Germany on June 23 triggered the second stage of its three-stage emergency gas plan, citing a deterioration of natural gas supplies, and raised its gas risk level to the second-highest “alarm” phase, Bloomberg reported. The final stage would include gas rationing.
Germany warned that Russia’s moves to cut Europe’s natural gas supplies risked sparking a collapse in energy markets, drawing a parallel to the role of Lehman Brothers in triggering the financial crisis earlier this millennium.
With energy suppliers piling up losses by being forced to cover volumes at high prices, there is a danger of a spill-over effect for local utilities and their customers, including consumers and businesses, Germany’s Economy Minister Robert Habeck was cited by Bloomberg as saying on June 23 after raising the country’s gas risk level.
Russian state oil and gas major PJSC Gazprom last week cut by 60% the volume of natural gas it delivers to Europe via the Nord Stream 1 pipeline that serves Germany and other European countries. Gazprom blamed the reduction on a technical fault, but it was widely seen in Western Europe as the latest indication that Moscow appears intent on punishing the region for sanctions and military support for Ukraine. Some fear the Russian gas supply reduction may be a precursor to a complete turning off of the supply taps.
Russia’s move has added urgency to efforts in Germany and elsewhere across Europe to build up gas inventories in a crucial effort to moderate escalating prices, and to try and head off the possibility of gas shortages this winter.
In May, the European Union (E.U.) agreed to require Member States to fill their gas storage facilities to at least 80% of capacity by Nov. 1. So far, member countries have been making good progress, with overall European storage levels at 55%, according to Bloomberg.
But Gazprom’s cutbacks have put that progress in doubt.
If gas storage is not filled by the end of summer, the markets will interpret that as a warning of price spikes or even energy shortages, according to Henning Gloystein, a Director at Eurasia Group, a political risk firm, as cited by Bloomberg.
If Nord Stream 1 was shut down completely, Europe would run out of gas in January, Bloomberg cited consulting firm Wood Mackenzie Vice President Massimo Di Odoardo as saying.
Natural gas prices are already about six times above where they were a year ago.
The front month (currently July) European gas contract on the ICE Dutch TTF gas futures was at €130.4 per megawatt hour (MWh) at 3.59 pm (local time) on July 23, up 3.325 on the day and versus €127.171 per MWh at close on June 17. The front-month TTF contract closed at just €80.434 per MWh on Jan. 3, and closed at just €31.545 per MWh on June 23 last year.
These latest escalating natural prices are forcing some fertilizer producers to question whether fertilizer production remains economically sustainable.
Romania’s biggest fertilizer producer, Azomureş SA, this week decided it is not. On June 22, the producer announced it had taken the decision to temporarily suspend ammonia production as of June 23, following a rise in natural gas prices and a decrease in fertilizer prices with the onset of crop harvesting.
Azomureş said it would continue to produce fertilizers at its Târgu Mureș site until the existing ammonia stock is depleted.
It said gas prices had risen from €80 MWh (approximately $84.3 at current exchange rates) to €125-130 MWh ($131.7-$137.00) in recent days following the problems in the European gas transmission chain and gas storage operations for the winter season 2022/2023, as well as the explosion at a Texas, U.S., liquefied natural gas (LNG) export terminal earlier this month, which is expected to cut exports for weeks.
“Under these conditions, it is obvious that fertilizer production is currently not economically sustainable,” Azomureş said.
The Romanian company only restarted production in early May (GM April 29, p. 32), after halting fertilizer production on Dec. 17 last year due to “the very high prices” for energy, natural gas, and electricity (GM Dec. 17, 2021; Dec. 10, 2021).
Production was restarted only at “limited levels” and only of certain fertilizer products, namely, ammonium nitrate, calcium ammonium nitrate, urea, and melamine. Azomureş had at the time anticipated restarting NPK production “in the coming months.”
Azomureş staff will continue to work where needed, but the company said laying off staff may be necessary in the event of an extended production suspension.
“It is serious what is happening today on the gas market for most European fertilizer producers,” said Azomureş General Manager Harri Kiiski.
“In Romania, we continue the dialogue with government authorities in order to apply economic aid offered by the E.U., already applicable in many European countries. For example, Bulgaria provides capped price of gas for its industries, €72 MWh. Until today, Romania does not implement the aid scheme for energy-intensive industries, given the European legal framework,” he said.
“As a producer, we know that it is difficult to ensure the necessary quantity for the next agricultural season if we do not produce during the summer. The scheme provided by the E.U. must be applied,” said Kiiski.
The Târgu Mureș-based company’s annual fertilizer production under normal operating conditions is 1.6 million mt, with approximately 75 percent of the output destined for Romanian farms, according to the company. It produces granular and prilled AN, granular CAN, granular urea, and NPs, as well as NPKs.
Azomureş has been owned by Swiss Group Ameropa, via a subsidiary, since 2012.
OCI NV last week was reported to be halting production at one of its two ammonia units in The Netherlands due to spiking natural prices, but would continue downstream production using imported ammonia (GM June 17, p. 28).
Shares in Poland’s biggest fertilizer producer, Tarnów-based Grupa Azoty SA, fell this week as concerns escalated about scarcity of natural gas in Europe as Russia limits supplies.
By close on June 23, Azoty shares had fallen to Pln42.94 (approximately $9.68 at current exchange prices) per share, a 7.66% drop on the day and a 15% drop in two days.
Erste Group Bank AG analyst Jakub Szkopek, cited in a Bloomberg report, said spot natural gas prices in Europe had risen 40% last week, adding pressure on fertilizer manufacturers’ margins.
Azoty may be also hit by a rise of thermal coal prices. The company consumes about 1.2 million mt of fuel annually, while prices in Polish coal in contracts are rising to PLn20/GJ from Pln10-12/GJ, Bloomberg reported.
On June 22, Polish Deputy Prime Minister Jacek Sasin said that state companies should not “maximize” their profits in current tough conditions for customers, seen by analysts as negative for companies like Azoty, according to the report.