Gas producers must be wringing their hands in glee as futuresprices topped $4.50/MMBtu on Friday, but some of their customersclearly are a little less than overjoyed. High gas prices areforcing some fertilizer producers to consider shutting down theirplants and selling their feedstock on the open market just to makeends meet.

WEFA Inc. energy analyst Ron Denhardt estimates the gas industrywill lose 25% (400 MMcf/d) of demand from the ammonia and ureaindustry this year because of the high price of natural gas. Otherobservers are expecting much larger losses, reaching as high as 1.5Bcf/d. Total gas consumption for ammonia and urea production isabout 1.6 Bcf/d.

WEFA’s Denhardt also estimates the potential loss of anadditional 1-2 Bcf/d of gas demand due to fuel switching in thepower production sector and said about 150 MMcf/d already has beenlost due to fuel switching among industrial end users. But the fuelswitching number is a moving target because of fluctuating pricesfor comparative fuels, particularly Nos. 1 and 2 fuel oil, both ofwhich currently exceed the price of natural gas per MMBtu.

Demand losses from cuts in ammonia and urea production moreevident. When an ammonia plant is shut down, demand from that plantobviously vanishes, and several plants already have shut down. Moreshut 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 itsemployees at its Blytheville, AR, urea plant that they will be laidoff for up to six months because the plant is being shut down inresponse to high gas prices, according to the June 5 issue ofFertilizer Markets. Farmland, another fertilizer producer, citedhigh 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 downafter an explosion last month. In addition, Mississippi Chemical,PES Nitrogen and Terra all say they are considering further outputreductions in the U.S. because of high feedstock costs.

“Chemical and fertilizer companies who have hedged their gassupplies are better off shutting down their plants right now andselling the gas into the market,” said one chemical plant supplymanager, who asked to remain anonymous. “It’s terrible. It’s awful.About 70% of my contracts for sale are pass-through based on thecost of raw materials, and that’s the only thing that is keeping mein business right now. We would not be making cost right nowotherwise. We might be at a break-even point. And we hedged about40% of our purchases back in September of last year, which was apretty good time, looking back right now. We just have to plan itday by day. A number of fertilizer companies have closed up,” henoted.

It’s difficult to say when it becomes uneconomic to producefertilizer because each plant is unique with its specificdepreciation rate and costs, noted Dennis Lee, manager of energyand feedstock for Sask Ferco Products Inc., a partnership ofCargill and the Saskatchewan government. Lee’s plant is one of thelargest ammonia and urea producers in the world. It uses about 75MMcf/d. Regardless of the unique circumstances of each plant,however, it’s clear most of the companies will have to put out alot of cash in the next few months to stay producing, said Lee.”From a credit perspective, some of the weaker companies may be ina credit crunch. There have been a couple of announcements ofprolonged shut-downs in the Gulf Coast region recently because ofhigh gas prices.

“People are getting antsy” because of a potential fertilizershortage in the fall, he said. “Overall, I don’t think it’s a veryhealthy time for our industry. There could be some restructuringbecause of it.”

He said it “doesn’t look like” his plant is in any danger of aprolonged shut-down “at this point” because it is very close to itscustomer base in the Midwest and has a high efficiency factor, muchhigher than its older competitors in the Gulf Coast andMidcontinent regions. But the outlook does not look as good formany of his competitors, he said.

“I’ve had fertilizer producers come up to me and say ‘we justcan’t make it through this.’ At the same time I’ve talked tomarketers who deal with fertilizer producers who say they arewilling to lock in $4 prices this year,” said Denhardt. “He saidtheir break even number is $5. You have to take what they say witha little bit of a grain of salt. People will say things just tomove the market.”

Fertilizer Markets claims average cash costs for ammoniaproduction at $4 gas prices are about $168/short ton compared tocurrent sales prices that average $197/short ton. “Their break evennumber probably is above $4” on average, said Denhardt. “However,the older less efficient plants are struggling.”

Procter & Gamble recently turned to energy procurement overthe Internet in an attempt achieve greater purchasing efficiencyand lower prices (see related story this issue). It is postingrequests for quotes (RFQ) for a number of its facilities on a newtransaction website, www.energygateway.com, as part of itsexploration of new avenues for supply acquisition. “We’re in theearly stages of experimenting with this,” a P&G energy buyersaid. P&G, which like most very large energy usingmanufacturers, continues to do its buying and risk managementin-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,” theP&G buyer said. “It’s not a good time to be a buyer in theenergy market. We’re re-evaluating our approaches. We don’t want tojust be a victim of the market.”

Rocco Canonica

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