FEEDSTOCK COSTS AT NOVACOR LIKELY TO HIKE ETHYLENE PRICE

FEEDSTOCK COSTS AT NOVACOR LIKELY TO HIKE ETHYLENE PRICE

Novacor Chemicals (Canada) Ltd. of Calgary faces price increases next month for its natural gas feedstock, company officials said, which industry observers expect will result in price increases to customers for ethylene and related downstream products.

Beginning Nov. 1, the company's higher energy costs will translate into a 2-cent-to-3-cent-a-pound increase in ethylene production costs, said Dennis McConaghy, Novacor's senior vice president of feedstocks. The start-up date of Novacor's new annual contracts is Nov. 1 for Alberta natural gas, purchased

from a number of local suppliers.With the price hike, Novacor will lose a key competitive advantage that grew from its ready access to low-cost Alberta natural gas, according Paul K. Raman, an industry analyst for S.G. Warburg & Co. Inc. of New York. That advantage more than offset the added shipping costs most Novacor customers ultimately paid to move production to distant end markets from northern Alberta.

"Feedstock costs have got to offset our geographic disadvantage," Mr. McConaghy said.

The scheduled gas price increase will boost Novacor's ethylene production costs to about 13 cents a pound, from 10 cents, Mr. Raman said. Because Novacor traditionally works on a cost plus 20 percent margin, it's likely to sell its ethylene for about 16 cents a pound, up from 12 cents, he estimates. Novacor, moreover, will continue to operate facilities at full capacity to enjoy economies of scale, while still maximizing profit, Mr. Raman said.

Stated another way, Novacor's 16-cent quote is comparable to the 21 cents a pound or so charged by U.S. Gulf Coast producers. The nickel differential represents the higher cost to transport product from Calgary to U.S. plants in the Midwest, compared with sourcing the product in the Gulf Coast. Effectively, however, higher gas prices mean that Novacor will have a tougher time winning business from customers located furthest from its plants, Novacor officials said.

Direct comparison between Novacor and Gulf Coast producers' feedstock costs are difficult because the U.S. firms have the option of using a number of different materials, each with its own cost structure, Mr. McConaghy said. Also muddying the manufacturing-cost comparison is the fact that Novacor's expenses are calculated in low-value Canadian dollars, increasing the competitiveness of its exports in the United States.

Novacor is one of Canada's largest buyers of natural gas, purchasing about 300 million cubic feet a day.

The company has taken steps to ensure that it has adequate gas supplies this winter, when the feedstock is in highest demand. Suppliers have told Novacor that they've upgraded manufacturing and storage facilities to guard against shortages that some Canadian pipeline companies such as Nova Corp. have warned are likely in the face of severe cold.

"We have contracted for all the supply we need," Mr. McConaghy said.

Novacor has known since 1985 that its "highly discounted" natural gas supply eventually would run out, he said. It was just a question of when the bubble would burst.

"What we will be paying is what we always counted on" in terms of long- term strategic planning, Mr. McConaghy said. The interim period, then, amounted to an eight-year holiday.

The eight-year hiatus represents the time Canadian natural gas pipeline companies needed to to build the additional capacity required to deliver the surplus gas supply that Ottawa had demanded be maintained, said Paul Martinson, an official with the Canadian Energy Research Corp. in Calgary, a non-profit research organization. Most of those pipelines now carry gas south to the United States, effectively creating a unified North American market that features lower prices than existed earlier.

The Canadian government created that artificial surplus by requiring Alberta's natural gas producers to have 20 years of proven reserve on hand for security purposes. Ottawa rescinded that requirement in 1985.