Soaring costs trim earnings

Rick Westhead
Toronto Star
October 9, 2004

Canadian businesses are beginning to experience the energy industry’s version of sticker price shock.

Driven by the highest demand in a quarter century, oil prices this year have climbed more than 60 per cent.

The run-up comes amid increases in electricity and an expected seasonal jump in natural gas prices, leaving many Canadian firms facing an uncertain future.

“A lot of companies are just at the break-even point right now,” said Allan Skjodt, a controller with Plastmo Ltd., which employs 60 people and makes vinyl rain gutters. “Some may decide it’s just not worth operating anymore.”

Skjodt, whose Brampton company pays about $35,000 a year for electricity and a further $16,000 a month in the winter for natural gas heating, said he foresees energy-related expenses spiking at least 20 per cent over the next six months.

Skjodt’s Plastmo isn’t alone in anticipating unwieldy oil, gas and electricity bills. From the floors of tool and die factories to automotive assembly lines to courier and transportation companies, businesses across Ontario are bracing for record-high energy bills this winter.

Ken McLennan, part-owner of Stemac Industrial Equipment in Scarborough, said he has increased his hourly service charge to $55 from $45 over the past six months to offset added gas expenses.

“I need my expenses covered,” said McLennan, whose company repairs and refurbishes tool and die machines.

Crude oil futures have hit record highs in recent days and yesterday closed at $53.31 (U.S.) in New York. The price of crude has surged 30 per cent in three months, a climb mirrored in other energy markets.

The price of electricity in Ontario has climbed as much as 30 per cent over the past two years and natural gas prices are expected to increase as much as 40 per cent this winter, said Gerry Fedchun, president of the Auto Parts Manufacturers Association, a trade group that represents about 400 Canadian auto-parts makers.

With oil, gas and electricity all on the rise, and a 50 per cent surge in the price of steel, “the question has become which one of the pebbles will sink the boat?” Fedchun said.

Oil production in the Gulf of Mexico has yet to recover fully from Hurricane Ivan, while Nigerian oil workers are poised to join a national strike. Nigeria produces 2.45 million barrels of oil a day and is the fifth-largest source of crude for the United States. Canada, by contrast, produces 3.13 million barrels.

With all that trouble around the world, some oil analysts have estimated crude prices could reach $60 a barrel this winter.

“I don’t see any relief coming,” said Lauri Gregg, director of energy management for Noranda Inc. and Falconbridge Ltd., two of the province’s biggest power users. “I think demand will continue to outpace supply.”

Gregg said Falconbridge spends as much as $25 million a year on natural gas for its Ontario operations. The mining company buy natural gas contracts three years in the future, a process known as hedging, to help soften any price spikes.

“That way, you’re not hit with sharp out-of-the pocket increases,” Gregg said.

Some businesses can take conservation measures – such as blowing insulation into the roof of older factories and warehouses – but many are left exposed to the market’s fluctuations.

“They are going to take their lumps,” said Tom Adams, executive director with Toronto research group Energy Probe. “There is going to be economic impact. We probably are going to see some high energy consumers shut down.”

Not everyone believes oil and natural gas prices will continue their climb.

Ted Mallett, chief economist with the Canadian Federation of Independent Business, said the trade group’s members may be concerned about the rise in energy prices, “but they don’t see it as catastrophic.”

And Andrew Pride, a vice-president with the Minto Group of Cos., which builds and manages homes and apartments, said he expects oil to drop back to the mid-$40 range within the next six months.

“I just don’t think $51 oil is sustainable, and my crystal ball is as good as anyone else’s,” Pride said.

 

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