High Prices Put a Damper on Industrial Demand

     Gas producers must be wringing their hands in glee as futures prices top 
$4.45/MMBtu, but some of their customers
     clearly are a little less than overjoyed. High gas prices are forcing 
some fertilizer producers to consider shutting down
     their plants and selling their feedstock on the open market just to make 
ends meet. 

     WEFA Inc. energy analyst Ron Denhardt estimates the gas industry will 
lose 25% (400 MMcf/d) of demand from the
     ammonia and urea industry this year because of the high price of natural 
gas. Other observers are expecting much larger
     losses, reaching as high as 1.5 Bcf/d. Denhardt also estimates the loss 
of an additional 1-2 Bcf/d due to fuel switching in
     the power production sector and possibly another 2.2 Bcf/d as industrial 
end users switch over to fuel oil. But those
     numbers are dependent on the comparative price of Nos. 1 and 2 fuel oil, 
both of which currently exceed the price of
     natural gas per Btu. 

     "Chemical and fertilizer companies who have hedged their gas supplies 
are better off shutting down their plants right now
     and selling the gas into the market," said one chemical plant supply 
manager, who asked to remain anonymous. "It's
     terrible. It's awful. About 70% of my contracts for sale are 
pass-through based on the cost of raw materials, and that's
     the only thing that is keeping me in business right now. We would not be 
making cost right now otherwise. We might be
     at a break-even point. And we hedged about 40% of our purchases back in 
September of last year, which was a pretty
     good time, looking back right now. We just have to plan it day by day. A 
number of fertilizer companies have closed
     up." 

     It's difficult to say when it becomes uneconomic to produce fertilizer 
because each plant is unique with its specific
     depreciation rate and costs, noted Dennis Lee, manager of energy and 
feedstock for Sask Ferco Products Inc., a
     partnership of Cargil and the Saskatchewan government. Lee's plant is 
one of the largest ammonia and urea producers in
     the world. It uses about 75 MMcf/d. Regardless of the unique 
circumstances of each plant, however, it's clear most of
     the companies will have to put out a lot of cash in the next few months 
to stay producing, said Lee. "From a credit
     perspective, some of the weaker companies may be in a credit crunch. 
There have been a couple of announcements of
     prolonged shut-downs in the Gulf Coast region recently because of high 
gas prices. 

     "People are getting antsy" because of a potential fertilizer shortage in 
the fall, he said. "Overall, I don't think it's a very
     healthy time for our industry. There could be some restructuring because 
of it." 

     He said it "doesn't look like" his plant is in any danger of a shut-down 
"at this point" because it is very close to its
     customer base in the Midwest and has a high efficiency factor, much 
higher than its older competitors in the Gulf Coast
     and Midcontinent regions. But the outlook does not look as good for many 
of his competitors, he said. 

     Procter & Gamble recently turned to energy procurement over the Internet 
in an attempt achieve greater purchasing
     efficiency and lower prices. It is posting requests for quotes (RFQ) for 
a number of its facilities on a new transaction
     website, www.energygateway.com, as part of its exploration of new 
avenues for supply acquisition. "We're in the early
     stages of experimenting with this," a P&G buyer said. (See Daily GPI, 
June 13) P&G, which like most very large energy
     using manufacturers, continues to do its buying and risk management 
in-house, plans to post more RFQs on the
     energygateway.com website. 

     "We're looking for other opportunities to try out and evaluate. We're 
always looking for ways to bring value to our
     company," the P&G buyer said. "It's not a good time to be a buyer in the 
energy market. We're re-evaluating our
     approaches. We don't want to just be a victim of the market."