Petchems on alert as high natgas prices lead to Europe fertilizer output cuts

Author: Jonathan Lopez


MADRID (ICIS)--European fertilizer output cuts due to high natural gas prices are keeping petrochemical producers on high alert as energy costs could add another challenge after a year of record-high transport costs.

Some petrochemicals producers in Europe have hinted at higher prices, and sources have said some producers are delaying contractual negotiations due to the high volatility in the energy markets.

“Some polyethylene terephthalate (PET) producers are holding off discussing 2022 contract prices with their accounts in view of the impossibility of predicting costs such as energy and transport,” one source told ICIS.

The UK and Spain are two markets highly dependent on natural gas for fertilizers and electricity production; both are highly dependent on imports.

UK’s trade group the Chemical Industries Association (CIA), which also includes pharmaceutical producers as well as petrochemicals, told ICIS its members are fearing a difficult winter if the current natural gas situation persists.

“The impact of a prolonged cold winter period, cold snaps, and the UK's dependency on imported LNG [liquefied natural gas] combined are serious concerns for our membership,” said the CIA.

Natural gas can be imported as LNG or via pipelines; the UK’s insular position makes it highly dependent on the former; continental Europe is highly dependent on pipeline supply, mainly from Russia, whose exports have been reduced in past weeks.

UK fertilizers plants have also reduced output, which has caused a shortage of carbon dioxide (CO2), widely used in the food and beverages industries.

Prime Minister Boris Johnson’s government has held talks with fertilizer-producing companies. On Tuesday, analysts said subsidies for fertilizers production to fix the shortage of CO2 could be on the cards.

While Spain’s natural gas supply depends largely on Algeria, global high prices have caused a spike in electricity prices due to the country’s price calculation system, which gives priority to the prices of the last supplies entering the energy system.

“We’ve had extremely high energy prices in the last months,” said a Spain-based petrochemicals trader. “It is starting to be critical for certain sectors.”

Petrochemicals prices in Europe reached highs earlier in the year on the back of booming activity in downstream sectors and supply chain woes lingering since the start of the COVID-19 pandemic.

In the past few weeks, several fertilizer producers in Europe have officially said they are curtailing output due to the record high prices for natural gas.

Prices for gas have risen sharply due to global short supply and high demand as the Northern hemisphere try to replenish stocks ahead of the winter season.

The European ICIS benchmark TFF for natural gas has risen sharply in past weeks.

Unlike fertilizers, for which natural gas is a key feedstock, European petrochemicals production is largely based on crude oil, for which prices have also risen but not to the extent posted by natural gas benchmarks.

Norway’s major Yara said last week it would cut ammonia production – for which natural gas is the main feedstock – by 40% at its European facilities; on Monday, OZP, a large producer in the key Ukraine market, followed suit.

The price of natural gas may affect petrochemicals via higher electricity costs due to its energy-intensive nature; a large proportion of electricity generation in Europe depends on gas.

In the US, however, petrochemicals producers – more dependant on natural gas-derived ethane as their feedstock – are posting higher production costs as well as higher margins in petrochemicals like methanol, for example.

Methanol production largely depends on natural gas; for more visit the ICIS Analytics Margins site.

This week natural gas prices in the US traded down by 2.4% as of Monday close.

Front page picture: Russia's gas major Gazprom promotional video for the planned Nord Stream 2 Pipeline through the Baltic Sea; archive image
Source: Sergei Ilnitsky/EPA-EFE/Shutterstock

Focus article by Jonathan Lopez

Additional reporting by Caroline Murray