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High Prices Put a Damper On Industrial Demand

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 ends meet.

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 noted.

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,, 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 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."

Rocco Canonica

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ISSN © 2577-9877 | ISSN © 1532-1266
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