Chemical companies, forced to shut in operations because of high natural gas prices, are nevertheless making money — by selling gas futures contracts. Terra Industries and Mississippi Chemical Corp. became the latest companies to announce cutbacks and shutdowns related to current natural gas costs.
Iowa-based Terra Industries said it had sold off a portion of its December natural gas purchases, and shutdown 50% of its Verdigis, OK, ammonia facility. The company had previously reported that it would not operate its Bytheville, AR, and Beaumont, TX, facilities during the month of December as well.
In a similar maneuver, Mississippi Chemical Corp., a producer of nitrogen, phosphorus and potassium-based products in Mississippi, Louisiana and New Mexico, reported the sale of all of its natural gas futures contracts from January forward, in order to take full advantage of the opportunity uncovered by soaring natural gas prices. Mississippi Chemical said it expects to realize a pre-tax gain of $16 million in its second fiscal quarter ending Dec. 31 from the recently sold contracts.
The problem lies in the fact that escalating natural gas costs are not being mimicked by chemical prices. An overabundance on the market has kept chemical prices relatively low, while gas prices, a feedstock for some chemicals, continue to climb. The difference in the latest shutdowns is that the companies involved have openly announced they have sold their gas contracts off because it is more profitable than manufacturing their products, said Ron Phillips of The Fertilizer Institute.
Duke Energy’s Ken Nyiri, divisional director of strategic planning and research, commented on Mississippi Chemical’s transactions, “I guess they probably made about a $4/MMBtu margin on the gas, which is significantly more than they could make on the ammonia; in fact, they would have lost $30/unit. Their ammonia was probably costing them about $205/ton to make (with gas bought at $5/MMBtu in November) and the market today is at $205 so basically they would break even on their ammonia production costs. By selling the gas at around $9/MMBtu they made $4/MMBtu. It was just a question of do they convert the gas to ammonia and make nothing on it, or do they sell the gas and make $16 million.”
Michael L. Bennett, executive vice president of Terra, said, “The natural gas price increase since our December requirements were purchased for Verdigris permitted us to sell a portion of those purchases and generate higher gross profits than could be realized from selling the products manufactured with the natural gas. We will evaluate the economics of bringing Verdigris back to full production near the end of December when January’s natural gas purchase commitments must be made.”
Terra estimates the idled facilities represent significant portions of the company’s North American ammonia (40%), UAN (30%), urea (77%) and methanol (88%) manufacturing capacity. The production of all four chemicals are heavily dependent on natural gas. Phillips said “The latest data we had in October was that of the companies that we survey, which is not the entire ammonia market, but a good bit of it, we were looking at operating rates of 76%.”
Currently, a total of 4-5 million tons/year of ammonia production capacity is out of service out of about 20-21 million tons/year of production capacity. “Clearly some of these folks have been selling their gas [rather than producing ammonia],” said Nyiri. “It’s the prudent thing to do, I think, in this marketplace. Buy your ammonia if you can. At $9 gas, that costs you $350/ton to make the ammonia, which is $145 more than the current market is willing to pay.”
A spokeswoman for Mississippi Chemical said the company held on to its December gas contracts, and has been operating at varied levels of capacity throughout 2000 (see NGI, July 3). “Depending on what the gas prices are, and what our product prices are around the January-February time frame, we will make decisions then on our operations rate [capacity],” said Melinda Hood, a Mississippi Chemical spokeswoman.
Charles O. Dunn, CEO of Mississippi Chemical, said, “We remain committed to the nitrogen business and our customers, but we also have to take advantage of opportunities to optimize cash flow during these challenging times. It is our belief that the current unprecedented natural gas prices are unlikely to be sustained during the intermediate term,” stated Dunn. “As a result, we felt it was in the company’s best interest to sell our futures positions to lock in the substantial gain afforded by the recent increase in natural gas prices. Going forward, we will continue to determine operating levels for our plants based on the relationship between natural gas prices, nitrogen product prices and our customers’ requirements, as we have been doing for some time.”
International imports are also hurting U.S. producers. Currently, there is a surplus of ammonia in the international market, which is holding ammonia prices down. U.S. fertilizer producers can’t compete with the international market. Gas prices are 46 cents/MMBtu in Russia, 50 cents to $1/MMBtu in Argentina and Venezuela, and $1/MMBtu in Trinidad. The U.S. imports 5.5 million tons of ammonia each year. Fertilizers represent 80% of the demand for ammonia in the United States.
Terra Industries said its facilities would resume production as soon as it became economical again —- whether from gas prices declining or nitrogen and methanol prices rising, just as long as “prices reach levels allowing positive cash flows.”
The situation for many Canadian fertilizer producers is eerily similar to their southern neighbors. Paul Lansbergen, a spokesman with the Canadian Fertilizer Institute, said a number of fertilizer producing facilities have curtailed, or temporarily shutdown production due to the spiking natural gas prices.
“We really have not thought about what the future has to hold,” said Lansbergen. ” Canada is kind of lucky in that most of its [production] plants are more recent, so they are a little more energy efficient than some of our [stateside] trading partners. This spike in the natural gas price is sort of a North American Phenomenon, so it could have some serious impacts. We are feeling the pinch as much as the states are.”
Lansbergen added that some Canadian producers are still operating at full capacity. Saskferco, the third largest fertilizer producer in Canada, said despite high gas prices, it is still operating its nitrogen fertilizer production plant at full capacity, while its competitors in the region are forced to curtail, or shut down. Saskferco is a commercial joint venture between Cargill, the Crown Investments Corp. of Saskatchewan and Citibank Canada.
“We have our winter gas pretty much covered,” said Don Gill, CEO of Saskferco. “Our competitive position is strong relative to the domestic industry because we are low energy consumption,” Gill added, referring to Saskferco’s efficient Belle Plaine, SK, plant built in 1992.
“We don’t anticipate significant production curtailments, but that’s not true for most of the producers,” Gill stated. “The December index is much lower than the spot price, and the January index could be at least 50% higher than the December index, so it is very painful now, and could be excruciating in January.”
Gill said he believes there is no answer to the problem in the short term, but thinks the long term solution includes bringing gas down from the Arctic, specifically the Yukon and Northwest territories. He added that we need “to recognize the reality in North America that we have not been building electric generation from either coal or nuclear for a lot of reasons, but we have to re-evaluate that [decision].”
Nyiri said he believes relief is in sight. He pointed out that the ammonia market has been sitting around the $205/ton level for the last several months, but believes ammonia prices will have to increase entering the next planting season. “I’ve got my model peaking out around $250/ton in April or May and at that time I have gas costs coming down.” At that point, the 1-2 Bcf/d of demand from the fertilizer production industry should begin returning to service.
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