Who is getting crushed by higher natural gas prices?

As natural gas prices increase across the globe ahead of winter its worth looking at which industries are most reliant on natural gas, and which have the flexibility to switch to alternatives. The greater the reliance and the lower the ability to switch the bigger the hit there is likely to be on margins, all other things being equal.

Industry structure (i.e. the level of competition) and the degree to which businesses have hedged their gas requirements will affect their ability and their incentive to pass additional energy costs onto their end customers.

Every four years the EIA carry out their ‘Manufacturing Energy Consumption Survey‘ (MECS), which as the name suggests surveys US manufacturers on their energy mix and the degree that they are able to change to an alternative energy source. I’ve pulled out the results from the most recent survey which was carried out in 2018 (click on chart below to expand).

The greater the reliance on natural gas, the less likely a particular industry is able to switch to an alternative. This makes sense since large industrial users have invested in equipment that may only be able to use one particular energy source, perhaps locating their manufacturing sites near gas distribution centres to benefit from cheaper transportation costs.

Overall US industry relies on natural gas for about 40% of its energy needs and is able to switch only 7% to alternatives. However, its on sector and sub-sector level where things get really interesting from an investment point of view.

The sectors most likely to be affected by high natural gas prices are those making industrial products for the construction and agricultural sectors: gypsum, glass, phosphate fertiliser and industrial gas producers.

The food manufacturing sector is also particularly exposed. Overall, natural gas accounts for 58% of total energy used by the sector but they are only able to switch around 10% to alternative energy sources.

On the flipside both wood and paper manufacturing sectors (e.g. sawmills and papermills) have a low degree of dependence on natural gas and a high ability to switch. Papermills for example typically have their own on-site generation bio-generation.

Related article: What impact will high natural gas prices have on the economy?

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