High natural gas prices hurting U.S industries

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High natural gas prices hurting U.S industries

Wednesday December 20, 1:21 PM EST

By Spencer Swartz

SAN FRANCISCO, Dec 20 (Reuters) - Record-high U.S. natural gas prices are taking an economic toll from coast to coast, leading to production cuts and the threat of layoffs in industries ranging from fertilizer producers to dairy farmers and flower growers.

"It's becoming a dangerous situation because of the secondary effects on other parts of the economy. This affects input costs for everyone - steel producers, the auto industry, the pulp and paper industries," said Dennis Higgins, a New York- based analyst at Morgan Stanley Dean Witter(MWD).

U.S. natural gas prices on the benchmark New York Mercantile Exchange (NYMEX) have risen steadily since mid-February from around $3.00 per million British thermal units (mmBtu) to an all-time high near $10.00 this month -- quadruple 1999 levels.

The unprecedented price spike has been pinned to a host of factors, including dwindling inventories brought on by a lack of exploration for new supplies after energy prices plunged in 1997-1998. Meanwhile, gas demand has surged from the power industry and others anxious to take advantage of the fuel's efficiency and environmental benefits relative to coal and oil.

Record gas prices -- already draining the wallets of the nearly 60 million U.S. homes that heat with gas -- have trimmed profit margins and triggered production cuts, closures and job layoffs this year at many big and small industrial and commercial companies who use gas in production.

Top among these are gas-guzzling nitrogen fertilizer producers, for which natural gas can account for up to 90 percent of production costs.

One of the many casualties has been Iowa-based Terra Industries Inc.(TRA), one of the largest U.S. fertilizer producers, which has closed two and a half of its six American-based production facilities until further notice, according to Mark Rosenbury, a company spokesman.

Some chemical producers also have temporarily shut plants and resold gas futures contracts purchased at well below current prices to reap large windfalls.

Last week, Mississippi Chemical Corp. (GRO) said it would sell all of its gas futures contracts, most of which were for January, locking in a pre-tax gain of $16 million.

In California, high-priced gas has pushed some greenhouse heating bills up to $500,000 a month for some state flower growers, compared to $100,000 a year ago, triggering closures, job layoffs and potentially hurting crops of Valentine's Day flowers, Lee Murphy, president of the California Cut Flower Commission, said.

Production costs have also soared for California dairy farmers who use gas for powering processing equipment. And the costs are likely to be passed on to consumers, said Dave Kranz, a spokesman for the California Farm Bureau.

In other parts of the country, exorbitant gas costs have threatened brick-making, aluminum and steel production.

Kaiser Aluminum Corp.(KLU), one of the biggest U.S. aluminum producers, has temporarily halted production at its facilities in the Pacific Northwest due to high power costs, caused in part by high gas prices.

Compounding the problem, analysts said, the high-priced gas environment facing industrial and commercial users comes amid clear signs of declining U.S. economic growth across many sectors, slumping share prices and tightening credit standards. All these factors are likely to hit consumer and capital spending.

ANY SILVER LININGS?

With production already taking a hit from high gas prices, industrial and commercial users have been switching to cheaper alternative fuels, especially in light of crude oil's more than 20 percent pullback from its October highs to $27 a barrel.

If this retracement holds into 2001, some analysts said, gas prices could also be weighed down due to more fuel customers switching over to cheaper refined oil products.

In addition, rising Canadian gas exports next year and gains in U.S. gas supplies expected in 2001 from the more than 800 rigs now exploring for gas also could help loosen the supply and demand balance.

Still, underpinning gas prices are cold winter forecasts that will likely further deplete already-low inventories and keep supplies tight to power machinery and air conditioners next spring and summer.

"Our industry was based on cheap gas for the past 15 years and that era is over. They are going to have make strategic decisions for the long term, some may have to relocate near cheaper fuel sources, continue fuel switching, if they can, or shutdown," said Irene King, a New York-based energy economist at J.P. Morgan. (JPM).



-- (M@rket.trends), December 20, 2000

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