The soaring gas market continues to claim casualties amongindustrial end-users. The ammonia, urea and methanol industries,just to name a few that require significant amounts of natural gasfor production, are on the verge of being crippled because of highfeedstock costs and continuing poor sales prices in the domesticand international markets.

Borden Chemicals and Plastics, Methanex and IMC Global allannounced plans to shut down production facilities last week. Theyjoin a growing crowd of companies that have either closed up plantsor exited their businesses for good, wiping out a significantamount of natural gas demand. Combined, the methanol and fertilizerindustries represent more than 2.3 Bcf/d of demand. At least 40% ofthat is curtailed right now with more curtailments likely to takeplace throughout the rest of this year.

Borden said last week it will exit all of its chemicaloperations, including ammonia, urea and methanol production, andwill shut down many of its plants to refocus entirely on polyvinylchloride production. The company said all of its non-PVC businesseshave become unprofitable because of high gas prices. Its nitrogenproduction facilities are being shut down this week or next and itsmethanol plant probably will be shut down by the end of the year.Both facilities are located in Louisiana. The nitrogen plantproduces 270,000 tons/year of urea and 400,000 tons/year of ammoniaand uses about 62 MMcf/d of gas. Total gas consumption for themethanol and nitrogen plants are about 100 MMcf/d, according to acompany spokesman.

“We are shedding businesses that are currently not profitableand have poor long-term prospects based on the U.S. natural gascosts currently exceeding $4.60 per MMBtu versus offshore naturalgas costs historically ranging between $0.25 and $1 per MMBtu,”said Borden CEO William H. Carter. “Natural gas is the principleraw material for methanol, ammonia and urea.”

Carter said that the operating limited partnership’smethanol/formaldehyde and nitrogen products businesses have beenbreak-even to cash negative for more than two years as a result ofhigh natural gas prices and worldwide overcapacity. U.S. gas priceshave been elevated for some time with no improvement on the costside foreseen, he said. In addition, increased offshore methanoland nitrogen products supported by far cheaper sources of naturalgas are expected to enter the U.S. market, weakening the domesticsupply and demand balance. The overall demand for methanol is alsoexpected to decline as MTBE is phased out as a fuel additive.

Carter added that Georgia Gulf, Ashland Chemical and other NorthAmerican methanol producers have exited the business in the last 24months due to unattractive fundamentals. In addition, a significantportion of the domestic chemical industry’s ammonia and ureaproduction is currently idled.

Methanex announced that it will shut down a Sterling ChemicalTexas City methanol plant this week for at least six months, whichleaves the largest methanol producer in the world with only oneplant operating, or less than 20% of its production, after fourother recent shut downs. The Methanex closures remove more than 2million tons of methanol production and about 200 MMcf/d of gasdemand.

“All the U.S. Gulf producers are in the same boat,” said BradBoyd, director of investor relations for Methanex. “Thisannouncement about Sterling is a case in point. U.S. Gulf producersare continuing to barely break even from a cash perspective.”

In addition IMC Global Inc., the world’s largest producer ofphosphate and potash fertilizers, announced plans last week tocurtail all phosphate production at its Louisiana facilitiesbeginning in late July until further notice.

“We’re shutting down indefinitely phosphate production on theMississippi River in Louisiana due to the continued suppressedglobal markets for phosphate and high prices for natural gas,” saidDave Prichard, vice president of investor and corporate relationsfor IMC. “We shut in 20% of our systemwide capacity last November.Yesterday we announced an additional 25% on top of that startingAug. 1, so that will mean the company has nearly 50% of its entirecapacity shut down.”

Ammonia is the main feedstock for phosphate production andnatural gas makes up about 75% of the cost of ammonia — 80% whengas prices are high. Last year the ammonia industry produced about18 million tons of ammonia, which was down from a productivecapacity of about 21.5 million tons, according to the FertilizerInstitute in Washington, D.C. On average, production of a ton ofammonia uses about 33.5 MMBtu of gas, which brings total daily gasconsumption by the ammonia producing industry to 1.9 Bcf/d (1.6Bcf/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 industryit’s a big deal,” said Ken Nyiri, director of market research forMississippi Chemical. “Right now it looks like more than 20% of[U.S. ammonia production] is down. I think it has a potential tofall even further as we get into July and August. We are curtailedat the moment at one of our three locations.”

Nyiri said that since Jan. 1, 10 U.S. ammonia plants have shutdown out of 36 active plants. There also have been outputreductions by other ammonia producers. A spokesman for theFertilizer Institute estimated that ammonia production is down byas much as 40% currently, which would mean 640-760 MMcf/d of gasdemand has been lost so far and some of that is not likely toreturn 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 MississippiChemical plant] until we can make some money, and at these gascosts it’s tough,” said Nyiri. “Efficiency is only a small issuebecause the range is about 30 MMBtu of gas up to about 35 MMBtu perton of ammonia production. If we’re paying $4.25/MMBtu for gas, themost efficient plant would use $127.50 worth of gas per ton ofammonia and the least efficient would use $149 worth of gas. Todaythe ammonia price is up to about $190/ton (Gulf). But on top ofyour gas costs, you have to add about $30 of plant cash costs. Youalso have general sales and administration costs and corporatecosts, so you’ve got to figure on top of that $160-$175 you haveadditional costs of at least $10 to $15 per ton. At the $190 level(Gulf) — and incidentally today’s prices are way up from whatthey were last year because of the shut downs — we are strugglingto cover our costs.”

Last year in June, ammonia was only selling for $105 per ton, hesaid. The price for ammonia has shot up sharply because the markethas been shorted with the plant closures that have occurred. Ifcosts remain high, there are a number of additional U.S. producerswho will not be able to continue production, he added.

“If these gas costs stay high, then the U.S. industry is justnot competitive with the world. The folks in the Middle East arepaying 25-50 cents/MMBtu for their gas. In Latin America, they arepaying 50 cents to $1. In Russia, who knows, but last I heard theywere paying 35 cents for their gas. These folks are able to makethese 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 movetheir $250 million chemical operations overseas. But for most,that’s not an option. “We have our plants, equipment andinvestments here in the United States, so as you can imaginethere’s a reluctance to close the doors here,” said Nyiri. “We’llcontinue to operate as long as we can, but folks, like Mr. Bordenover there in Louisiana, say they have had enough.

“A number of our companies in this industry are in severefinancial difficulty. Wilgrow declared bankruptcy, and they areout, and we have several others that are on the brink ofbankruptcy. We need the marketplace to improve or gas costs have tocome down or else this is going to continue.”

Rocco Canonica

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