to decrease this year. In fact, a number of observers expect that an additional round of price hikes will be announced this fall.

The price of another essential raw material—natural gas—is also having a big impact on mill costs. Natural gas is an important cost input for several products. Gas prices have surged and remain high. Natural gas prices do not necessarily receive the same level of coverage in the general media as oil prices, but these costs have an important impact as well. One key impact of higher gas prices is higher pigment costs. Kaolin producers use natural gas to produce calcined clays and to spray dry hydrous kaolin. This cost element can have a major impact on clay costs, accounting for up to one-third the cost of production for calcined clays and about 15% for hydrous clays.

HIGHER STILL? The price consumers pay for gasoline at the pump has fallen drastically in areas where prices surged during the summer. Will a similar decline occur in mill chemical prices if oil prices fall? First, in general oil prices have not fallen much. However, according to the view of many chemical manufacturers, prices are not expected to decrease this fall, even if oil prices do. In fact, it appears there is a good chance of an additional 15% hike in the price of some synthetic binders. This is due to the fact that producers haven’t been able to pass on all of their cost increases to date, and the supply and demand situation for feed stocks could get even tighter.

A number of coating binder producers have their own feed stock capacity. This is similar to the case where a paper mill owns its own corrugated box plants. However, this does not insulate these producers from the impact of rising costs for feed stocks. They have to charge their own plants a reasonable fee, otherwise they might as well sell the product to someone else.

What can mills do to counteract these increases? Unfortunately, in many cases little can be done. Most mills have already adjusted their coating binder formulations to obtain the maximum performance at the lowest cost. There are cheaper binders, such as starch, but normally these are already used as co-binders where possible. To increase the use of cheaper products in coated board, for example, would lower costs but at the price of a decrease in printability.