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Doom and gloom of economic forecast offset by plummeting product cost

January 1, 2009 By and    

Be honest now – how many of you marketers were convinced that your cost of product would ever go down again once spot prices surged past $1 two years ago and rumbled toward $1.90 heading into this winter?

Who ever would have believed you would be in a position to cut customer prices and still increase your margins in the middle of a high-demand winter heating season?

Please forgive me if I don’t believe those who say they saw it coming. Surely, most of the 420 propane marketers who answered our annual State of the Industry survey back in September didn’t. As reported in our somber SOI Report last month, pessimism for 2009 ran deeper than ever.

For the first time in the last six years, less than 50 percent of retailers told us they expect to have more customers and less than 30 percent anticipated higher profits in the year ahead. And had our survey been conducted in October – after we all became aware of the economic crisis now gripping the nation – rather than early September, those retailer attitudes and forecasts for 2009 surely would have reflected even broader financial angst.

But the breathtaking fall in crude (and subsequently propane) prices since our survey has marketers positioned for one of the best winter seasons in recent memory, provided the weather and cost of product don’t go berserk. With street prices holding, the biggest price fall ever has enabled retailers to realize record margins of $1.50 per gallon – double the industry average – at the close of 2008, according to government data that does not factor the impact of hedges or costly summer pre-buys.

Few survey respondents would ever have imagined that happening – and certainly would never dare suggest that it might happen this soon.

Let’s not put too much lipstick on the swine that is the current business climate, however. Economic indicators from every cranny of the nation point to potential crises unseen since the days of Depression-era bread lines. Billion-dollar government bailouts and industry-wide collapses breed legitimate fears for even the most prudent and optimistic businessmen among us.

In the propane industry, many of the long-time, prominent equipment companies plan to significantly scale back in a New Year they expect to be unkind. Several traditional industry event sponsors are pulling out or cutting back to save costs. Other stalwarts may eliminate their trade show floor presence for the first time in decades.

All of which tells me that the cumulative concerns reported from the front lines still have merit – healthy retail margins notwithstanding. The dynamics that impact their business – like today’s fragile economy and unpredictable price of propane – understandably cause local businesses concern for their impacts on debt margins, outstanding receivables, lost customers and profit margin.

Some question whether the annual survey simply serves as a “bitch blog” for propane marketers to vent. I honestly don’t think so. Their written comments, many straight from the heart, may sound like it. But you need to consider what themes arise from the overall comments and how they are substantiated.

For example, the high price of propane was a dominant theme that was underscored by the EIA forecast that household heating costs for this winter were expected to be $1,544 for propane compared to $889 for natural gas and $943 for electricity. That certainly is a concern of merit.

I should also note for the record that we never approach the State of the Industry Report with a hypothesis we try to prove. We let the composite answers to the survey questions speak for themselves – good or bad.
Either way, I hope you agree that the report makes for interesting observation and analysis. Let’s plan to kick it around again in about a year to grade those prognostications.

 

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