High Power Costs Force US Industrials, Factories to Shut

It was going to happen soon.

Chemicals, steel mills, andfertilizer plants were the first to go. Paper mills, soybeanprocessors, and electronics factories went dark.

Natural gas and electricity prices are going to affect the US industrial complex.

On June 22, 600 workers at the second- largest aluminum mill in America, accounting for 20% of US supply, learned they were losing their jobs because the plant can't afford electricity. Century says it will shut down the biggest of its three US sites in Kentucky for a year. A shutdown like this can take a month as workers swirl molten metal into storage so it doesn't solidify in pipes and vessels and turn the facility into a useless brick. It will take another nine months to restart. Unless they've exhausted all other options, owners don't stop operations.

Not the only one, this is the most poignant signal yet of what to come.

According to an industry executive who asked not to be identified because the information is not public, at least two steel mills have begun suspending some operations to cut energy costs. In May, a group of factories across the US Midwest warned federal energy regulators that they were close to closing because of excessive electricity costs. It would be the first time that such a request would be made.

That is no wonder. By the beginning of June, natural gas prices had tripled what they were a year earlier, threatening households and businesses alike with huge utility bills. Electricity rates for industrial customers are expected to hit their highest levels ever this summer. This could be the moment the rug is pulled out from under American industry because plants and factories rely on both electricity and gas.

Manufacturing overtime hours have already declined for three straight months, the longest downward stretch since 2015, and a measure of US manufacturing activity weakened in June to a two year low. The nation's largest aluminum producer said it is closing a third of its production because of "operational challenges."

The long-term boom in US manufacturing could eventually be threatened by these headwinds as companies look to reduce their dependence on China. Executives are highlighting plans to relocate production at a greater clip this year than they did in the first half of the year, but energy and labor costs will pose challenges for any company looking to build a new operation in the US.

The US economy used to be based on manufacturing. More than a third of the nation's labor force was employed by plants 70 years ago. If there is a downturn in the industrial sector and weakness in other sectors, it could lead to a recession. Even though the might of American industry has weakened over the years, it still accounts for more than a tenth of US gross domestic product, and politicians still like to visit factories.

There are limits to how much plants can save by operating more efficiently. Industrial users are paying for capacity, an insurance policy that keeps enough power on the grid for the most extreme of demand days. Think summer days when everyone's air conditioners are loud. In the middle of the country, where most of the country's industrial operations are located, the insurance premiums are growing fast because of the high energy prices.

Nature Energy expects to start building facilities this year to collect and convert cow dung and crop waste into renewable natural gas. The proposal to stack batteries on barges that can be shipped around to customers in need is drawing more attention.

According to an attorney for the Texas Association of Manufacturers, her members have three big cost drivers. Electricity is an even larger factor than normal right now. She says that some companies with multiple factories are trying to decide which plants to keep open this summer based on how cheap electricity is. Century will continue to operate in Iceland because of the cheap power that comes from local renewable energy sources.

Extreme weather brought on by climate change, Russia's invasion of Ukraine, and a surge in US natural gas exports are all to blame for the surge in US energy prices. Post-pandemic demand has rebounded sharply.

Some manufacturers will tell us so. The Industrial Energy Consumers of America has been calling on the Biden administration for months to limit the amount of gas US energy suppliers send overseas. Billions of dollars of investments in natural gas terminals along US shores would be at risk if a measure like that were to become law. There have been no restrictions on shipments overseas.

It depends on a lot of variables, including how long energy prices stay high. Milder weather, less power plant disruptions, and more solar and wind farm deployment could shift the natural gas market back into an era of lower prices. We are not close to that today.

Some industrial clients are having to put millions of dollars of credit on the line to secure power and gas contracts because of the high costs. He says that it can be devastating for a company. There is no scenario in which gas prices are going to go down in the long term, unless there is an explosion at a US liquefaction facility.

Natural gas is up 70% and is driving the new cold war.