High Prices Put a Damper On Industrial Demand
Gas producers must be wringing their hands in glee as futures
prices topped $4.50/MMBtu on Friday, but some of their customers
clearly are a little less than overjoyed. High gas prices are
forcing some fertilizer producers to consider shutting down their
plants and selling their feedstock on the open market just to make
WEFA Inc. energy analyst Ron Denhardt estimates the gas industry
will lose 25% (400 MMcf/d) of demand from the ammonia and urea
industry this year because of the high price of natural gas. Other
observers are expecting much larger losses, reaching as high as 1.5
Bcf/d. Total gas consumption for ammonia and urea production is
about 1.6 Bcf/d.
WEFA's Denhardt also estimates the potential loss of an
additional 1-2 Bcf/d of gas demand due to fuel switching in the
power production sector and said about 150 MMcf/d already has been
lost due to fuel switching among industrial end users. But the fuel
switching number is a moving target because of fluctuating prices
for comparative fuels, particularly Nos. 1 and 2 fuel oil, both of
which currently exceed the price of natural gas per MMBtu.
Demand losses from cuts in ammonia and urea production more
evident. When an ammonia plant is shut down, demand from that plant
obviously vanishes, and several plants already have shut down. More
shut downs or production curtailments could be on the way,
according to plant operators and market observers.
Terra Industries, for example, already has told 70% of its
employees at its Blytheville, AR, urea plant that they will be laid
off for up to six months because the plant is being shut down in
response to high gas prices, according to the June 5 issue of
Fertilizer Markets. Farmland, another fertilizer producer, cited
high gas prices when it shut down its Pollack, LA, plant last week.
CF Industries has been in no hurry to restart its Donaldsonville,
LA, ammonia and nitrogen fertilizer plant, which was shut down
after an explosion last month. In addition, Mississippi Chemical,
PES Nitrogen and Terra all say they are considering further output
reductions in the U.S. because of high feedstock costs.
"Chemical and fertilizer companies who have hedged their gas
supplies are better off shutting down their plants right now and
selling the gas into the market," said one chemical plant supply
manager, who asked to remain anonymous. "It's terrible. It's awful.
About 70% of my contracts for sale are pass-through based on the
cost of raw materials, and that's the only thing that is keeping me
in business right now. We would not be making cost right now
otherwise. We might be at a break-even point. And we hedged about
40% of our purchases back in September of last year, which was a
pretty good time, looking back right now. We just have to plan it
day by day. A number of fertilizer companies have closed up," he
It's difficult to say when it becomes uneconomic to produce
fertilizer because each plant is unique with its specific
depreciation rate and costs, noted Dennis Lee, manager of energy
and feedstock for Sask Ferco Products Inc., a partnership of
Cargill and the Saskatchewan government. Lee's plant is one of the
largest ammonia and urea producers in the world. It uses about 75
MMcf/d. Regardless of the unique circumstances of each plant,
however, it's clear most of the companies will have to put out a
lot of cash in the next few months to stay producing, said Lee.
"From a credit perspective, some of the weaker companies may be in
a credit crunch. There have been a couple of announcements of
prolonged shut-downs in the Gulf Coast region recently because of
high gas prices.
"People are getting antsy" because of a potential fertilizer
shortage in the fall, he said. "Overall, I don't think it's a very
healthy time for our industry. There could be some restructuring
because of it."
He said it "doesn't look like" his plant is in any danger of a
prolonged shut-down "at this point" because it is very close to its
customer base in the Midwest and has a high efficiency factor, much
higher than its older competitors in the Gulf Coast and
Midcontinent regions. But the outlook does not look as good for
many of his competitors, he said.
"I've had fertilizer producers come up to me and say 'we just
can't make it through this.' At the same time I've talked to
marketers who deal with fertilizer producers who say they are
willing to lock in $4 prices this year," said Denhardt. "He said
their break even number is $5. You have to take what they say with
a little bit of a grain of salt. People will say things just to
move the market."
Fertilizer Markets claims average cash costs for ammonia
production at $4 gas prices are about $168/short ton compared to
current sales prices that average $197/short ton. "Their break even
number probably is above $4" on average, said Denhardt. "However,
the older less efficient plants are struggling."
Procter & Gamble recently turned to energy procurement over
the Internet in an attempt achieve greater purchasing efficiency
and lower prices (see related story this issue). It is posting
requests for quotes (RFQ) for a number of its facilities on a new
transaction website, www.energygateway.com, as part of its
exploration of new avenues for supply acquisition. "We're in the
early stages of experimenting with this," a P&G energy buyer
said. P&G, which like most very large energy using
manufacturers, continues to do its buying and risk management
in-house, plans to post more RFQs on the energygateway.com website.
"We're looking for other opportunities to try out and evaluate.
We're always looking for ways to bring value to our company," the
P&G buyer said. "It's not a good time to be a buyer in the
energy market. We're re-evaluating our approaches. We don't want to
just be a victim of the market."