Europe chemicals players grapple with energy cost surges

Tom Brown

20-Oct-2021

LONDON (ICIS)–Multi-decade price highs for natural gas in Europe are rippling through the energy-intensive European chemicals sectors, with attempted price hikes or production cutbacks among the responses, and with the situation only set to worsen in the event of a cold winter.

Unusually strong demand elsewhere in the world, a long winter, supply bottlenecks and production issues have all contributed to the highest gas prices seen this century.

The TTF front-month benchmark price for liquefied natural gas (LNG) rocketed to nearly €110/megawatt hour (MWh) this week, representing a multiple of the prevailing prices through the 2000s.


“Demand for LNG globally at the moment has rebounded since the worst of COVID-19 last year at an unprecedented rate. Principally, demand for gas in Asia – mainly due to the economic bounce back – but also in places like South America for entirely different reasons,” said Tom Marzec-Manser, lead European gas analyst at ICIS.

“At the same time, there have been a number of LNG production problems, which is making the global LNG market very tight,” he added.

Intensified demand from other regions in response to energy supply issues has straitened overall supply, with increased bidding from energy Asia-based buyers pushing costs in both regions to all-time highs, according to the International Energy Agency (IEA).


“Brazil is not a huge importer of LNG, but its 2021 imports are about three times greater than last year. China’s bounce-back is not just about the economy, the country has also had hydro problems,” said Marzec-Manser.

“We always have storms and hurricanes out of the US Gulf, which limits LNG exports. But we’ve also had LNG production problems elsewhere.”

A long 2020-2021 European winter depleted supplies and left the region in a precarious position, with strong competition for stocks on the open market, making inventory-replenishment more difficult

“The previous winter was longer than usual, and we were still withdrawing storage gas in April and even into May this year, when normally that would finish by the end of March,” said Marzec-Manser.

“So, essentially, the market has been on the backfoot from the word go in terms of building up stocks for this winter.”

Another source of emergency stocks for Europe is Russia, but the IEA noted that state-owned energy major Gazprom, while honouring long-term contract commitments, has reduced exposure to short-term sales and has not moved to replenish European storage sites to the levels seen last winter.

Pipeline bookings this week showed no uptick in Russia gas flows to western Europe next month, indicating that little relief can be expected in the near future from that side, with feverish demand for spot likely to continue to pressure pricing upward.


PETROCHEMICALS IMPACT
The unprecedented energy price increases represent the latest global disruption that petrochemical players have had to face, from disrupted and expensive logistics and raw material scarcity to the pandemic itself over the last 20 months.

While reduced petrochemicals supply earlier in the year on the back of outages and the impact of the polar storms in the US Gulf Coast, petrochemicals producers have largely been successful in passing on sufficient cost increases to generate strong profits.

Having digested numerous price hikes through the year, buyers may now be facing additional costs, with a flurry of letters issued in the last week, particularly on commodity chemicals.

Many producers have announced price hikes across the petrochemicals space in response to the increasing gas prices, with the attempted increases commonly referred to in customer letters as a “gas surcharge”.

In a letter to its customers, a company said: “This unprecedented and unforeseen situation renders economically exorbitant the performance of the delivery of our products manufactured in our sites impacted by the above energy price surge.”

The range of price increase targets seen by ICIS extends from the mid double-digit euros per tonne to over €350/tonne, but it remains unclear whether and to what extent buyers accept the hikes.

Players in the acrylonitrile (ACN) market have been sceptical about surcharges announced at the lower end of that range in addition to October contract increases.

Many chemicals buyers are understood to be assessing the announcements and seeking legal advice.

“There is no reason why we should pay this as no part of our formula is connected to natural gas – but it may be due to hardship causes – there is a high increase in steam power and gas costs and, if this continues, then we as well will look for drastic measures and also need to look for surcharges down the chain,” said a buyer.

Other players were more philosophical about the strains that producers are currently facing.

“The gas price is killing the producers,” said a methyl methacrylate (MMA) trader.

“It’s a strange time. We are considering our options for the time being,” said a producer.

Others are looking to keep inventory low and try as much as possible to avoid substantial purchases during what they hope will be a short-lived surcharge period, which has resulted in reduced demand in some markets.

“We don’t intend to purchase any product at these continued price increases,” said a PMMA sector player.

“We continue to produce at normal rates, but we have heard of buyers reducing or slowing down due to the high energy costs – what if demand goes away?” said a European producer.

“It’s a perfect storm: there is no transport, no raw material, producers are sold out on contracts with low margins,” said a polyethylene terephthalate (PET) market player.

The extent of the cost surges have also seen some reduce or curtail production of particularly energy-intensive or low-margin products.

Some players are looking more toward firm buyer commitments, with questions remaining over how substantial an increase downstream clients will bear.

At present, the entire market is in wait-and-see mode, a Europe-based trader said, looking for clues on how much of these higher costs end users will be willing to absorb and how to enter 2022.

The cost of refilling inventories “is increasing and increasing [and] I don’t want this without commitments from customers … This is the big challenge now,” the trader said.

Those attempting to wait out surcharge pricing with restricted purchasing will also be looking toward contract negotiations for next month, with many players understood to have opted to absorb the energy costs for now but to attempt to pass those on during the talks.

HARSH WINTER
Hopes for any kind of normalisation for European energy pricing are riding on a mild winter, with below-average heating demand providing scope for national inventories to normalise going into the 2022 phase of the winter weather.

“It will depend on the weather. The amount of gas that gets withdrawn from storage during Q4-Q1 of any given year can be quite a large range, and that is entirely driven by how cold it is. So, it is plausible that if it’s a very mild Q4 the dependence on storage gas across the continent is relatively little,” said ICIS’ Marzec-Manser.

“This would mean the amount of gas left in storage for Q1 is brought effectively back into line with seasonal norms. So, the market tightness could dissipate in this situation.”

A harsh winter could see prices rocket even further, particularly in light of an early freeze across China.

Without increased producer output, the fever pitch of bidding for limited open-market gas stocks will only intensify, meaning that corporations and residents will be contending with historic energy pricing well into the new year.

“The flip side of that coin is that if November and December are colder than usual, then the market supply/demand balance will tighten further, which, in my mind, means even higher prices,” added Marzec-Manser.

“ If the gas doesn’t start flowing sooner rather than later, be it from Russia or wherever else, the only way to draw in more volume is for the price to go up so that we outbid those Asian buyers for that extra LNG.”

Front page image source: Shutterstock

Focus article by Tom Brown

Additional reporting by Eashani Chavda, Jane Gibson, Fergus Jensen, Mathew Jolin-Beech, Jane Massingham and Caroline Murray.

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