UK chemical industry hit by soaring gas prices

As fears escalate over rising gas prices in the UK following record levels throughout November, the Chemical Industries Association (CIA) has told the country's Trade & Industry Committee that it has 'underestimated the danger of damage to UK industry this winter' in its report on its inquiry into 'Security of Gas Supply'.

According to the report: 'Price spikes have continued to take place in both the spot and the forward markets for gas, with prices in July 2005 reaching the heights that they did in October 2004 [70 pence per therm]. In November 2005, prices reached highs of well over £1.00 per therm on both the spot and forward markets. In other words, peaks are becoming not only more frequent but also higher on each occasion.'

The CIA says that: ''Day ahead' prices for gas rose by as much as 400% over two weeks in November, [while] flows of gas along the Interconnector from the continent have so far failed to exceed 70% of capacity on any one day, and during the second half of November averaged only 56%'; which, according to Alan Eastwood, CIA's head of utilities and competitiveness, 'is clear evidence of a malfunctioning market'.

In the face of such sustained high prices, many chemical manufacturers have had to reduce or even suspend production, while others have transferred production to sites outside the UK. These include Terra Nitrogen, which has now stopped producing and is instead shipping-in chemicals, and Ineos Chlor, which has reduced its chlorine production.

While the CIA has commended the Committee's assessment that the UK 'does not have a properly functioning forward gas market' and its concern over 'problems of uncertain supply and the high prices caused by dependence of the liberalised UK market on the largely unreformed European one', it has chastised the report for making 'no reference to the possibility of supply interruptions to "firm" industrial gas customers, which CIA believes may happen'.

The report does raise the issue of: 'temporary derogations in relation to emissions trading permits and to controlled emission levels under the Climate Change Scheme,' before going on to state that the Government's current focus on climate change means that it would be 'very reluctant to do so', although it would consider such actions if 'disruptions to gas supplies made it impossible for industrial plants to meet their energy efficiency needs'.

Eastwood went on to add: 'A "voluntary" reduction in gas usage caused by such wholly uncompetitive prices will help to balance the system, but at a high cost to overall UK economic activity, both now and in the future. We are now looking to Ofgem and the EC competition authorities to conduct a speedy investigation of the working of the European market as a whole and to take prompt remedial action.'

According to Swiss chemicals group Ciba, quoted in today's Financial Times: 'Chemicals companies could stop investing in the UK if prices continue to rise.' Considering that the chemical industry contributes £5bn to the country's annual balance of payments from a gross output of £50bn and accounts for 1.5% of gross domestic product, such a move could spell bad news for the UK economy as a whole.

Over 65% of the CIA's membership is headquartered outside the UK, and the Association warns that: 'Any significant imbalance in business operating environment between the UK and other locations can lead to the loss of UK output, trade and investment opportunities.'