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SINGAPORE (ICIS)–au Jibun Bank’s flash
manufacturing purchasing managers’ index (PMI)
for Japan rose to 48.6 in March from 47.7 in
February as output and new orders contracted at
a slower pace, the Japanese bank said on
Friday.
A PMI reading above 50 indicates expansion in
the manufacturing economy, while a lower number
denotes contraction.
“Both output and new orders were scaled back
further in the latest survey period, although
the respective rates of reduction were the
softest for five months,” au Jibun Bank said in
a statement.
Moreover, there was some evidence of easing
cost pressures as seen by the rate of input
price inflation dipping to the lowest since
August 2021, it said.
Japanese manufacturers were also buoyed by
improving supply chains with average lead times
for inputs extending to the lowest extent for
29 months, the bank said.
“Concurrently, business sentiment strengthened
at the end of the first quarter to reach the
strongest since last October,” it added.
24-Mar-2023
SINGAPORE (ICIS)–Click here to see the
latest blog post on Asian Chemical Connections
by John Richardson.
China’s polyethylene (PE) and polypropylene
(PP) markets were, in our view, never going to
see a big recovery in 2023.
Conventional opinion was that by now we would
be seeing a strong recovery. But sadly, because
of record high levels of oversupply, a recovery
may not happen until as late as 2025.
In PE, for example, ICIS forecasts that global
capacity exceeding demand will be 26m tonnes
this year compared with the 10m tonnes/year
average in 2000-2021. Much of the new capacity
is in China and southeast Asia.
We can see how far we are from recovery from
the China PE and PP prices spreads over Japan
naphtha costs. Spreads have always been the
single best measure of supply and demand
balances. For example:
The average China PE spread between 1
January and 17 March this year was just $290,
the lowest since our assessments began in 1993
– and lower than last year’s average spread of
$321/tonne, which was the previous record low.
Between 2000 and 2021, the annual spread
averaged $532/tonne. This means that until
spreads increase by 83% from their current
levels, there will have been no recovery.
We believe one of the reasons why some market
participants thought there would be a strong
rebound was that they weren’t considering the
impact of demographics and debt.
Let us stress again, though, that as the year
progresses, China’s demand for PE and PP will
surely improve on resumed economic activity.
But to repeat our analogy, the automobile (the
Chinese economy) was travelling at 30km/hour
during zero-COVID because large swaves of the
economy were shut down.
The speed of the car must therefore pick up to,
say, 60km/hour as people travel and shop more
etc. But because of debts and demographics, the
economy cannot return to 110km/hour.
Crucially, an economy travelling at 60km/hour
is nowhere near fast enough to absorb the PE
and PP oversupply in 2023 – and very probably
in 2024 and 2025 as well.
Editor’s note: This blog post is an opinion
piece. The views expressed are those of the
author, and do not necessarily represent those
of ICIS.
24-Mar-2023
HOUSTON (ICIS)–The American Chemistry Council
(ACC) submitted a letter to US Senators holding
a hearing on rail safety saying that it
supports a multi-layered approach to
transporting hazardous chemicals by rail and
outlining the industry’s commitment to rail
safety.
Chris Jahn, ACC president and CEO, said he
supports the legislative intent of the Railway Safety Act of
2023 and other proposals to further improve
the safety of the nation’s rail network.
Jahn said the range of measures supported by
the ACC include establishing federal standards
for railcar defect detectors, working to
improve tank car performance, and supporting
emergency responders.
The chemicals industry has shared its concerns
over the levels of service provided by
the nation’s Class 1 railroads for several
years, but the recent derailment of a
Norfolk Southern train in Ohio carrying vinyl
chloride monomer (VCM) has brought a new level
of attention to rail safety.
Jahn said the ACC encourages the development of
federal standards for the placement and
operation of railcar defect detectors, and that
the requirements should be developed through a
federal rulemaking process, be risk- and
performance-based, and allow for continued
technological progress and advancement.
Jahn noted that shippers have made significant
investments in recent years to upgrade their
fleets and are currently working toward a
mandated replacement of tank cars used to
transport Class 3 flammable liquids by 2029.
He said the ACC supports an earlier phaseout
deadline for these cars based on the rail
equipment industry’s tank car manufacturing and
retrofit capacity.
The letter also urged improved training and
flow of information for first responders.
“It is critical that emergency responders have
the information, training, and resources they
need to respond to a rail incident,
particularly one involving hazardous
materials,” Jahn said.
In addition, the ACC supports new federal
standards to expand the types of hazardous
material shipments that must be reported in
advance to state agencies.
Jahn said the ACC also supports increasing the
registration fees paid by hazardous materials
shippers and carriers in order to fully fund
the Pipeline and Hazardous Materials Safety
Administration’s grant programs that assist
emergency response planning and training.
“ACC supports a comprehensive and data-driven
approach to enhance the safe transportation of
hazardous materials by rail,” Jahn said.
“Safety is a shared responsibility, and
shippers, rail carriers, along with the federal
government, have made steady progress by
working together,” he said. “But we can, and
must, do more.”
23-Mar-2023
SAO PAULO (ICIS)–Global demand for
petrochemicals will remain “challenging” in
2023 and the recovery will only come from 2024
onward, the CFO at Brazil’s petrochemicals
major Braskem said on Thursday.
Pedro Freitas added that the recovery in
petrochemicals demand may start “by the end of
2023”, although he argued the recovery will
depend on the pace the Chinese economy
re-opens.
China’s re-opening will be key for
petrochemicals spreads, which were poor in 2022
as input costs rose and prices fell.
Freitas was speaking to reporters and financial
analysts after Braskem said earlier on Thursday
it had posted a fourth-quarter
net loss of $326m on the back of
poorer spreads for many of the products it
produces, especially those for polyethylene
(PE) and polypropylene (PP).
ALL ABOUT CHINABraskem’s
CFO said spreads for key polymers PE and PP,
key feedstocks for plastics production, should
start recovering in 2023 after “some positive
news” coming from China’s re-opening.
However, it should remain an uphill struggle
for Braskem.
“We still see a challenging scenario in 2023,
but 2024 and 2025 should be more positive as we
don’t see enough capacity coming to the market,
which will be below demand growth. If China
recovers faster than expected, that could be
even more positive,” said Freitas.
The CFO conceded large petrochemicals
capacities are set to come online in 2023 and
the years ahead, but he said the chance for
delays could be an opportunity for Braskem to
improve its performance.
Braskem’s CEO, Roberto Bischoff, also
present at the press briefings, added that the
environment for petrochemicals remained
“volatile” and added that, while the industry
awaits for China to prop up demand, Braskem
would focus on cost control as well “capture”
new markets.
“The pace of China’s reopening will be one of
the main factors in the recovery of spreads in
the international market and the resumption of
the upcycle. In this scenario, we are
prioritising actions to maximise operations,
capture sales opportunities … and maintain cost
discipline,” said Bischoff.
Earlier on Thursday, Freitas said Braskem
could
consider expanding its Duque de Caxias, Rio
de Janeiro, cracker if more domestic natural
gas liquids (NGLs) from pre-salt reserves
become available.
In an interview with ICIS
earlier in March, the director for Latin
America corporates at US credit rating agency
Fitch said demand for petrochemicals should
grow healthily if China’s re-opening happens
faster than expected.
“[That] would have a huge impact on
petrochemicals as the country is a big consumer
of plastics. That, in turn, could have a huge
impact on global prices,” said Lincoln Webber.
POLYMERS
PROTECTIONISTThe Brazilian
government recently announced a hike in import
tariffs for several petrochemicals, a move in
trade policy for which Braskem had been
lobbying for.
Smaller players in the Brazilian petrochemicals
industry have said, however, the new tariffs
would sharply increase their costs
to import product from overseas, mostly from
Asia.
The hike in tariffs, however, would prop up
Braskem’s earnings before interest, taxes,
depreciation and amortisation (EBITDA),
according to its CFO.
“Analysts estimated the previous lower tariffs
had an impact of $150m in our EBITDA in 2022
and 2023. With this [import tariff hike], we
will recover a part of that. It will also have
an impact in our recovery of market share,”
said Freitas.
“This resetting of tariffs put them in previous
levels, and to the average levels of other
products. It brings us back to a competitive
position regarding market share.”
Front page picture: Facilities operated by
Braskem Idesa in Mexico, archive image; Braskem
Idesa is a joint venture between and Mexico’s
Grupo Idesa
Source: Sashenka
Gutierrez/EPA/Shutterstock
23-Mar-2023
SAO PAULO (ICIS)–Braskem could consider
expanding its Duque de Caxias, Rio de Janeiro,
cracker if more natural gas liquids (NGLs) from
pre-salt reserves become available, the CFO at
the Brazilian petrochemicals major said on
Thursday.
Pedro Freitas said Braskem remains in “constant
dialogue” with players in the pre-salt natural
gas and crude oil industry and is
well-positioned to take advantage of more NGLs
once they are available.
However, he added: “We don’t see that
[expansion at Duque de Caxias] happening in the
short term.”
Freitas was speaking to reporters and financial
analysts after Braskem said earlier on Thursday
it had posted a fourth-quarter
net loss of $326m on the back of poorer
spreads for many of the products it produces,
especially those for polyethylene (PE) and
polypropylene (PP).
Following the results publication, the
company’s stock was down more than 4% to
Brazilian reais (R) 16.77/share ($3.18/share)
by 13:00 local time on Thursday.
“We would be interested [in the expansion] if
there are more NGLs available from pre-salt
reserves [as] we would be interested in having
access to those volumes. The most competitive
investment in Brazil today would be expanding
our cracker in Rio,” said Freitas.
“That would be the best alternative for the
country about where it allocated additional
feedstocks if they become available. We keep
tracking pre-salt activity and are in constant
dialogue with players in the industry to be
positioned [to have access to those
feedstocks].”
Braskem has been mulling an expansion at Duque
de Caxias for years; it has hinted that it
could expand its production capacities by as
much as 50%.
Currently, Braskem produces ethylene,
high-density polyethylene (HDPE), linear
low-density polyethylene (LLDPE), propylene and
PP at the facility.
Duque de Caxias
Capacity
Ethylene
520,000
HDPE
270,000
LLDPE
270,000
Propylene
75,000
PP
310,000
Source: ICIS
Ethane is one of those NGLs Braskem could use
to produce ethylene and then polymers. Pre-salt
layer reserves are found in the Atlantic’s
African and Brazilian coasts, and pre-salt oil
reserves are thought to be a significant
fraction of the world’s oil reserves.
Brazil’s state-owned energy major Petrobras is
building a pipeline called Rota 3 from its
pre-salt wells in the Atlantic to its site in
Itaborai in Rio de Janeiro, where it is
building a gas processing plant, although the
project has been marred by several issues.
Once that plant is completed, Petrobras will be
producing NGLs which could provide Braskem with
the additional feedstock it needs to expand
Duque de Caxias.
According to Brazilian oil and gas company
Petrobras, the oil and natural gas reserves lie
below an approximately 2,000-metre-thick layer
of salt, which in turn is beneath more than
2,000 metres of post-salt sediments in places,
which in turn is under water depths between
2,000 and 3,000 metres in the south Atlantic.
($1 = R5.27)
Additional reporting by Al Greenwood and
Yashas Mudumbai
23-Mar-2023
Updated on 23 March with the latest
headlines
On this topic page, we gather the latest news,
analysis and resources, to help you to keep
track of developments in the area of
sustainability in the fertilizers industry.
LATEST NEWS HEADLINES
EU unveils plans to tackle
greenwashing
By Morgan Condon 23-Mar-23 13:39 LONDON
(ICIS)–The European Commission has launched a
proposal to stamp out greenwashing in a bid to
support consumers seeking sustainable
alternatives.
India’s IFFCO and
CIL to manufacture nano DAP for three
years
By Chris Vlachopoulos 20-Mar-23 15:35 LONDON
(ICIS)–The Indian Union Minister of State for
Chemicals and Fertilisers, Bhagwanth Khuba, has
confirmed that Fertilizer cooperative IFFCO and
Coromandel International Ltd (CIL) will
manufacture nano diammonium phosphate (DAP) for
a period of three years.
USDA awards Ostara funds to boost
sustainable phosphate fertilizer
output
By Chris Vlachopoulos 15-Mar-23 11:48 LONDON
(ICIS)–The US Department of Agriculture (USDA)
has awarded Ostara $7.6m as part of its
initiative to increase its domestic fertilizer
production, with a focus on sustainability and
innovation.
Canadian prime minister confirms
fertilizer emission goal is
voluntary
By Erica Sesay 07-Mar-23 14:26 LONDON
(ICIS)–Canadian prime minister Justin Trudeau
assured farmers this week that the fertilizer
emissions reduction target proposed by the
government is voluntary, not mandatory.
US fertilizers industry increases
carbon capture in 2021 – TFI
By Erica Sesay 20-Feb-23 17:10 London
(ICIS)–The US fertilizers industry captured
31% of all CO2 generated per tonne of nutrient
produced in 2021, up from 9% captured in 2013
according to The Fertilizers Institute (TFI’s)
2022 sustainability report.
Indian president calls for reduction in
chemical fertilizer use
By Erica Sesay 13-Feb-23 11:54 LONDON
(ICIS)–Indian president Droupadi Murmu has
called for a reduction in chemical fertilisers
use in order to protect the country’s soil
health.
IFFCO plans to export nano urea to 25
countries
By Sylvia Traganida 10-Feb-23 16:06 LONDON
(ICIS)–Indian Farmers Fertiliser Cooperative
Limited (IFFCO) is planning to export nano urea
to 25 countries and expects its output to reach
300m bottles by December 2024, according to
local media reports.
Amman selects Elessent Clean
Technologies for Indonesia sulphuric acid
plant
By Mark Milam 08-Feb-23 21:46 HOUSTON
(ICIS)–Indonesian mining company Amman Mineral
Industri (AMIN) has selected Elessent Clean
Technologies to provide the process technology
for the new smelter off-gas sulphuric acid
plant equipped with wet gas scrubbing
technology that it will construct in Sumbawa,
Nusa Tenggara Barat, Indonesia.
Lotte Chemical
forms clean ammonia consultative body with RWE
and Mitsubishi Corporation
By Mark Milam 08-Feb-23 23:32 HOUSTON
(ICIS)–Lotte Chemical announced it has formed
a clean ammonia global consultative body with
RWE, a German energy company, and Japan’s
Mitsubishi Corporation, with a goal to
cooperate and jointly develop a large-scale
clean ammonia production and supply chain in
Asia, Europe and US.
Global 2020-2021
specialty fertilizer demand growth led by north
America, Asia
By Sylvia Traganida 08-Feb-23 10:19 LONDON
(ICIS)–Global demand for specialty fertilizers
has grown by 5.7-6.7% in 2020-2021, according
to the International Fertilizer Association
(IFA).
BASF and Cargill
extend enzymes business and distribution to
US
By Morgan Condon 25-Jan-23 12:59 LONDON
(ICIS)–BASF and Cargill are expanding their
partnership by rolling out their enzyme
solutions to animal protein producers in the
US, the German major announced on Wednesday.
Saudi Aramco awards sulphur facilities
overhaul contract to Technip
By Erica Sesay 24-Jan-23 12:50 LONDON
(ICIS)–Saudi Aramco has awarded a contract to
engineering firm Technip Energies to upgrade
the sulphur recovery facilities at its Riyadh
refinery, Technip announced on Tuesday.
The contract covers improving the performance
of the existing three sulphur recovery units to
comply with more stringent regulations for
sulphur dioxide emissions, with recovery
efficiency at more than 99.9%.
India sets green
hydrogen targets for shipping, oil & gas,
fertilizer sectors
By Priya Jestin 16-Jan-23 09:42 MUMBAI
(ICIS)–As part of its aim to achieve its net
zero carbon emission goal by 2070, the Indian
government has released a blueprint for its
National Green Hydrogen Mission which has set
consumption targets for various industries,
including the oil and gas and fertilizer
industrie
Germany misses climate target despite
lower energy consumption
By Stefan Baumgarten 06-Jan-23 16:00 LONDON
(ICIS)–Germany missed its 2022 carbon dioxide
(CO2) emissions reduction target despite
declining energy consumption and an increase in
the use of renewables, according to a study
this week.
EU CARBON BORDER ADJUSTMENT MECHANISM
(CBAM) EXPLAINED
What is it?
The risk of carbon leakage frustrates the EU’s
efforts to meet climate objectives. It occurs
when companies transfer production to countries
that are less strict on emissions, or when EU
products are replaced by more carbon-intensive
imports.
This new mechanism would counteract this risk
by putting a carbon price on imports of certain
goods from outside of the EU.
How will it work?
EU importers will buy carbon certificates
corresponding to the carbon price that would
have been paid, had the goods been produced
under the EU’s carbon pricing rules.
Conversely, once a non-EU producer can show
that they have already paid a price for the
carbon used in the production of the imported
goods, the corresponding cost can be fully
deducted for the EU importer.
This will help reduce the risk of carbon
leakage by encouraging producers in non-EU
countries to make their production processes
greener.
A reporting system will apply from 2023 with
the objective of facilitating a smooth roll out
and to facilitate dialogue with non-EU
countries. Importers will start paying a
financial adjustment in 2026.
How is the fertilizer industry
affected?
The fertilizer industry is one of the sectors
to fall under the CBAM.
The more energy-intensive nitrogen fertilizers
will be affected most in the sector by the
mechanism.
DEFRA CONSULTATIONS
EXPLAINED
The UK’s Department for
Environment, Food & Rural
Affairs (DEFRA) launched a
consultation at the beginning of
November 2020 on reducing ammonia
emissions from urea fertilizers.
The consultation ran until 26
January 2021.
It set out three options for
tackling ammonia emissions:
A total ban on solid urea
fertilizers
A requirement to stabilise
solid urea fertilizers with the
addition of a urease inhibitor.
A requirement to restrict the
spreading of solid urea fertilizers
to between 15 January and 31 March
of a given year.
Liquid urea is excluded from any
new rules or restrictions.
DEFRA is currently analysing the
feedback received.
In March 2022, DEFRA announced that
it had delayed introducing
restrictions on the use of urea by
at least a year to support farmers
with fertilizer availability and
keep their costs down
Should DEFRA decide to restrict the
use of urea in the future, growers
would be left with just ammonium
nitrate-based fertilizers.
PREVIOUS NEWS HEADLINES
TFI reacts to US Congress passing the Water
Resources Development ActHelm
becomes a shareholder in UK bio-fertilizer
company Unium Bioscience
Yara
inks deal to deliver fossil-free green
fertilizers to Argentina
Canadian firms plan fuel
cell generator pilot using green ammonia
Deepak Fertilizers awards contract to reduce
emissions, increase productivity
Saudi Aramco launches $1.5bn sustainability
fund to support net zero ambition
CF
Industries and ExxonMobil plan CCS project in
Louisiana
Canada’s plan to cut
fertilizer emissions is voluntary –
minister
Canada’s fertilizer emission goal raises food
production concerns
Uniper, Vesta to cooperate on renewable ammonia
site in the Netherlands
German Uniper to work with Japan’s JERA on US
clean ammonia projects
ADNOC ships first cargo of low-carbon ammonia
to Germany
US
Mosaic and BioConsortia expand collaboration to
microbial biostimulant
IMO deems Mediterranean Sea area for sulphur
oxides emissions control
Canada’s Soilgenic launches new enhanced
efficiency fertilizers technology for
retail
Austria’s Borealis aims to produce 1.8m
tonnes/year of circular products by 2030
European Parliament rejects proposed carbon
market reform
IFA
’22: southern Africa looks to bio-fertilizer as
cheaper, sustainable option
IFA ’22: Indian farmers will struggle to
embrace specialty fertilizers – producer
Canadian Nutrien plans to build world’s largest
clean ammonia facility in Louisiana
Japan’s JGC Holdings awards green ammonia plant
contract to KBR
Bayer to partner with Ginkgo to produce
sustainable fertilizers
Australia Orica and H2U Group partner on
Gladstone green ammonia project
Canada sets tax credit of up to 60% for carbon
capture projects
UK delays urea restrictions to support farmers
as fertilizer costs at record high
EU states agree to back carbon border tax
Yara to develop novel green fertilizer from
recycled nutrients
USDA
announces plans for $250m grant programme to
support American-made fertilizer
Canada seeks guidance to
achieve fertilizer emissions target
Fertilizer titan Pupuk Indonesia develops
hydrogen/blue ammonia business
India
launches green hydrogen/ammonia policy, targets
exports
Canada AmmPower to develop green hydrogen and
ammonia facility in Louisiana
US DOE awards grant to project to recover rare
earth elements from phosphate production
Fertiglobe, Masdar, Engie to develop green
hydrogen for ammonia production
Czech Republic’s Spolana enhances granular AS
production
India’s Reliance to invest $80bn in green
energy projects
Yara, Sweden’s Lantmannen aim to commercialise
green ammonia by 2023
Novatek and Uniper target Russia to Germany
blue-ammonia supply chain
Fertz giant Yara goes green with
electrification of Norwegian
factoryCanada
Arianne Phosphate exploring use of phosphate
for hydrogen technology
FAO and IFA renew MoU to promote sustainable
fertilizer use
Sumitomo Chemical, Yara to explore clean
ammonia collaboration
Sri
Lanka revokes ban on imports
Tokyo scientists convert bioplastic into
nitrogen fertilizer
Aramco plans Saudi green hydrogen, ammonia
project
China
announces action plan for carbon peaking &
neutrality
Saudi Aramco targets net zero emissions from
operations by 2050
Fertiglobe goes green with Red Sea zero-carbon
ammonia pro
Australian fertilizer major Incitec Pivot teams
up for green ammonia study
INTERVIEW: BASF to scale
up new decarbonisation tech in second half of
decade – CEO
India asks fertilizer companies to speed up
production of nano DAP
Japan’s Itochu set to receive first cargo of
blue ammonia for fertilizer use
Norway’s Yara acquires recycled fertilizers
maker Ecolan
Bayer Funds US start-up aims to cut nitrogen
fertilizer use by 30%
BP: Green ammonia production in Australia
feasible, but needs huge investment
Origin and MOL explore shipping green ammonia
from Australia
India’s IFFCO seeks to
export nano urea fertilizer
Sri Lanka reinstates ban on import of chemical
fertilizers
Nutrien to cut greenhouse gas emissions 30% by
2030
RESOURCES
IFA – Fertilizers and climate change
TFI –
Sustainability report
23-Mar-2023
This story has originally been published
for ICIS Power Foresight subscribers and
was written by Luca Urbanucci, EU Power
Analyst.
Our ICIS Power Foresight customers have
access to extensive modelling of different
options and proposals. Our long-term price
forecast now also extends to 2050 across
European countries. If of interest, please get
in contact with Lead Analyst Matthew Jones
(matthew.jones@icis.com).
At the end of last year, the French power
market witnessed a rapid drop in the Q1 ’23
price as the delivery period approached,
certainly driven by the reduction of the
natural gas price, but also by the prompt
disappearance of a significant risk premium,
which had been in turn mainly boosted by
uncertainties over nuclear generation and fear
of potential cold spells.
Recent discoveries of new cracks at French
reactors, together with a general uncertainty
about future nuclear availability that has
never disappeared, have inflated the Q1 ’24
price for next winter, similarly to what
happened last year.
In this analysis, ICIS adopts a ‘theoretical
price-setting plant’ approach to investigate
the extent to which future French electricity
prices are impacted by risk premium.
First, what happened last year to the Q1 ’23
product is reviewed, and then the current
situation of the Q1 ’24 contract is analysed
and the reasons behind the risk premium are
discussed.
A second analysis on the topic will follow,
investigating different scenarios on French
power for next winter, and presenting the
results from the soon-to-be launched ICIS Power
Foresight Model.
Background
Along with the gas crisis that has affected the
whole of Europe, France has also faced problems
related to their ageing nuclear reactors.
In 2022, the national nuclear
generation plummeted to its lowest
level since the 1980s at around 278TWh,
mainly due to corrosion problems.
The generation was below 30GW for a
large part of the year (from April to
November) but improved in December when
returned above the 40GW level.
The outlook for 2023 was generally more
positive, with an expected generation by EDF of
300-330TWh.
Yet, the recent discovery of new
corrosion cracks and EDF’s need to review
the fleet control strategy accordingly have
brought uncertainty back, with a consequent
impact on markets.
At present, however, EDF has not
revised down the expected annual
generation, and news on the updated control
and maintenance plan for reactors is
awaited.
As already mentioned, the general
uncertainty and the news about future nuclear
availability deeply impacts the French price
curve.
Nevertheless, this analysis does not go
into the details of French nuclear issues
(which will be dealt with in a separate
analysis), but rather focusses on assessing
the risk premium priced in the French Q1
’23 and ’24 products and discussing the
reasons behind it.
Methodology
The methodology herein adopted is based on
the evaluation of the efficiency
of the theoretical gas
plant that would set the power price in the
delivery period.
Given the prices of natural gas,
carbon, and power for a certain future
contract, the efficiency of the
above-mentioned theoretical gas plant can
be easily evaluated.
The efficiency can then be compared to
historical averages and to the efficiency
of actual plants to assess the “fairness”
of the contract price.
The main advantage of this methodology is
that the analysis is stripped of gas and carbon
prices, as they can vary (significantly) over
time, thus making it possible to assess the
price of electricity net of these two drivers.
Moreover, the methodology can also be
reserved, i.e., by evaluating the electricity
price implied by a gas plant (set the
efficiency) given the natural gas and carbon
prices.
In this case, the implied price can
then be compared to the contract price.
Q1 2023 product
In this section we apply the methodology to
analyse the progress of the French
first-quarter 2023 baseload power contract, for
the whole period of trading (from 4 January to
30 December 2022).
The efficiency of the theoretical
price-setting gas plant was around 35-40% in
the first months of the year, slightly below
the average value actually realised in 2022
(i.e., 41% – evaluated considering day-ahead
market prices).
From April onwards, largely as a reaction
to growing concerns about reduced
nuclear generation and potential cold
spells, the theoretical efficiency of the
price-setting gas plant dropped significantly
and hovered around 15-25% until December,
when nuclear
availability returned above the 40 GW
threshold, restoring confidence to the
market.
Comparing the efficiency of the
theoretical price-setting plant to that of
the least efficient French gas plant
(around 32% according to the ICIS analytics
database), it is clear how the price of
French Q1 2023 power was for a significant
part of the year inflated by market risk
premium, well above the level suggested by
fundamentals.
Moreover, the efficiency of the
theoretical plant that has set the price so
far in 2023 is around 51%, clearly showing
how the market substantially overestimated
the value of the contract.
The chart that displays the Q1 2023
contract price, along with the implied prices
of gas plants with different efficiencies,
helps to assess how much the market
overestimated the value of the contract during
last year.
Considering as reference the 2022
average efficiency of the theoretical
price-setting gas plant (41%), the price
was on average around €275/MWh higher
(+81%) than it should have been.
In particular, the price was
consistently overestimated by more than
€400/MWh during all of August, September,
and October, largely due to the
uncertainties surrounding the gas supply
and fear of potential demand curtailments.
Q1 2024 product
This section focusses on the French
first-quarter 2024 baseload power contract,
from day one of trading (3 January 2023) to
date.
The efficiency of the theoretical
price-setting gas plant hovered around 30% from
the beginning of the year until the first week
of March, when it fell below 25% following the
discovery of an unexpected crack at the Penly 1
reactor, and the subsequent request by the
French Nuclear Safety Authority (ASN) to EDF to
revise its maintenance and repair programme.
The efficiency has always been well
below the 2022 realised average (41%), but
it is now even below the threshold of the
least efficient plant (32%), as was the
case for the Q1 ’23 product during much of
last year.
The comparison between the Q1 ’24 price and
the implied-price sensitivity considering a
range of plant efficiencies shows how the
market is currently overestimating the value of
the contract above reasonable levels, short of
a massive reduction in nuclear availability
leading to security of supply issues (see
section below).
As of 21 March, the French Q1 ’24 is
assessed at €309/MWh, while the implied price
from 40%- and 50-% efficient plants is €164 and
€132/MWh, respectively.
Should the efficiency of the theoretical
price-setting plant in Q1 ’23 be in line with
the average of what was realised in 2022 (41%),
the delivery price would be about half of its
current market value.
If the average efficiency realised
during the first quarter of 2022 is
considered (45%), a current market
overestimation of around 110% is assessed.
What is the risk that is being priced
in?
Thus, the question arises: what is behind the
risk premium that the market deems to be priced
in the French first-quarter 2024 product?
Certainly, a general risk around gas prices
(and to an extent around carbon prices) exists.
Yet, the future price of gas (and carbon)
already accounts for this risk, and, in any
case, this applies across all Europe, whereas
the French product is the only one trading so
far above the fundamentals.
This means that the premium is entirely due
to the perceived risk around reduced nuclear
availability. However, the market’s fear does
not seem to be that a low nuclear generation
may just push the power system to the end of
the French merit order (which is a
32%-efficient gas plant) or even to the end of
the merit order in connected countries (e.g., a
21%-efficient coal plant in Germany – as the
price would likely be set by imports if nuclear
generation would fall significantly).
Indeed, the current price would imply
that these low-efficient plants would set
the price in almost every hour of the
quarter, which is highly unrealistic.
To justify these price levels, we have to
get into the realms of supply shortages, where
scarcity pricing can come into play, accounting
for very high values in certain hours.
This applied as well to the Q1 23
product, but scarcity prices have not
materialised so far this year, as the
highest hourly value has been €270/MWh.
Yet, a perfect storm of simultaneous
and prolonged low nuclear availability and
cold weather could trigger security of
supply issues next winter, resulting in
skyrocketing prices (at least for some
hours).
In the end, it is key to assess the
likelihood of this scenario occurring.
In the next analyst update on the
topic, we will investigate how low French
nuclear availability must drop to endanger
supply security, and compare such a
scenario with that adopted in the ICIS
Foresight Model.
Conclusions
The ‘theoretical price-setting gas plant’
analysis suggests that the current price of
French Q1 ’24 is largely inflated by risk
premium, as the resulting efficiency is around
20% (well below that of the least efficient
plant, which is around 32%).
As a result, the French Q1 ’24 is
currently about twice as much as it should
be, if the efficiency realised in 2022 is
considered as reference.
Such a high price level cannot be justified
by the fundamentals alone and is the result of
the market’s fear of scarcity pricing scenarios
for next winter, resulting from security of
supply issues that may occur if nuclear
availability were to be very low in conjunction
with cold spells.
Looking back to what happened to the Q1
2023 contract, the analysis shows that the
price has been on average overestimated by
around 80% during 2022 (adjusted for gas and
carbon price effects). Indeed, fears of supply
shortages for this winter have not become
material so far.
In the next analyst update on the topic, we
will investigate how low French nuclear
availability must drop to endanger supply
security, and compare such a scenario with that
adopted in the ICIS Foresight Model.
23-Mar-2023
NEW YORK (ICIS)–The failure of two sizeable
banks (Silicon Valley Bank and Signature Bank)
in the US and the crisis of confidence
contagion spreading to other regional banks and
now European financial institutions threatens
to significantly tighten lending conditions at
the very least, further slowing economic growth
and potentially tipping US and European
economies into recession.
The implications for the economically sensitive
chemical industry are huge, as a major step
down in GDP growth or a contraction would
crater demand in an already weak environment.
The US regional banking crisis reduces the odds
of a soft landing, and our base case is still a
mild recession lasting two to three quarters.
Stabilising the financial system will be
critical to keeping the downturn mild.
The emergency takeover of Credit Suisse by UBS
at the behest of the Swiss government
highlights the inherent risks to the global
economy from banking contagion.
The US Federal Reserve raised interest rates at a record pace through 2022 to tamp down runaway
inflation. The result has been a collapse
in the value of long-term Treasuries and other
long-duration debt such as mortgage-backed
securities (MBS) that banks accumulated on
their books. In a bank run, banks must sell
these securities at big
losses to cover outflows.
The Fed, Treasury, and Federal Deposit
Insurance Corporation (FDI)C stepped in on 12
March with a strong move to halt a run on
regional banks, guaranteeing all deposits at
the two banks above the protected $250,000
threshold.
The Fed also created a new lending facility to
boost liquidity where banks can pledge debt
securities as collateral at par (face value),
even if the value of those securities may be
far lower.
Yet without an explicit guarantee that all
uninsured bank deposits (those over $250,000)
will be safe, it’s hard not to believe large
depositors, including businesses, will continue
to take funds out of smaller regional banks and
put them into the ones deemed
“too big to fail”.
DOWNBEAT DATAMeanwhile,
the latest economic data from the US shows
weakening consumer spending and inflation at
the producer level.
Retail sales fell by 0.4% month on month in
February, while the Producer Price Index (PPI)
fell by 0.1%. Yet the key Consumer Price
Index (CPI) was up by 0.4% in February from
January and up by 6.0% year on year.
The core CPI (excluding food and energy) being up 5.5% from last year is still well above the Fed’s 2% inflation target.
The Fed on 22 March raised rates by another
0.25 percentage points and
softened its stance towards further hikes
in the light of uncertainty amid the regional
banking crisis. The Fed remains undeterred in
its goal of bringing inflation down to its 2%
target.
Fed chair Jerome Powell acknowledged that the
banking turmoil will likely tighten credit
conditions, but added that it is too early to
tell the extent of the impact.
GROWTH SLOWLY RISINGICIS
expectations for US GDP growth are at around
0.6% in 2023 and 0.7% in 2024. Global GDP
is forecast to grow at 1.8% in 2023, rebounding
to 2.8% in 2024.
The US industrial sector is already taking a
hit, with the latest ISM US Manufacturing
Purchasing Managers’ Index (PMI) in contraction
(below 50) in February for the fourth
consecutive month at 47.7. However, the
Services PMI remains strong, with the February
reading at 55.1.
The labour market continues to show resilience,
with unemployment ticking up slightly to 3.6%
in February. Wage gains have moderated,
providing some relief on the inflation front.
Meanwhile, the ICIS US Leading Business
Barometer (LBB) rebounded in February after 11
months of decline but is still signalling
recessionary conditions. Even as interest rates
are poised to decline heading into a recession,
tighter credit conditions will continue to
weigh on the key housing and automotive end
markets.
ICIS projects that US housing starts will
plunge by 19% to 1.26m in 2023. While light
vehicle sales are expected to rebound by 7% to
14.7m units this year on easing supply-chain
constraints, they will remain far below the
pre-pandemic 2019 level of 17.0m.
Additional contribution from ICIS senior
economist Kevin Swift
23-Mar-2023
LONDON (ICIS)–The European Commission has
launched a proposal to stamp out greenwashing
in a bid to support consumers seeking
sustainable alternatives.
In the Proposal for a Directive on Green Claims
published on Tuesday, the paper demands more
stringent measures for companies to prove
environmental claims and transparent labelling.
Evidence from a public consultation in 2020 and
proposals supporting the green transition
indicated “misleading practices, such as
greenwashing and lack of transparency and
credibility of environmental labels” happened
at various stages of consumption.
More than half of the samples studied in 2020
made environmental claims that were vague,
misleading or unfounded, with 40% of the claims
unsubstantiated.
This new proposal would be implemented
alongside the Unfair Commercial Practices
Directive to “tackle false environmental claims
by ensuring that buyers receive reliable,
comparable and verifiable information,” the
paper said.
The study found that consumer trust in
environmental claims was quite low, and that in
current conditions companies offering truly
sustainable products are at a disadvantage, and
face unnecessarily high compliance costs.
The change will mean traders would not be able
to deceive consumers about the environmental or
social impact, durability, and reparability and
would be prevented from making generic,
unproven environmental claims.
It would also restrict the presentation of
legal requirements as a distinctive feature
offer as well as any sustainability labels not
based on a certification scheme or established
by public authorities.
“Companies routinely use environmental claims
to market their goods, and when consumers see
those claims, it’s difficult to separate truth
from fiction,” said Commissioner Virginijus
Sinkevicius, responsible for the Environment,
Oceans and Fisheries.
“I have seen jackets where on the label it’s
written that they are made from recycled
plastic bottles, but when you look closer only
1% is made from recycled bottles. This is what
we want to avoid.”
Sinkevicius added that the proposal “has teeth”
as EU Member States would be able to carry out
enforcements including inspections, sanctions
and judicial pursuits in line with consumer
protection laws.
Thumbnail image shows a bottle deposit in
Utrecht, the Netherlands (image credit:
Hollandse Hoogte/Shutterstock)
23-Mar-2023
SINGAPORE (ICIS)–The Philippines’ central bank
hiked its policy interest rates by 25 basis
points on Thursday with inflation expected to
remain elevated and projected to average higher
than the target this year.
Full-year inflation average projected at
6.0%
February inflation dips but remains above
8.0%
25bps rate hike likely in May before pause
Effective 24 March, the interest rates at its
overnight reverse repurchase facility will be
6.25%, the Bangko Sentral ng Pilipinas (BSP)
said in a statement.
The decision came after the Federal Reserve issued a
similar increase in its benchmark interest
rates despite recent bank failures
in the US.
Current conditions “warranted a continuation of
monetary tightening to anchor inflation
expectations,” the BSP said, adding that it
expects 2023 inflation to average 6.0%, above
the 2.0-4.0% target range, before falling to an
average of 2.9% in 2024.
“The effect of supply shortages on domestic
food prices remains a concern, while the
potential impact of higher transport fares,
increasing electricity rates, as well as
above-average wage adjustments in 2023 point to
the broader-based nature of price pressures,”
the BSP stated.
The central bank noted that it may not be the
end of its monetary tightening cycle.
“Further policy tightening will also preserve
the buffer against external spillovers amid
heightened uncertainty and volatility emanating
from financial sector distress in advanced
economies,” it said.
Consumer inflation in February stood at 8.6%,
down from 8.7% in the previous month and
dipping for the first time in six months.
“We think the slowdown in inflation was a major
factor in the BSP’s decision to ease the pace
of tightening,” said Makoto Tsuchiya, assistant
economist, at the research firm Oxford
Economics in a note.
In previous monetary policy meetings, the BSP
had been raising interest rates by 50bps.
“We expect the BSP to raise the policy rate
again by 25bps at its May meeting, before
holding the rate at that level throughout the
year,” Tsuchiya said.
Barring any supply shock, inflation in the
Philippines should trend down.
“However, risk of further/bigger hikes cannot
be ruled out if the peso depreciates a lot
given ongoing external pressures,” the
economist said.
Meanwhile, the BSP is keeping a “watchful eye
over developments in the international banking
industry,” even as it assessed the local
banking system as “resilient to evolving market
conditions.”
Focus article by Pearl
Bantillo
Click here to read the
Ukraine topic page, which examines the impact
of the conflict on oil, gas, fertilizer and
chemical markets.
Visit the ICIS Coronavirus
topic page for analysis of the
impact on chemical markets and links to latest
news.
23-Mar-2023
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