INSIGHT: Crashing gas spurs fertilizer ramp up, petchems still shuttered

LONDON (ICIS) — Around a third of European ammonia production which shut down over the summer has reportedly ramped up in October, although overall gas demand remained subdued, ICIS research shows.

Other gas-intensive production lines, particularly in the petrochemicals sector, remain closed and unlikely to return online soon unless there is a substantial decline in feedstock costs and an improvement in economic factors.

Overall daily average gas demand data for the EU and UK show that consumption increased some 11% in October ’22 compared to September ’22 but the uptick was lower compared to a 24% month-on-month rise over the same period last year.

As prices soared to record levels in response to an unprecedented supply crunch this year, overall European gas consumption had dropped 24% year on year in the first ten months, helping to roll back some of the gas price premium gained over the summer.

Even so, in Germany, one of Europe’s largest fertilizer and petrochemicals producers, industrial gas demand fell 32% over the six-year average in October, indicating that a recovery in industrial production may still not be in sight.

ICIS compiled data show that gas demand in Germany’s power sector and local distribution zones (LDZ) also continued to fall against the six-year average. In October, the country’s combined industrial, electricity generation and LDZ consumption was down by 27% over the six-year average.

FERTILIZER PRODUCTION
More than 70% of Europe’s total ammonia output shut down in recent months.

Record high feedstock and energy costs forced the industry either to ramp down or scout for supply options which had never been explored before.

An 80% drop in spot gas prices this month has translated into a 67% fall in ammonia production costs, incentivising some companies to resume activity.

Based on current gas prices, the cost of producing ammonia is just over $1,000/tonne and that of urea, also used in fertilizer production, is lower than $800/tonne, which is below current market levels.

The selling price of ammonia in Europe is $1,100-1,200/tonne CFR (cost & freight) while urea is around $820/tonne CFR.

Even so, traders say 45-50% of production remains offline, with many producers expecting to get more clarity on EU measures to curb costs and shield consumers. The figure, however, may be lower as some of the major producers prefer not to disclose output rates owing to sensitivities around timing and for antitrust reasons.

“Lower gas prices are a comfort for producers but they don’t know how long they will keep securing gas. So, there is some caution about resuming [fertilizer production],” said a European trader.

HISTORIC CHANGES
Available data show ammonia output has partially resumed in west European countries, while production in east European countries such as Romania, Serbia, Slovakia or Hungary is still closed.

The discrepancy may be linked to a radical reversal in gas deliveries which occurred this year.

Russian gas historically delivered from east to west has now been replaced by Norwegian imports or global liquefied natural gas delivered to western European terminals after Russia cut pipeline supplies by three quarters.

While rising LNG imports helped to pressure gas prices in western Europe, landlocked countries further to the east continued to struggle with comparatively higher gas prices.

The radical changes in gas supply dynamics have been mirrored by similarly drastic shifts in the fertilizer supply chain globally.

If in 2021, Russia covered nearly 19% of total ammonia and urea imports globally, that share halved in 2022.

In Europe, typical imports from Russia and Egypt were replaced by deliveries from non-traditional markets such as Nigeria, the US or from the Arab Gulf and Black Sea countries. Even Indonesian and Vietnamese material were shipped to Europe over the past few months.

The European Commission floated a proposal to suspend import duties on nitrogen fertilizers, but this bill is not expected to pass, likely due to opposition from domestic producers in Europe.

Fertilizer producers are watching closely legislative proposals by the EU including the possibility of capping wholesale and retail gas prices.

The idea is supported by France, Italy, Spain and Greece but the EU has been reluctant to take action amid concerns that market interventions would distort price signals, which would, in effect lift demand at a time when it should be reined in.

Given the uncertainty, fertilizer producers remain cautious, declining to confirm whether the latest production ramp-up will continue or whether it is just a short-lived opportunistic episode.

PETROCHEMICALS
The picture appears clearer, albeit much gloomier for the petrochemicals market where production may remain shut down for an extensive period of time because of deteriorating economic conditions.

Earlier this week, Germany-headquartered BASF, the world’s largest chemicals producer and one of Europe’s largest gas consumers, said it would permanently downsize its European operations, preparing to relocate part of operations to China.

BASF said it had spent €2.2bn more on natural gas in Europe for the first nine months of 2022 compared with last year.

Other high-profile companies, including France’ Total Chemicals, Spain’s Repsol Chemicals or Dutch Shell Chemicals also posted collapsing margins this year.

Chemical companies in Europe are unable to pass on soaring energy and feedstock costs to customers because they have coincided with a sharp downturn in demand. The region’s economy is sputtering and there is the prospect of recession.