European natural gas futures extended their gains to a record-high settlement on Aug. 18, according to Bloomberg, as an energy-supply crunch continued to batter the region amid signs that the fuel is becoming too costly for industrial use and power generation.
The benchmark contract settled 6.7% higher at 241 euros a megawatt-hour, above the previous record in early March when Russia’s invasion of Ukraine sent shockwaves across markets.
Prices are about 11 times higher than where they usually are for this time of the year, with costs spiraling for households and businesses that are facing the worst inflation in decades.
Even before the new gas spike, market players put the cost of producing ammonia in Europe at $2,000/mt (GM Aug. 12, p. 1). Major producers Yara International ASA, OCI NV, and BASF have already cut ammonia production. CF Industries Holdings Inc., which had to permanently close an ammonia plant in the UK due to high natural gas prices, told analysts on Aug. 10 that the current ammonia outages in Europe were already substantial. It said that while there will not be a complete shutdown of ammonia assets, it could reach 10 million mt.
In the meantime, Lithuanian phosphate fertilizer producer AB Lifosa, a subsidiary of EuroChem Group AG, which restarted in early August (GM July 1, p. 28), may have to go back down due to an ammonia shortage, according to a Tass report citing former chief executive of the plant Jonas Dastikas on Aug. 17. He said it was impossible to get ammonia from a EuroChem plant in Russia due to sanctions. Production was expected to resume at about 70% of capacity. Lifosa’s main product is DAP, with a production capacity of some 1 million mt/y.
Lifosa had initially been forced to halt operations in April after banks froze the company’s accounts the previous month after the European Union (EU) imposed sanctions on EuroChem’s former controlling shareholder and CEO Russian billionaire Andrey Melnichenko on March 9 (GM April 15, p. 1; March 11, p. 1).
While a “nationwide gas shortage does not necessarily have to occur,” Germany expects “there could definitely be gas shortages regionally,” Klaus Mueller, President of the Federal Network Agency BNetzA, said in an interview with news website t-online.
“The restrictions would probably be temporary at first and could end again or occur several times,” the regulatory chief said. “In this case, we have to ensure that the gas is safely transported across the country.”
Europe will likely aggressively tap its stockpiles should curbed flows from Russia continue through the winter, which would mean low inventories at the end of the heating season and a new cycle to refill the facilities in the summer.
“It is all the more important that everyone understands: It’s not just about one winter, but at least two,” Mueller said. “And the following winter could be even harder.”
As the winter supply crunch looms, Europe will have to compete with Asia for available supplies of liquefied natural gas, especially from the US. Tracking with European prices, Asian spot LNG prices were just below $60 per million British thermal units on Aug. 17, the highest level since early March.
“An increase in demand from Asia as buyers prepare for winter could raise the number of US cargoes bound for the region in the coming months,” Lujia Cao, a BloombergNEF analyst, wrote in a note.
Elsewhere, water levels on the Rhine River are expected to rise temporarily in the coming days due to rainfall, which could provide some respite to the crisis that has restricted barge transit on the water. However, the river is still historically low. The situation on the Rhine has exacerbated Europe’s energy crisis.