Gas Market Continues to Take Heavy Toll on Chemical Industry
The soaring gas market continues to claim casualties among industrial end-users. The ammonia, urea and methanol industries, just to name a few that require significant amounts of natural gas for production, are on the verge of being crippled because of high feedstock costs and continuing poor sales prices in the domestic and international markets.
Borden Chemicals and Plastics, Methanex and IMC Global all announced plans to shut down production facilities last week. They join a growing crowd of companies that have either closed up plants or exited their businesses for good, wiping out a significant amount of natural gas demand. Combined, the methanol and fertilizer industries represent more than 2.3 Bcf/d of demand. At least 40% of that is curtailed right now with more curtailments likely to take place throughout the rest of this year.
Borden said last week it will exit all of its chemical operations, including ammonia, urea and methanol production, and will shut down many of its plants to refocus entirely on polyvinyl chloride production. The company said all of its non-PVC businesses have become unprofitable because of high gas prices. Its nitrogen production facilities are being shut down this week or next and its methanol plant probably will be shut down by the end of the year. Both facilities are located in Louisiana. The nitrogen plant produces 270,000 tons/year of urea and 400,000 tons/year of ammonia and uses about 62 MMcf/d of gas. Total gas consumption for the methanol and nitrogen plants are about 100 MMcf/d, according to a company spokesman.
"We are shedding businesses that are currently not profitable and have poor long-term prospects based on the U.S. natural gas costs currently exceeding $4.60 per MMBtu versus offshore natural gas costs historically ranging between $0.25 and $1 per MMBtu," said Borden CEO William H. Carter. "Natural gas is the principle raw material for methanol, ammonia and urea."
Carter said that the operating limited partnership's methanol/formaldehyde and nitrogen products businesses have been break-even to cash negative for more than two years as a result of high natural gas prices and worldwide overcapacity. U.S. gas prices have been elevated for some time with no improvement on the cost side foreseen, he said. In addition, increased offshore methanol and nitrogen products supported by far cheaper sources of natural gas are expected to enter the U.S. market, weakening the domestic supply and demand balance. The overall demand for methanol is also expected to decline as MTBE is phased out as a fuel additive.
Carter added that Georgia Gulf, Ashland Chemical and other North American methanol producers have exited the business in the last 24 months due to unattractive fundamentals. In addition, a significant portion of the domestic chemical industry's ammonia and urea production is currently idled.
Methanex announced that it will shut down a Sterling Chemical Texas City methanol plant this week for at least six months, which leaves the largest methanol producer in the world with only one plant operating, or less than 20% of its production, after four other recent shut downs. The Methanex closures remove more than 2 million tons of methanol production and about 200 MMcf/d of gas demand.
"All the U.S. Gulf producers are in the same boat," said Brad Boyd, director of investor relations for Methanex. "This announcement about Sterling is a case in point. U.S. Gulf producers are continuing to barely break even from a cash perspective."
In addition IMC Global Inc., the world's largest producer of phosphate and potash fertilizers, announced plans last week to curtail all phosphate production at its Louisiana facilities beginning in late July until further notice.
"We're shutting down indefinitely phosphate production on the Mississippi River in Louisiana due to the continued suppressed global markets for phosphate and high prices for natural gas," said Dave Prichard, vice president of investor and corporate relations for IMC. "We shut in 20% of our systemwide capacity last November. Yesterday we announced an additional 25% on top of that starting Aug. 1, so that will mean the company has nearly 50% of its entire capacity shut down."
Ammonia is the main feedstock for phosphate production and natural gas makes up about 75% of the cost of ammonia --- 80% when gas prices are high. Last year the ammonia industry produced about 18 million tons of ammonia, which was down from a productive capacity of about 21.5 million tons, according to the Fertilizer Institute in Washington, D.C. On average, production of a ton of ammonia uses about 33.5 MMBtu of gas, which brings total daily gas consumption by the ammonia producing industry to 1.9 Bcf/d (1.6 Bcf/d in 1999).
"In the whole scheme of things it may only represent 2-3% (2.6% last year) of demand for the gas industry, but for our industry it's a big deal," said Ken Nyiri, director of market research for Mississippi Chemical. "Right now it looks like more than 20% of [U.S. ammonia production] is down. I think it has a potential to fall even further as we get into July and August. We are curtailed at the moment at one of our three locations."
Nyiri said that since Jan. 1, 10 U.S. ammonia plants have shut down out of 36 active plants. There also have been output reductions by other ammonia producers. A spokesman for the Fertilizer Institute estimated that ammonia production is down by as much as 40% currently, which would mean 640-760 MMcf/d of gas demand has been lost so far and some of that is not likely to return to the market.
Since the beginning of last year, five ammonia plants have shut down permanently. The permanent closures include Solutia's plant in Luling, LA, and PCS Nitrogen's LaPlatte, NE, plant and its Clinton, IA, plant. Wilgrow Fertilizer in Prior, OK, went bankrupt and sold its assets. And Borden Chemical announced it will shut down completely its Geisman, LA, plant this week. There are many others like Mississippi Chemical that have announced that they will reduce production. Terra Industries, for example, 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 temporarily in response to high gas prices (see NGI, June 19). Farmland has shut down its Pollack, LA, fertilizer plant. 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.
"Our position is we are not going to restart [our Mississippi Chemical plant] until we can make some money, and at these gas costs it's tough," said Nyiri. "Efficiency is only a small issue because the range is about 30 MMBtu of gas up to about 35 MMBtu per ton of ammonia production. If we're paying $4.25/MMBtu for gas, the most efficient plant would use $127.50 worth of gas per ton of ammonia and the least efficient would use $149 worth of gas. Today the ammonia price is up to about $190/ton (Gulf). But on top of your gas costs, you have to add about $30 of plant cash costs. You also have general sales and administration costs and corporate costs, so you've got to figure on top of that $160-$175 you have additional costs of at least $10 to $15 per ton. At the $190 level (Gulf) --- and incidentally today's prices are way up from what they were last year because of the shut downs --- we are struggling to cover our costs."
Last year in June, ammonia was only selling for $105 per ton, he said. The price for ammonia has shot up sharply because the market has been shorted with the plant closures that have occurred. If costs remain high, there are a number of additional U.S. producers who will not be able to continue production, he added.
"If these gas costs stay high, then the U.S. industry is just not competitive with the world. The folks in the Middle East are paying 25-50 cents/MMBtu for their gas. In Latin America, they are paying 50 cents to $1. In Russia, who knows, but last I heard they were paying 35 cents for their gas. These folks are able to make these products, not just the ammonia but the downstream products, and ship them over here cheaper than we can make them."
Some U.S. companies that have the ability are attempting to move their $250 million chemical operations overseas. But for most, that's not an option. "We have our plants, equipment and investments here in the United States, so as you can imagine there's a reluctance to close the doors here," said Nyiri. "We'll continue to operate as long as we can, but folks, like Mr. Borden over there in Louisiana, say they have had enough.
"A number of our companies in this industry are in severe financial difficulty. Wilgrow declared bankruptcy, and they are out, and we have several others that are on the brink of bankruptcy. We need the marketplace to improve or gas costs have to come down or else this is going to continue."
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