Chemical Producers Sell Their Gas Supply, Cut Production
Chemical companies, forced to shut in operations because of high natural
gas prices, are nevertheless making money --- by selling gas futures contracts.
Terra Industries and Mississippi Chemical Corp. became the latest companies
to announce cutbacks and shutdowns related to current natural gas costs.
Iowa-based Terra Industries said it had sold off a portion of its December
natural gas purchases, and shutdown 50% of its Verdigis, OK, ammonia facility.
The company had previously reported that it would not operate its Bytheville,
AR, and Beaumont, TX, facilities during the month of December as well.
In a similar maneuver, Mississippi Chemical Corp., a producer of nitrogen,
phosphorus and potassium-based products in Mississippi, Louisiana and New
Mexico, reported the sale of all of its natural gas futures contracts from
January forward, in order to take full advantage of the opportunity uncovered
by soaring natural gas prices. Mississippi Chemical said it expects to
realize a pre-tax gain of $16 million in its second fiscal quarter ending
Dec. 31 from the recently sold contracts.
The problem lies in the fact that escalating natural gas costs are not
being mimicked by chemical prices. An overabundance on the market has kept
chemical prices relatively low, while gas prices, a feedstock for some
chemicals, continue to climb. The difference in the latest shutdowns is
that the companies involved have openly announced they have sold their
gas contracts off because it is more profitable than manufacturing their
products, said Ron Phillips of The Fertilizer Institute.
Duke Energy's Ken Nyiri, divisional director of strategic planning and
research, commented on Mississippi Chemical's transactions, "I guess
they probably made about a $4/MMBtu margin on the gas, which is significantly
more than they could make on the ammonia; in fact, they would have lost
$30/unit. Their ammonia was probably costing them about $205/ton to make
(with gas bought at $5/MMBtu in November) and the market today is at $205
so basically they would break even on their ammonia production costs. By
selling the gas at around $9/MMBtu they made $4/MMBtu. It was just a question
of do they convert the gas to ammonia and make nothing on it, or do they
sell the gas and make $16 million."
Michael L. Bennett, executive vice president of Terra, said, "The
natural gas price increase since our December requirements were purchased
for Verdigris permitted us to sell a portion of those purchases and generate
higher gross profits than could be realized from selling the products manufactured
with the natural gas. We will evaluate the economics of bringing Verdigris
back to full production near the end of December when January's natural
gas purchase commitments must be made."
Terra estimates the idled facilities represent significant portions
of the company's North American ammonia (40%), UAN (30%), urea (77%) and
methanol (88%) manufacturing capacity. The production of all four chemicals
are heavily dependent on natural gas. Phillips said "The latest data
we had in October was that of the companies that we survey, which is not
the entire ammonia market, but a good bit of it, we were looking at operating
rates of 76%."
Currently, a total of 4-5 million tons/year of ammonia production capacity
is out of service out of about 20-21 million tons/year of production capacity.
"Clearly some of these folks have been selling their gas [rather than
producing ammonia]," said Nyiri. "It's the prudent thing to do,
I think, in this marketplace. Buy your ammonia if you can. At $9 gas, that
costs you $350/ton to make the ammonia, which is $145 more than the current
market is willing to pay."
A spokeswoman for Mississippi Chemical said the company held on to its
December gas contracts, and has been operating at varied levels of capacity
throughout 2000 (see NGI, July 3). "Depending
on what the gas prices are, and what our product prices are around the
January-February time frame, we will make decisions then on our operations
rate [capacity]," said Melinda Hood, a Mississippi Chemical spokeswoman.
Charles O. Dunn, CEO of Mississippi Chemical, said, "We remain
committed to the nitrogen business and our customers, but we also have
to take advantage of opportunities to optimize cash flow during these challenging
times. It is our belief that the current unprecedented natural gas prices
are unlikely to be sustained during the intermediate term," stated
Dunn. "As a result, we felt it was in the company's best interest
to sell our futures positions to lock in the substantial gain afforded
by the recent increase in natural gas prices. Going forward, we will continue
to determine operating levels for our plants based on the relationship
between natural gas prices, nitrogen product prices and our customers'
requirements, as we have been doing for some time."
International imports are also hurting U.S. producers. Currently, there
is a surplus of ammonia in the international market, which is holding ammonia
prices down. U.S. fertilizer producers can't compete with the international
market. Gas prices are 46 cents/MMBtu in Russia, 50 cents to $1/MMBtu in
Argentina and Venezuela, and $1/MMBtu in Trinidad. The U.S. imports 5.5
million tons of ammonia each year. Fertilizers represent 80% of the demand
for ammonia in the United States.
Terra Industries said its facilities would resume production as soon
as it became economical again ---- whether from gas prices declining or
nitrogen and methanol prices rising, just as long as "prices reach
levels allowing positive cash flows."
The situation for many Canadian fertilizer producers is eerily similar
to their southern neighbors. Paul Lansbergen, a spokesman with the Canadian
Fertilizer Institute, said a number of fertilizer producing facilities
have curtailed, or temporarily shutdown production due to the spiking natural
"We really have not thought about what the future has to hold,"
said Lansbergen. " Canada is kind of lucky in that most of its [production]
plants are more recent, so they are a little more energy efficient than
some of our [stateside] trading partners. This spike in the natural gas
price is sort of a North American Phenomenon, so it could have some serious
impacts. We are feeling the pinch as much as the states are."
Lansbergen added that some Canadian producers are still operating at
full capacity. Saskferco, the third largest fertilizer producer in Canada,
said despite high gas prices, it is still operating its nitrogen fertilizer
production plant at full capacity, while its competitors in the region
are forced to curtail, or shut down. Saskferco is a commercial joint venture
between Cargill, the Crown Investments Corp. of Saskatchewan and Citibank
"We have our winter gas pretty much covered," said Don Gill,
CEO of Saskferco. "Our competitive position is strong relative to
the domestic industry because we are low energy consumption," Gill
added, referring to Saskferco's efficient Belle Plaine, SK, plant built
"We don't anticipate significant production curtailments, but that's
not true for most of the producers," Gill stated. "The December
index is much lower than the spot price, and the January index could be
at least 50% higher than the December index, so it is very painful now,
and could be excruciating in January."
Gill said he believes there is no answer to the problem in the short
term, but thinks the long term solution includes bringing gas down from
the Arctic, specifically the Yukon and Northwest territories. He added
that we need "to recognize the reality in North America that we have
not been building electric generation from either coal or nuclear for a
lot of reasons, but we have to re-evaluate that [decision]."
Nyiri said he believes relief is in sight. He pointed out that the ammonia
market has been sitting around the $205/ton level for the last several
months, but believes ammonia prices will have to increase entering the
next planting season. "I've got my model peaking out around $250/ton
in April or May and at that time I have gas costs coming down." At
that point, the 1-2 Bcf/d of demand from the fertilizer production industry
should begin returning to service.