Chairman Voinovich and members of the Senate Subcommittee on Clean Air, Climate Change, and Nuclear Safety, good morning and thank you for the opportunity to testify today.
My name is Jim Krimmel and I am President of Zaclon, Incorporated.
My company, which is located in Cleveland, Ohio, is a manufacturer of both specialty and basic chemicals with wide applications and worldwide sales. Currently, we are the largest producer of galvanizing fluxes in the world, and sell products in 19 countries. But we’re a small company, with only 35 employees and under $12,000,000 in annual revenues. Our primary competitors are domestic, European, and increasingly Asian.
I am also the current Chairman of the Board of Directors for the Ohio Manufacturers’ Association. The OMA, with its’ 2500 member companies is the voice of manufacturing in Ohio – the strength of Ohio’s economy.
Today, as job providers in Ohio, manufacturers employ over a million people directly and countless million others in the service, finance and other industries employed indirectly by Ohio’s manufacturing companies.
As you know, Ohio is an energy intensive state that ranks in the top five nationwide in both commercial and residential energy consumption.
To maintain a competitive advantage in today’s tough global marketplace, it is essential that Zaclon and Ohio’s other manufacturers have access to dependable, low cost energy sources. But in recent years, energy, and more specifically natural gas, has been anything but low cost. And fuel switching related to compliance with ever tightening air regulations coupled with inadequate exploration and drilling for natural gas is a major factor in this unprecedented run-up and volatility in natural gas prices. As the manufacturing economy improves and as more fuel switching occurs, the problem will only get worse. The high price and volatility of natural gas has threatened and continues to threaten the very existence of small and medium sized manufacturers like Zaclon. In that respect, my company’s experiences are a good illustration. The charts that I’ve included with my testimony tell the story.
This first graph shows Zaclon's Energy/Utility Costs by medium over the past 15 years. It demonstrates both the magnitude and volatility of expenditures that my company has faced during that time. By itself, this chart is interesting enough in that it shows a 63% increase in natural gas costs from 1999 to 2002. The run-up in natural gas prices back in 2001 nearly put us out of business despite imposing an energy surcharge on our customers.
What is more revealing, however, is this next graph which superimposes Zaclon’s product sales on the energy cost numbers over the past 10 year period.
This combination of increasing energy costs with declining sales revenues is unsustainable for any length of time. We are running out of other cost reduction opportunities, and we really can’t pass the increases on to our customers without giving up a significant share of the U.S. market to our overseas competitors.
To further emphasize the impact of escalating natural gas prices on Zaclon, the next two pie charts show a comparison of my company’s total cost structure between the most recent year – 2002 - and 1999 before the run up of natural gas costs.
As you can see energy costs have increased from 10% in 1999, which was pretty typical for years before 1999, to 15% in 2002. And what’s causing this problem is natural gas price. The final chart shows Zaclon’s delivered cost per MCF of natural gas for a 15-year period.
You can see that except for predictable seasonal swings, the price of natural gas was stable until recent years. Since that time it is high – and unstable. This makes running our business very difficult, and often unprofitable. Soaring energy costs combined with a tough global marketplace represent a serious threat to Zaclon's existence.
In closing, I strongly urge you to consider carefully the impact of what you do in this committee on the competitiveness of companies like Zaclon. Any additional legislation that encourages fuel switching to natural gas without addressing the supply side of the equation could very well put me out of business.
Thank you for the opportunity to testify here today.
I would be happy to answer any questions.