Israeli Industrialists Don’t Care About Competition - as Long as the Natural Gas Is Cheap

At current prices they’re enjoying big savings, but prices aren’t low enough to compete in the United States.

Reuters

Israeli industrialists are divided over the issue of competition and price controls for natural gas, but one thing they agree on is that low-cost gas is critical for them to remain competitive in overseas markets.

“Without question, the price of gas in Israel is high and doesn’t let us compete in the American market, only in European markets,” said Eran Haimovich, the CEO of Phoenicia, Israel’s sole maker of plate glass and a big consumer of power.

Phoenicia was at risk of shutting down before it was finally connected to the national gas network in February. Since 2012, it had lost 100 million shekels ($26.5 million) but is now embarking on an expansion program.

“Our savings from being hooked up come to about 15% of our energy costs, or about $1 million a month,” Haimovich said.

The issue of the gas cartel and prices has been portrayed as an issue for consumers, but actually the biggest beneficiary from low-cost gas is Israeli industry. For companies like Phoenicia, energy costs can make the difference between survival and expansion.

Even now, as the government wrestles with Delek Group and Noble Energy, the companies that control the Tamar and Leviathan gas fields, Israeli natural gas is 25% to 50% cheaper than petroleum. Still, most industrialists TheMarker has spoken to said the price was still too high and that if the government was prepared to see down the energy companies on the matter, it should at least subsidize the price.

To compete in U.S. markets for energy-intensive products like plate glass, the price of natural gas in Israel measured in million British thermal units must be about $1.50 lower than it is now.

“We’re cheaper than Europe, but that’s not the right comparison,” Haimovich said. “In the United States, the price is $2.70 per MBTU. In Israel, it has to be around $4 for industry to be competitive, but industry is now paying $6 to $8.”

Negev Ceramics, which manufactures ceramic and granite-porcelain floor tiles, has saved several million shekels a year since it was connected to the gas pipeline network and is now pondering exports. Before that, its annual energy bill for petroleum reached 20 million shekels.

Its parent company, Africa Israel Investments, is working to get its Ashkelon steel plant hooked up.

“The government can’t ignore the macroeconomic impact of the triangle of taxes on the gas companies, the return on investment for the gas companies and the price to manufacturers,” said an Africa Israel executive who asked not be named.

“The government can set a maximum return for the gas companies at a reasonable level, according to a global benchmark, or it can guarantee a price to manufacturers. On the tax issue, the Sheshinski committee has already taken care of that. If the government doesn’t want to clash with the gas companies, it should support industry [with subsidies].”

The gas Negev Ceramics gets is produced at the Tamar field and bought via Dor Energy, a middleman between Tamar and end users. Dor also offers a kind of insurance policy by ensuring a supply of petroleum if the gas supply is interrupted. Tamar is Israel’s sole source of natural gas.

Galam, a maker of specialty ingredients for the food and other industries, is still clamoring for natural gas. CEO Liad Cohen said the company had spent $2 million getting its factory at Kibbutz Ma’anit south of Haifa ready to move to gas.

“The problem is that the gas hasn’t come to the plant because of massive bureaucratic problems,” he said. “Construction of the pipeline isn’t accepted by some local authorities that need to approve it, so they’re not letting it move forward. I don’t think we’ll get the gas this year.”

The company spends 15 million shekels annually on energy, a bill that would fall 40% if the company could switch to gas even at current prices. Cohen estimates that the savings would enable him to boost production 30% and add 20 people to his payroll of 200.

For now, Galam is struggling to compete both on labor and energy costs in global markets.

“In addition, we’re exposed to imports — Turkey is overwhelming us with starches after customers were reduced to zero,” Cohen said. “I have no doubt that if we were manufacturing with gas we’d be able to cope with the competition easily.”