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ENERGY When fuel costs are on fire, profits pivot on distance

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Soaring gasoline prices are driving West Coast service centers off the road and steadily isolating the Northwest market

The world has been shrinking ever since people started using something other than foot power to get around, and has become ever more smaller with the development of technologies that can instantly take you to the far reaches of the virtual globe.

But for some steel distributors in one corner of the United States, things appear to be just the opposite. Soaring energy costs, for fuel in particular, are driving West Coast markets to become increasingly isolated.

"The map may say we're only 1,500 miles from L.A., but we're getting further and further away," said Roger Parr, sales manager at Seattle-based Seaport Steel, and local markets are becoming isolated from each other. There's a silver lining to the trend, however, since competitors in Los Angeles, Utah and other locations now find it more expensive to divert tonnage to Seattle when surpluses develop in their own markets.

Parr noted that freight costs from a major wide-flange beam source east of the Rockies have jumped to $3.50 per hundredweight from $2, while freight rates to Seattle from Los Angeles, formerly as low as $1,000 per 24-ton truckload, now costs as much as $2,500.

Perhaps no service center better illustrates the impact that higher fuel costs have had on the West Coast than TPL Metals Inc., Lake Forest, Calif. Earlier this year, the flat-rolled house established TPL Metals Northwest in Portland, Ore., after earlier serving the Northwest from California. "We're convinced that the price of fuel is not going to go down," said Tom Lawrence, TPL's president. Rising fuel costs have reached the point where material can't be shipped economically to Portland, he said, and it's becoming increasingly necessary for service centers to be within 200 to 300 miles of their customers.

California's gasoline prices rank among the highest in the nation. Gasoline costs California consumers an average of $3.167 a gallon during the week ended July 23, 5.4 percent higher than the national average of $3.005, according to data from the Energy Information Administration (EIA), the statistical arm of the U.S. Department of Energy. The state's high water mark so far this year was an average $3.508 a gallon during the week ended May 7, a whopping 13.3 percent higher than the $3.097 national average.

The reason? California operates its own reformulated gasoline program, which has more stringent requirements than federal-mandated clean gasolines. In addition to the higher cost of cleaner fuel, California has a combined state and local sales and use tax of 7.25 percent on top of an 18.4-cent-a-gallon federal excise tax and an 18-cent-a-gallon state excise tax. "Refinery margins have also been higher due, in large part, to price volatility in the region," according to information on the EIA's Web site (www.eia.doe.gov).

"California prices are more variable than others because there are relatively few supply sources of its unique blend of gasoline outside the state," according to the EIA. "California refineries need to be running near their fullest capabilities in order to meet the state's fuel demands. If more than one of its refineries experiences operating difficulties at the same time, California's gasoline supply may become very tight and the prices soar."

And while supplies could be obtained from some Gulf Coast and foreign refineries, the EIA says, California's substantial distance from those refineries is such that any unusual increase in demand or reduction in supply results in a large price response long before relief supplies can be obtained. "The further away the necessary relief supplies are, the higher and longer the price spike will be," the agency said.

And a gallon of gasoline doesn't necessarily have equal weighting in all states because the fuel, like other liquids, expands in increased temperatures. In warm-weather states like California, for example, while the gas pumps dispense the same amount of fuel as in other, cooler states, consumers are spending a little more to get the same amount of vehicle power as they compensate for the fuel being less dense in their warmer-weather environment.

The upshot of the "hot fuel" issue is that the county's drivers could be losing the energy equivalent of 40 million gallons of gasoline a year, based on a continuing survey of gasoline temperatures, the Foundation for Taxpayer and Consumer Rights, a non-profit watchdog group, said, citing a Kansas City Star report quoting an L.A. County official. At current prices, that would amount to a $160-million annual loss to consumers in a single large county, the foundation said.

"Gasoline prices are rising nationally, and especially in the Midwest, in response to higher oil prices and refinery outages, which means the cost of hot fuel will also grow," the group said.

The foundation is just one consumer advocate group that's been pressing for regulations in which gasoline sales would be adjusted for temperature. One solution could be the installation of temperature-adjusting pumps, but so far efforts to mandate their use in California have failed.

What this all boils down to is a less-competitive stance for service centers operating in the region.

Lawrence noted that the price of imported steel is about the same in Portland as it is in Los Angeles, while it actually costs less to bring material into that market from the Midwest. In that type of market, material shipped from Los Angeles doesn't stand much chance of being competitive. "The prospects of things going back to the way they were are nil," he said.

The Northwest's growing isolation is just as evident in long products as in flat rolled.

"As a beam specialist, we rely on mills that are far away," Milton J. Lampros, president of Portland-based distributor Lampros Steel Inc., said. He pointed out that 80 percent of his company's structural steel supply comes from mills that are 2,000 to 3,000 miles away. So far, Lampros Steel is one of only a few service centers in that market that hasn't implemented a separate fuel surcharge on beams, but instead includes those costs in the final price. However, Lampros acknowledged that, one way or another, "every pound of steel that we buy has a fuel surcharge" and Lampros Steel is now considering a separate surcharge.

Meanwhile, Lampros Steel is looking to save on energy costs elsewhere. The company is spending $120,000 to install a "state of the art" system that's designed to cut its $36,000-a-month lighting bill in half. The project should pay for itself within a year, due both to lower operating costs and state energy-saving rebates, Lampros said.

Renate F. Mas, New York, contributed to this story.


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