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Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com.
European commodity producers and manufacturers are reeling from high energy prices , thanks in large part to the Ukraine crisis. Europe's industrial energy costs have skyrocketed in the wake of Russia's war on Ukraine, severely denting manufacturers' ability to compete in the global marketplace, with natural gas three times more expensive in Europe than in the U.S.
In fact, the situation has grown so bleak that energy-intensive industries such as steel, chemical, and fertilizer manufacturing are shutting their European factories amid soaring oil and gas costs as well as growing concerns that Russia may cut off its supply.
Europe has been preparing for a scenario where Russia suddenly turns the gas taps off with Finland, Bulgaria, and Poland already having suffered that fate after their supply of Russian gas was cut off by state-owned company Gazprom PJSC. Europe is heavily reliant on cheap Russian oil and natural gas. Last year, the European Union bought 40% of its natural gas from Russia according to EU data . According to the WSJ, some producers are shuttering operations in the face of competition from factories in the U.S., the Middle East and other regions where energy costs are much lower than in Europe. To complicate matters, Europe's consumers are unlikely to pick up the slack, with high inflation already sapping their purchasing power.
To be fair, Europe's energy woes began long before Russia invaded Ukraine.
To wit, not only have plastic makers been facing growing competition over the past few years as more refiners shift from gasoline and diesel to plastics, but now they are seeing a sharp contraction in profit margins thanks to higher naphtha and LPG costs--major plastics feedstocks.
Petrochemicals--the building blocks of plastics--are processed from naphtha and LPG, or propane and butane. Companies with production units that are part of a larger refinery complex can tap on these raw materials produced on-site as a by-product of oil distillation, but everybody else has to procure feedstock from the open market.
The result: Standalone plants lacking a fully-integrated refining system and ready access to affordable feedstocks have increasingly been facing much higher production costs and forced to cut runs starting from the third quarter of 2021.
According to Bloomberg, Some of Asia's biggest producers of the building blocks used to make plastic have been forced to cut processing rates after Asia's steam cracking capacity increased by 20% last year.
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Steam crackers plants turn naphtha and LPG into ethylene and propylene, the main building blocks for plastics. Meanwhile, a massive surge in natural gas prices as well as a huge ramp in petrochemical capacity in Asia, led by China , is not helping matters, either.
The shale boom led to an overabundance of cheap oil and natural gas, key commodities used in the manufacture of plastics both as feedstocks and as fuel. The fossil fuel industry has been heavily pivoting into the petrochemical sector as a second cash cow even as the world grew increasingly weary of its role in environmental degradation and investors started giving it a wide berth.
According to the American Chemistry Council , hundreds of new plastic production plants and expansions were given the green light to develop new facilities. Global plastics production was set to increase by about a third over the next five years and triple over the next three decades.
But the energy and health crisis put paid to those plans and rosy projections.
Last year, Thailand-based PTT Global Chemical announced that it would indefinitely delay its plan to build a $10B ethane-cracker plant in Ohio, citing uncertainty amid the health crisis, while Shell said in March that it was shelving its Pennsylvania project .
Meanwhile, China's plans to invest $84 billion in plastic and energy investment in West Virginia are yet to materialize three years since the promise was made.
That said, North American petrochemical makers appear to be in much better shape, with demand recovering and companies lining up four major projects weighing in at more than $10 billion.
Source: Chemical & Engineering News
Meanwhile, the commodities sector, including oil, natural gas, metals, and agricultural produce are soaring thanks to severe supply chain disruptions wrought by Russia's war on Ukraine.
Indeed, fertilizer makers are poised to record their biggest profits in years following a massive supply squeeze of essential crop nutrients due to the Ukraine crisis.
The biggest fertilizer makers, Nutrien Ltd (NYSE:NTR), CF Industries (NYSE:CF) and the Mosaic Co (NYSE:MOS), are enjoying windfall profits thanks to sanctions on Russia and Belarus, the world's #2 and #3 producers of potash, sending prices of the key fertilizer nutrient to levels last seen during the 2008 food crisis. Not surprisingly, stocks of major fertilizer producers are soaring: NTR has gained 86.8% over the past 12 months; CF has gained 103.4%, while MOS is up 87.9% over the timeframe.
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To be fair, the potash rally pre-dates the Ukraine crisis, with prices already on an uptrend from last year on tight supplies after international sanctions were slapped on Belarus' state-owned producer Belaruskali in response to President Alexander Lukashenko's crackdown against political opponents. However, events in Ukraine have only served to exacerbate the supply squeeze and push prices to new highs since Russia is a key supplier of potash as well as several other critical crop nutrients such as nitrogen, phosphate, urea and ammonia.
"Nutrien, for sure, is going to raise their (earnings) guidance. I'd be shocked if they don't, " Joel Jackson, senior analyst at BMO Capital Markets Equity Research, has told Reuters. Back in March, Nutrien, the world's biggest fertilizer maker, announced plans to ramp up its annual potash output by 1 million tonnes to nearly 15 million tonnes in response to the uncertainty of supply from Eastern Europe.
But not all fertilizer makers are as lucky as Nutrien. As Morningstar equity analyst Seth Goldstein has pointed out, some fertilizer producers, particularly those who specialize in nitrogen-based fertilizers such as CF Industries, are likely to find high fertilizer prices partially offset by soaring natural gas prices. However, more vertically integrated companies like Mosaic and Nutrien that mine their own potash are likely to feel the blow of cost inflation less.
Unfortunately, high fertilizer costs will negatively impact world food supplies, and almost inevitably lead to high food prices.
The availability of affordable commercial fertilizers is highly critical to the success of the global agricultural sector. The discovery of the Haber-Bosch method in the early 1900s, which is still used to make fertilizer today, has allowed farmers to vastly increase their yields, with the industry now largely hinging on man-made fertilizer. But skyrocketing fertilizer prices are now expected to take a heavy toll on fertilizer use and, consequently, yields: according to industry consultancy MB Agro, in Brazil, the world's biggest soybean producer, a 20% cut in potash use is expected to lead to a 14% drop in soybean production in the current year. In West Africa, falling fertilizer use could shrink this year's rice and corn harvest by a third, the International Fertilizer Development Center, a food security non-profit group, has reported.
By Alex Kimani for Oilprice.com
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Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com.
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