Factories Feeling the Heat From Gas Costs

At La Brea Bakery in Los Angeles, the dough isn’t the only thing that has been rising.

First came the fuel costs for the 32 trucks that ferry olive bread, sourdough baguettes and other crusty wares to restaurants and grocery stores from Santa Barbara to San Diego. Next came the cost of the ingredients, such as the 100% virgin olive oil, the flax seed and the California golden raisins, as suppliers passed on their rising energy costs.

But the one that figures to be as temperamental as the natural leavening crucial to a fine loaf is the cost of the natural gas used to operate some of the bakery’s huge walk-in tunnel ovens.

In California last week, natural gas sold for more than $11 per million British thermal units, a common measurement for large gas trades. Although that is far below the levels recorded during the state’s 2000-01 energy crisis when gas briefly commanded about $60 per million BTUs, the price is more than twice what it was a year ago.

In other parts of the country, the numbers are even more ominous. Natural gas futures, which were trading at $2 to $3 per million BTUs as recently as 2002, hit a record $14.338 on Tuesday in New York. (A typical California home uses slightly more than 1 million BTUs a week.)

Those prices are sending shockwaves through the nation’s manufacturers, which have already invested heavily in more energy-efficient equipment. Some, such as La Brea Bakery, are wondering how they will cope when their current natural gas contracts expire. Others are struggling to absorb skyrocketing gas costs.

“It’s like an infection. It gets into everything,” said John Yamin, chief executive of La Brea Bakery Holdings Inc. “It makes you reexamine every aspect of your business.”

Natural gas is not only the fuel of choice behind many manufacturing processes, it is also a regulatory requirement in states with serious air pollution problems. Moreover, it is used in making thousands of products and in chemical industry processes.

“It’s taking their breath away in addition to their money,” said Frederick H. Pickel, who runs Los Angeles-based Wilshire Energy Consulting Group. “This is really creating a shock in terms of budget impacts for business where natural gas is a core component or even a peripheral one.”

Costs could rise even more with predictions for a harsher-than-normal winter and slow post-hurricane recovery of natural gas production in the Gulf of Mexico. That has got the nation’s factories clamoring for price controls and the lifting of barriers against natural gas drilling in coastal waters. They are also railing against what they call a contradictory national policy that has driven the widespread use of natural gas as a clean energy source even as environmental concerns conspire against increased domestic production and imports of liquefied natural gas.

“The U.S. is in a natural gas crisis,” Andrew Liveris, chief executive of Midland, Mich.-based Dow Chemical Co., recently told the Senate Finance Committee. This year for the first time, Dow’s energy costs are expected to exceed 50% of the company’s overall sales, Liveris testified.

Paying $14 per million BTUs for natural gas is the equivalent of forking over $7 a gallon for gasoline, Liveris said. “This price renders the U.S. chemical industry -- which uses natural gas as both a fuel and a raw material -- simply uncompetitive with the rest of the world; in fact, it undermines all U.S. manufacturers,” he said.

Antex Knitting Mills is feeling the heat.

On the edge of downtown Los Angeles, amid the clatter of knitting machines and the hiss of steam from dye-heating boilers, 400 workers knit, color and print about 1.5 million yards of fabric a week. Natural gas brings the dyes to the high temperatures needed to permanently penetrate fabric, and the fuel is costing Antex $300,000 a month. In 2002, the monthly natural gas tab was $75,000, President Bill Tenenblatt said.

“It’s a disaster,” Tenenblatt said. “We have absorbed it. We have kept our employees, but the profit gets smaller and smaller.”

Antex hasn’t raised its basic prices yet, opting to meet the energy costs head on by generating lucrative new business.

For years the company focused on knitted fabrics for junior, contemporary and children’s clothing markets, but in the last 18 months it has branched off into athletic-wear performance fabrics. Such fabrics wick moisture away from the body better than more traditional materials and can command a higher price.

La Brea Bakery, founded by pastry chef Nancy Silverton in 1989 as a neighborhood bakery, has taken a similar approach.

La Brea has increased sales by 30% in the last year, to $53.4 million, partly on the success of a new product: partially baked gourmet bread that its customers finish cooking in their own ovens. Backed by Irish food and agribusiness firm IAWS Group, which purchased 80% of La Brea in 2001, the company sells its products in 42 states and six foreign countries and may expand deeper into Europe.

La Brea’s prices have risen about 5% overall, but selling more has softened the hit on consumers, Yamin said.

“Whether I’m making one loaf or 10 loaves, it’s almost the same amount of time and labor involved,” Yamin said. “We are trying to buy bigger and buy smarter.”

Analysts are worried that aggressive business practices simply won’t be enough because many businesses such as La Brea Bakery are still working off the energy they already bought when prices were lower.

“I am more worried about the long-term impact,” said Phil Flynn, vice president and senior market analyst for Alaron Trading Corp. in Chicago. “We are seeing something that could really put the economy at risk.”

Kellie Johnson, who runs a small defense industry subcontractor in Torrance, has responded to expensive natural gas by adding 20% to the contract bids submitted by Ace Clearwater Enterprises. She has also joined forces with the National Assn. of Manufacturers to call for new natural gas exploration off the U.S. coast. Ace’s problems were featured by the trade group during a recent news conference to urge the lifting of federal bans on new offshore drilling for oil and natural gas.

It’s not just that the company’s monthly natural gas bill is bigger, rising to $14,000 from $9,000 a year ago, or that suppliers have tacked on surcharges of 1% to 3%, said Johnson, whose company employs 178 people to make metal parts for military aircraft.

An even bigger problem for Ace is that it has seen an erosion in its competitive edge against much larger companies: the ability to deliver products quickly, Johnson said. In fact, Ace will be hard-pressed to match the $28 million in sales it recorded last year, she said.

Before gas prices leaped, Ace would keep its foundry constantly running on low power so that it would be ready to heat rapidly to 900 degrees when needed. Ace now turns off the foundry between jobs. It takes 40 hours to restart and bring it back to operating temperature, and a contractor had to be hired to turn it on every week.

In addition, suppliers of Ace’s special metal alloys hold off until they receive an order before they turn ingots into ready-to-use sheet metal, adding substantially to the time Ace must wait for components. In the past, suppliers had the sheet metal ready to go, but rising natural gas costs have caused them to hold off until they have a waiting customer.

“I’m sure we are losing on contract bids because of this,” Johnson said. “It’s killing my company.”