Global record-high natural gas prices appear to be pushing some of the energy-intensive firms to curtail production in a trend that is now adding to disruptions to global supply chains in some industries like food. This means that the higher costs might be passed on to the company’s clients.
Some of the firms, including fertilizer manufacturers, steel producers, and glass makers, have been forced to suspend or reduce their production in Asia and Europe due to the spiking of energy prices. This features two of the biggest fertilizer makers in the world. They announced that they would reduce production in Europe.
The United Kingdom on September 21 said that it agreed to offer state support to one of the firms to restart its production of by-product carbon dioxide that is used in food production, to avoid a supply crunch.
Natural gas prices have surged steeply around the world in recent months. The increase has been due to a combination of factors: including low gas inventories, growing demand particularly from Asia as a result of a post-pandemic recovery, and tighter-than-usual gas supplies from Russia.
Notably, gas prices in Europe have surged by over 250% in 2021, while Asia has seen about a 175% surge since late January. In the US, prices have increased to multi-year highs and are almost doubling from where they were at the start of the year. The prices of electricity have also surged steeply as most of the power plants are gas-fired.
One trade group representing chemical, food, and materials manufacturers, Industrial Energy Consumers of America, has recently called on the United States Department of Energy to stop the nation’s liquefied natural gas producers from exporting gas to help in pushing the energy costs down for industries.
Extra supplies of gas may reduce pressure. In that context, Norway has authorized increased gas exports. More supply may flow from Russia by the end of 2021 with the nation’s new Nord Stream 2 pipeline now awaiting an operating license from Germany’s energy regulator.
That pipeline project has attracted lots of criticism from the US, which says it will increase Europe’s reliance on Russian energy supplies.
Production Disruptions
Pressures in the oil markets and manufacturing have been severe in Europe, where gas stocks are currently lower than usual heading into the winter season. One of the biggest fertiliser makers globally, Norway’s Yara International ASA (YAR.OL), on September 17 said it would slash nearly 40% of its European ammonia production as a result of high gas prices.
This decision came after American-based CF Industries Holdings Inc (CF.N) stated that gas prices were pushing it to stop operations at two of its British plants. Natural gas is the most critical cost input for all nitrogen-based chemicals and fertilizers.
Svein Tore Holsether, Yara’s chief executive, told Reuters in an interview on September 20 that the firm was sending ammonia to Europe from production facilities located elsewhere including Australia and the United States. He said:
“Instead of using European gas, we are essentially using gas from other parts of the world to make that product and bring it into Europe.”
CF Industries is yet to comment on this issue.
Some industries are now calling on governments to intervene on their behalf to ensure that their businesses do not sink under. These pleas now come as some nations have acted to protect consumers from increasing energy bills, like Spain, which in the past week approved a package of measures like price caps.
Among those that are asking for help is the food sector after a shortage of carbon dioxide (CO2) caused by the halting of production in some of the fertilizer plants. Carbon dioxide is used in the vacuum packing of food products to increase their shelf life, stun the animals before slaughter, and put the fizz that is found in beer and soft drinks.
In the United Kingdom, meat processors had warned that they will run out of CO2 within five days, forcing them to stop production. The soft drink manufacturers that rely on the gas to make carbonated drinks stated that supplies were running quite low.
On September 21, the British government stated that it struck a 3-week deal with CF Industries for the American firm to resume production of carbon dioxide in the UK. Britain’s environment minister had said that the state support may run into tens of millions of pounds, also warned the food sector that carbon dioxide prices may surge steeply.
CF Industries said in an official statement that it is instantly resuming ammonia production at its Billinghamplant after that agreement.
Surviving Through The Storm
Many other energy-intensive industries like steel and cement are also feeling the heat. The director-general at industry group UK Steel, Gareth Stace, said:
“Surging gas prices have in the last several weeks forced some steelmakers to suspend operations during those periods of the night and day when the cost of energy rockets.”
Stace declined to identify which companies. The nation’s second-biggest steel producer, British Steel, stated that it was maintaining normal production levels but that the:
“colossal” energy-price increases made “it impossible to profitably make steel at certain times of the day.”
Some of the manufacturers say that can cope with the storm, so far. Europe’s second-largest steelmaker, Germany’s ThyssenKrupp AG, said that the hedging mechanisms that it had in place against energy price surges, mostly gas, meant that it was not stopping production. However, it said that it was indirectly affected due to the industrial gases that it used are connected to electricity prices.
The world’s second-biggest cement maker, HeidelbergCement AG (HEIG.DE) of Germany, stated that higher energy prices were pushing up production costs but operations had not been stopped as a result.
Several ceramic, steel, and glass makers in China have reduced production to avoid any losses, according to Li Ruipeng. Li Ruipeng is a local supplier of liquefied natural gas operating in the northern province of Hebei.
China’s southwestern province of Yunnan in September imposed limits on the production of some heavy industries like chemicals, cement, fertilizers, and aluminium smelters due to energy shortages, a move the analysts said may reduce exports.
To survive through the storm, some of the energy-intensive sectors and utility companies in Asia and the Middle East have now shifted from gas to crude, fuel oil, coal, and naphtha, according to traders and analysts. This trend is expected to continue for the rest of this year and into the start of 2022, based on the Paris-based energy watchdog, the International Energy Agency.
The demand for coal to be used as an alternative source of power in Europe has increased considerably. But the options for switching to alternative energy sources are limited in the region mainly due to the government policies aimed at encouraging the use of gas over polluting fuels like coal.
In the past, the glass sector was powered by fuel oil, but nearly all sites in the UK have now shifted to natural gas, according to Paul Pearcy, federation coordinator at British Glass, a United Kingdom trade association. Just a few sites have fuel oil tanks that allow them to switch energy sources in case the prices exploded, Pearcy added.
