High gas prices have caused severe and lasting demand destruction in the industrial sector, wiping out at least 2.8 Bcf/d of industrial consumption so far. According to Arlington, VA-based Energy Ventures Analysis’ (EVA) annual Fuelcast long-term outlook, industrial demand probably will decline another 2.5 Bcf/d before it begins to recover, and the recovery isn’t likely to happen soon.

“The longer-term outlook for industrial sector demand is that it will not recover to 2000 consumption levels until sometime after 2020, as some of the current demand destruction within the sector will be permanent,” EVA said.

“It will be 2012-2015 before some of this demand begins to come back,” said EVA consultant Stephen Thumb. “It just doesn’t look very rosy. I know the rest of the economy is going good, but the industries that use natural gas are not looking good at all.

“We think gas prices will start to get better in 2006-07, but some of this is permanent. When these guys shut a plant or go ahead and build new plants in Trinidad, or move to Germany, this is permanent. I don’t see them building any greenfields after this shock.”

The chemical industry, which represents 50% of the gas demand in the industrial sector, already has been hit by a series of bankruptcies, plant closings and reductions in production levels because the plants can no longer compete with such high gas prices. Gas makes up a substantial portion of their total costs.

Bankrupt fertilizer firms include Farmland (with plants in the Midwest and Louisiana), Vicksburg Chemical (Mississippi), Agrifos (Texas), Mulberry Phosphates (Florida) and Agway (Saracuse, NY).

Mississippi Chemical (Yazoo City, MS) was able to get a one-year credit extension but permanently shut down its Donaldsonville, LA, plant. Air Products has ceased production at its Pace, FL, plant because of high gas prices. Additional plant shut downs have included PSC Chemicals in Geisma, LA, and Memphis, TN; Terra Industries in Verdigris, OK; Koch in Enid, OK, and Sterlington, LA; and IMC Global in Faustina, LA. Terra Industries (Sioux City, IA) has acknowledged a limited ability to effectively hedge future gas prices, EVA said.

“In essence, the current high gas prices [have] caused a fundamental shift in the competitive position between U.S. chemical firms and those located overseas,” EVA said. “This has occurred because the U.S. chemical sector is based heavily upon natural gas and natural gas liquids, while European and Asian chemical producers are based heavily on oil (i.e., naptha). During the latter part of the golden era of the U.S. chemical industry (i.e., the 1980s and 1990s) the ratio between gas and oil prices was 0.6, while [currently] that ratio is 1.0.”

As a result, U.S. exports have dropped sharply and foreign imports have even replaced domestic production. EVA noted that recently a Louisiana ethylene and plastics plant closed up shop and moved to Germany where gas prices are lower and more stable.

To date, the ammonia-based fertilizer sector has been the most affected part of the chemical industry. The U.S. fertilizer industry is not competitive with imports from Trinidad, Mexico, Russia or the Middle East unless gas prices are lower than $3/MMBtu. Coastal fertilizer plants have suffered the most because plants farther inland have a transportation advantage.

“While some production facilities will come back online or increase the shifts at specific locations during low points for gas prices over the intermediate term, long term it is projected that at least half of these facilities eventually will be displaced by foreign competition (i.e., a loss or approximately 285 Bcf per year in gas demand), particularly those facilities close to tidewater, as inland plants have an additional transportation barrier,” EVA said.

To make matters worse, the chemical industry also will have to bear the impact of 16 states banning MTBE as an additive to gasoline by 2006. The likely replacement for MTBE will be ethanol, which does not use gas as a feedstock. “The net result is a reduction of approximately 80 Bcf per year of gas as a feedstock, as well as the idling of several methanol plants,” according to EVA.

Another industry that has been severely impacted is the aluminum industry. The United States has become a swing producer of aluminum because of its high costs, particularly the high cost of gas-fired power generation. “With significant worldwide surplus capacity in the industry (i.e., in 2001 capacity increased 22% and another 25% in 2002) it is doubtful that there will ever be another greenfield aluminum plant built in the United States,” said EVA. “Furthermore it is questionable how may of the currently idled seven U.S. aluminum facilities will reopen.”

Currently idled aluminum plants include following: Alcan’s West Virginia plant; the Mead, Tacoma and Trentwood plants of bankrupt Kaiser Aluminum; Alcoa’s Troutdale, OR, and Rockdale, TX, plants; the bankrupt Longview, WA, plant; and the Goldendale, WA, plant.

Currently only two plants in the Pacific Northwest, the heart of the aluminum industry, are still operating: Glencore’s Columbia Falls in Kalispell, MT, at 20% capacity and Alcoa’s Ferndale plant in Bellingham, WA.

Once you get past the chemical and primary metals industries, there is a second tier of industries that are suffering. Although the cost of gas doesn’t make up as much of their total production costs, they still are struggling through a transition that probably will claim some of their plants. In this second tier, which includes paper, food processing, petroleum, stone and glass, irrigation and the sweetener industry, among others, gas costs can represents 20-30% of their total costs, said Thumb.

“It’s not nearly as much demand as from the top tier, but it has to be in the tenths of a Bcf. It’s not as bad as the petrochemicals. It probably isn’t a full Bcf of demand, but those tenths add up,” he said.

“In the food processing industries, gas costs make up maybe 20%. The glass and stone industries are getting hurt too, but if they can get their prices up they could be okay. Refineries have been pretty successful in being able to pass on their costs. Refinery margins are terrible but the big oil companies can absorb the losses.”

EVA’s outlook for continued high gas prices through at least 2006 probably will result in further demand erosion. The critical issue will be to determine what industries can survive with $5 gas over the next couple years. EVA forecasts that gas prices at the Henry Hub will average $4.76 (nominal dollars) in 2005, $3.79 in 2010, and $4.34 in 2015.

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