Chemical companies, forced to shut in operations because of highnatural gas prices, are nevertheless making money — by sellinggas futures contracts.

Terra Industries and Mississippi Chemical Corp. became thelatest companies to announce cutbacks related to current naturalgas costs.

Iowa-based Terra Industries said it had sold off a portion ofits December natural gas purchases, and shutdown 50% of itsVerdigis, OK, ammonia facility. The company had previously reportedthat 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 ofnitrogen, phosphorus and potassium-based products in Mississippi,Louisiana and New Mexico, reported the sale of all of its naturalgas futures contracts from January forward, in order to take fulladvantage of the opportunity uncovered by soaring natural gasprices. Mississippi Chemical said it expects to realize a pre-taxgain of $16 million in its second fiscal quarter ending Dec. 31from the recently sold contracts.

The problem lies in the fact that escalating natural gas costsare not being mimicked by chemical prices. An overabundance on themarket has kept chemical prices relatively low, while gas prices, afeedstock for some chemicals, continue to climb. The difference inthe latest shutdowns is that the companies involved have openlyannounced they have sold their gas contracts off because it is moreprofitable than manufacturing their products, said Ron Phillips ofThe Fertilizer Institute.

Duke Energy’s Ken Nyiri, divisional director of strategicplanning and research, commented on Mississippi Chemical’stransactions, “I guess they probably made about a $4/MMBtu marginon the gas, which is significantly more than they could make on theammonia; in fact, they would have lost $30/unit. Their ammonia wasprobably costing them about $205/ton to make (with gas bought at$5/MMBtu in November) and the market today is at $205 so basicallythey would break even on their ammonia production costs. By sellingthe gas at around $9/MMBtu they made $4/MMBtu. It was just aquestion of do they convert the gas to ammonia and make nothing onit, 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 requirementswere purchased for Verdigris permitted us to sell a portion ofthose purchases and generate higher gross profits than could berealized from selling the products manufactured with the naturalgas. We will evaluate the economics of bringing Verdigris back tofull production near the end of December when January’s natural gaspurchase commitments must be made.”

Terra estimates the idled facilities represent 40%, 30%, 77% and88% of the company’s North American ammonia, UAN, urea and methanolmanufacturing capacity, respectively. The production of all fourchemicals are heavily dependent on natural gas. Phillips said “Thelatest data we had in October was that of the companies that wesurvey, which is not the entire ammonia market, but a good bit ofit, we were looking at operating rates of 76%.”

Currently, a total of 4-5 million tons/year of ammoniaproduction capacity is out of service out of about 20-21 milliontons/year of production capacity. “Clearly some of these folks havebeen selling their gas [rather than producing ammonia],” saidNyiri. “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 tomake the ammonia, which is $145 more than the current market iswilling to pay.”

A spokeswoman for Mississippi Chemical said the company held on toits December gas contracts, and has been operating at varied levels ofcapacity throughout 2000 (see Daily GPI, June 30). “Depending on what the gasprices are, and what our product prices are around theJanuary-February time frame, we will make decisions then on ouroperations rate [capacity],” said Melinda Hood, a Mississippi Chemicalspokeswoman.

Charles O. Dunn, CEO of Mississippi Chemical, said, “We remaincommitted to the nitrogen business and our customers, but we alsohave to take advantage of opportunities to optimize cash flowduring these challenging times. It is our belief that the currentunprecedented natural gas prices are unlikely to be sustainedduring the intermediate term,” stated Dunn. “As a result, we feltit was in the company’s best interest to sell our futures positionsto lock in the substantial gain afforded by the recent increase innatural gas prices. Going forward, we will continue to determineoperating levels for our plants based on the relationship betweennatural 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 internationalmarket, which is holding ammonia prices down. U.S. fertilizerproducers can’t compete with the international market. Gas pricesare 46 cents/MMBtu in Russia, 50 cents to $1/MMBtu in Argentina andVenezuela, and $1/MMBtu in Trinidad. The U.S. imports 5.5 milliontons of ammonia each year. Fertilizers represent 80% of the demandfor ammonia in the United States.

Terra Industries said its facilities would resume production assoon as it became economical again — whether from gas pricesdeclining or nitrogen and methanol prices rising, just as long as”prices reach levels allowing positive cash flows.”

Nyiri said he believes relief is in sight. He pointed out thatthe ammonia market has been sitting around the $205/ton level forthe last several months, but believes ammonia prices will have toincrease entering the next planting season. “I’ve got my modelpeaking out around $250/ton in April or May and at that time I havegas costs coming down.” At that point, the 1-2 Bcf/d of demand fromthe fertilizer production industry should begin returning toservice.

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