Lower U.S. Natural Gas Prices: Effects on Industrial Commodities

Supply and Demand Dynamics

Lower U.S. natural gas prices are influenced by a global supply-demand balance, with strong demand and potential supply disruptions creating tighter dynamics. Long-term demand for natural gas remains robust, and industry margins are affected by these supply-demand shifts and price changes in natural gas and related commodities.

"Energy security is very important, so is affordability and availability. Prices at the pump are determined by the balance of supply and demand globally, not just one supplier. ExxonMobil is doing our part to efficiently supply the market." --- (XOM, event transcript, 2024/05/29)

"And what that does is it creates a tighter supply-demand balance, particularly as demand continues to be strong and you need to have strong operations out of that entire system, or you need to bring in supplies from somewhere else if you've got planned or unplanned issues that the system is dealing with." --- (CVX, earning call, 2024/Q1)

"We also see long-term demand for natural gas, and so I think as we look at both of those, both the liquids and the gas side of the equation, we see a long-term future there and an opportunity for this company to participate if we have advantaged projects that position us on a low cost of supply, and so that's how we think about that." --- (XOM, earning call, 2024/Q1)

"Industry margins are sometimes volatile and can be affected by the global and regional supply-and-demand balance for refined products and petrochemicals, and by changes in the price of crude oil, other refinery and petrochemical feedstocks, and natural gas." --- (CVX, sec filing, 2024/Q1)

"Refining margins in the quarter rose to the top of the 10-year range, as demand grew while turnarounds and global disruptions weighed on supply." --- (XOM, sec filing, 2024/Q1)

Impact on Production Costs

Lower U.S. natural gas prices have significantly reduced production costs across various industrial sectors. Companies like Air Products and Chemicals, Eastman Chemical, DuPont, and Dow Inc. report lower power, fuel, and raw material costs, leading to improved contribution margins and operating income, highlighting the cost advantages in the Americas.

"Price contributed 1%. The combined impact of pricing and lower power costs across most regions resulted in strong contribution margins." --- (APD, earning call, 2024/Q2)

"These impacts were partially offset by $15 million lower raw material and energy costs and distribution costs, net of lower selling prices." --- (EMN, sec filing, 2024/Q1)

"4% as volume declines were partially offset by the impact of lower product costs and Spectrum earnings contribution." --- (DD, earning call, 2024/Q1)

"Today, about 2 thirds of our capacity is in the cost advantaged Americas, where our access to growing U. S. Natural gas and natural gas liquids production and large oil to gas spreads allows us to capture margin momentum." --- (DOW, event transcript, 2024/05/16)

"Operating income of $398.6 increased 25%, or $79.6, due to higher volumes of $53, pricing, net of lower power and fuel costs, of $24, and a favorable impact from currency of $13, partially offset by higher costs of $10." --- (APD, sec filing, 2024/Q2)

Pricing of Industrial Commodities

Lower U.S. natural gas prices are expected to benefit industrial commodity pricing by improving cash flow and investment potential for companies like FCX. However, macroeconomic factors, particularly in China, and market price fluctuations significantly impact revenues and net income, highlighting the sensitivity of industrial commodities to broader economic conditions.

"We’ve got sensitivities to the various commodities on the right with long life reserves, large-scale production; we’re extremely well-positioned to benefit from improved pricing, providing substantial cash flow for investments in our organic growth and cash returns to shareholders on our performance-based payout framework." --- (FCX, earning call, 2024/Q1)

"We've discussed on prior calls, the impact of macro sentiment and investor positioning that can drive large moves in pricing. Richard referred to the domestic economic challenges in China, the ongoing weakness in the Chinese property market, destocking and working capital management and increase in copper exchange inventories and delays in actions to stimulate economic growth, which have all weighed on the market." --- (FCX, earning call, 2024/Q2)

"Realized Prices. Our consolidated revenues can vary significantly as a result of fluctuations in the market prices of copper, gold and molybdenum." --- (FCX, sec filing, 2024/Q1)

"Our consolidated operating cash flows are estimated to approximate $7.4 billion, net of $0.2 billion of working capital and other uses, for the year 2024, based on current sales volume and cost estimates, extension of PT-FI’s export licenses for copper concentrates and anode slimes beyond May 2024, and assuming average prices of $4.25 per pound for copper, $2,300 per ounce for gold and $20.00 per pound for molybdenum for the remainder of 2024." --- (FCX, sec filing, 2024/Q1)

"We estimate that each $0.05 change in the price realized from the March 31, 2024, recorded provisional price would have an approximate $22 million effect on 2024 revenues ($7 million to our 2024 net income attributable to common stock)." --- (FCX, sec filing, 2024/Q1)

Industry-Specific Effects

Lower U.S. natural gas prices have reduced operating expenses for CF Industries, a major fertilizer producer, despite increased maintenance and repair costs. This shift has impacted profitability, particularly in industrial contracts, and highlights the volatility in the LNG market affecting energy producers.

"Ben Theurer: And then just a quick follow-up on that industrial versus agriculture use, the impact you had in the first quarter that shift towards the lower profitability on the industrial use just because of fulfilling those contracts." --- (CF, earning call, 2024/Q1)

"I think adding to that is just really the volatility in the market. So any LNG plant that goes down, whether it be here in the U. S. Or Malaysia, it's having an effect on those energy. So if you're a producer and you have 2 main points where you're selling" --- (CF, conference, 2024/05/15)

"As a result, the price of natural gas in North America directly impacts a substantial portion of our operating expenses. CF INDUSTRIES HOLDINGS, INC." --- (CF, sec filing, 2024/Q1)

"The decrease was due primarily to lower realized natural gas costs, including the impact of realized derivatives, partially offset by higher costs for maintenance, repairs and certain unabsorbed fixed costs as a result of plant downtime, including the impact of the adverse weather in January 2024 as discussed above." --- (CF Industries, sec filing, 2024/Q1)

Global Market Implications

Lower U.S. natural gas prices are reinforcing the role of U.S. LNG as a global transition fuel, enhancing energy security for international partners. Additionally, the planned addition of 133 new gas plants by U.S. utilities indicates a robust future supply, potentially stabilizing global natural gas markets.

"Our agreement validates the role of U.S. LNG as the global transition fuel and in providing energy security to America's partners around the world." About Tellurian Inc." --- (TELL, press release, 2024/07/01)

"As an example of how industry players see the world developing, S&P Global Insights has quoted in Gas Daily reports that US utilities plan to add 133 new gas plants over the next several years." --- (KMI, earning call, 2024/Q2)

Environmental and Regulatory Impacts

Regulatory uncertainty and environmental policies significantly impact industrial commodities. Tesla highlights the sensitivity of its industry to such uncertainties, while Amazon faces substantial financial risks from plastic pollution regulations. These factors underscore the broader regulatory challenges affecting industrial commodities amid lower U.S. natural gas prices.

"However, we operate in a cyclical industry that is sensitive to political and regulatory uncertainty, including with respect to trade and the environment, all of which can be compounded by inflationary pressures, rising energy prices, interest rate fluctuations and the liquidity of enterprise customers." --- (TSLA, sec filing, 2024/Q1)

"The growing plastic pollution crisis poses increasing risks to Amazon. Corporations could face an annual cumulative financial risk of $100,000,000,000 should governments require them to cover the waste management costs of the packaging they produce, a policy that is increasingly being enacted around the world." --- (AMZN, event transcript, 2024/05/22)

"And according to the company this morning, their decision was driven by uncertainty about the regulatory environment." --- (TSLA, earning call, 2024/Q2)

Technological Advancements

Technological advancements in the industrial sector are driving significant changes, focusing on reliability, environmental sustainability, and innovation. Companies like Emerson Electric, Honeywell, and General Electric are leading the way with breakthroughs in electrification, autonomy, and interconnected systems, addressing evolving customer demands and global challenges.

"Check out this article as Peter Chin, VP of Marketing for Final Control, as he shares with us the technological advancements the industrial landscape is undergoing to focus on reliability and environmental sustainability." --- (EMR, Twitter post, 2024/05/28)

"So in terms of electrification and autonomy, I think one of the end market segments that's driving a substantial amount of technology advancement is what we call our Advanced Air Mobility Market segment, EV tolls as an example." --- (HON, conference, 2024/05/14)

"And we’re doing this across the industry’s largest and growing fleets. With our deep domain expertise and talent, commitment to innovation and capacity to invest, we’re poised to deliver the breakthrough technologies of the future." --- (GE, earning call, 2024/Q1)

"Rising Complexity and Interconnectivity of Industrial Systems The increasing complexity and interconnectivity of industrial systems, driven by factors such as globalisation, technological advancements, and evolving customer demands, pose significant challenges for asset management and maintenance." --- (HON, press release, 2024/04/22)

"And then you have your 10%, which is really around advanced technologies. This is really pushing the envelope in terms of tech advancement in certain areas." --- (HON, conference, 2024/05/14)