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
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
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