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
"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
"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
"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."