The good news is that the outlook for the industrial sector has turned to “gradual recovery;” however, natural gas will likely be late to the party as any rebound in the top four gas-consuming sectors will not be as brisk, according to analysts at Barclays Capital.

Due to this, natural gas demand will recover over the next six to 18 months at a pace slower than broader economic recovery trends would suggest, according to Barclays.

“Among the gas-intensive industries, chemicals, petroleum and coal products (primarily refining), food and primary metals (mostly steel and aluminum production) account for 65% of total industrial demand. As such, trends in these four sectors have an overwhelming importance for natural gas balances,” Barclays analysts wrote in a research note Tuesday.

While a rebound in the automotive sector is leading improvement in the industrial demand outlook, not much of that is likely to spill over to gas demand, they said.

In the chemicals segment, production of ethylene dropped 12.3% last year, and it could fall another 2.4% this year, Barclays said. A recovery in 2010 is expected to be only 0.1% from 2009’s depressed levels, the analysts said. Output for other chemical components is expected to recover by 3-5% year-over-year (y/y) in 2010, compared with a 5.4% recovery in industrial production overall, they said.

Petroleum refineries account for 93% of the petroleum and coal products segment’s gas demand, and their throughput has dropped by 3% y/y this year through July following a 3.8% y/y decline last year. Barclays expects U.S. refining utilization to increase 1.4-2.8% y/y in 2010 and views strengthening of 5-6% as unlikely, the analysts said.

While the primary metals sector accounted for 10% of industrial gas demand in 2006, producers won’t find comfort there either. Domestic aluminum production was down 38% y/y in May. “…[T]here is very little incentive to ramp up production in the next six months,” the analysts wrote. Domestic facilities will be among the last to restart due to their high costs, they said.

The food sector has been spared the worst of the recession, with production down just 0.9% y/y in June. However, the shortfall precludes a steep recovery, the analysts said.

“In summary, prospects for the recovery of activity for each of the top four natural gas-consuming sectors are more muted than our economists’ expectations for a rebound in industrial production in 2010,” the analysts said.

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