The future of Europe’s fertilizer industry: a year of shocks

REGIONAL REPORT

The future of Europe’s fertilizer industry: a year of shocks

Russia’s invasion of Ukraine has hit European fertilizer producers hard. Ammonia plants across the continent have been inactive over the winter due to prohibitively high feedstock costs. The future of nitrogen fertilizer production in the region will depend on access to an affordable, secure and sustainable energy supply and the switchover to low-carbon technologies.

CF Fertilisers UK announced the closure of its Ince, Cheshire fertilizer production complex last June due to cost pressures.

PHOTO: CF FERTILISERS UK

As CRU summed up recently, 2022 was a turbulent year for the global fertilizer market. Prices rallied to record highs at the end of March last year following Russia’s invasion of Ukraine, with the market fearful of drastic supply shortfalls.

But across the world, producers, farmers and policymakers subsequently responded with ramped-up output, application cuts and softer sanctions, respectively. Fertilizer prices consequently ended 2022 significantly below their March peak.

Europe’s fertilizer producers, though, have experienced a uniquely tough 12 months since Russia invaded Ukraine on 24th February 2022.

Anatomy of a crisis

The shock to the European nitrogen industry first began at the height of last summer when BASF announced ammonia production cuts in Germany in reaction to high gas prices.

“We are reducing production at facilities that require large amounts of natural gas, such as ammonia plants,” BASF’s CEO Martin Brudermueller said in an earnings call on 27th July. “We are monitoring developments very closely, particularly at our largest site in Ludwigshafen, where we use considerable amounts of gas.”

BASF said falling gas supplies from Russia were behind its decision. Ammonia production was particularly vulnerable, being responsible for one quarter of its overall natural gas consumption. The company said it would fill some of its ammonia supply shortfall with purchases from external suppliers, but warned that farmers would still face higher fertilizer costs in 2023.

“[A cut in ammonia production] would put additional pressure on an already extremely tight market. Russia is a major exporter of ammonia and fertilisers. Exports from Russia are currently in sharp decline. A reduction in gas supplies in Germany would further exacerbate the shortage of fertilisers worldwide, reduce food production and lead to further price increases for basic foodstuffs,” BASF said in a statement.

Fig. 1: European nitrogen production shutdowns/curtailments, end-August 2022

But the European industry crisis really kicked in at the end of August 2022, as record natural gas price rises triggered a spate of ammonia production curtailments across the continent. These included major shutdown announcements from CF Fertilisers UK, Grupa Azoty, Yara International and others.

“We have now confirmed that 50 percent of total European ammonia capacity (excluding Ukraine) is shuttered or curtailed, up from 26 percent the week prior,” CRU reported on 25th August.

CF Fertilisers UK, for example, announced the halt of ammonia production at its Billingham complex on Teesside on 24th August. The company, a subsidiary of US-headquartered CF Industries, continued to produce ammonium nitrate (AN) and nitric acid at the site using imported ammonia instead.

“At current natural gas and carbon prices, CF Fertilisers UK’s ammonia production is uneconomical, with marginal costs above £2,000 per tonne and global ammonia prices at about half that level. The current cost of natural gas at NBP* is more than twice as high as it was one year ago, with the NBP forward strip suggesting that this price will continue to rise in the months ahead,” said CF Fertilisers UK at the time.

(*NBP is the wholesale trading point for UK natural gas.)

The company said it expected “to fulfil all ammonia and nitric acid contracts and all orders of AN contracted for delivery in the coming months” by switching to imported ammonia instead.

The ammonia production halt at Billingham followed the closure by CF of its Ince, Cheshire fertilizer production complex in June last year. This ended more than 55 years of production at the site (Fertilizer International 509, p8). Ammonia production at Billingham and Ince had also been halted in mid-September 2021 due to high natural gas prices, although the Billingham plant restarted a few weeks later after the UK government stepped in to cover costs (Fertilizer International 505, p8).

CF’s announcement of UK curtailments came the day after Poland’s Grupa Azoty halted nitrogen fertilizer production at Tarnow, Poland, and also reduced production at its Pulawy site. In total, the company has the capacity to produce 524,000 tonnes of ammonia, 375,000 tonnes of urea and one million tonnes of NPKs annually, according to ICIS.

The decision was prompted by record natural gas prices. Azoty said its natural gas costs had rocketed from e72 per megawatt hour (MWh) to e276/MWh over the six months between 22nd February 2022 by 22nd August.

Yara International also reacted to these record high gas prices by announcing large-scale production curtailments on 25th August. These reduced its total European ammonia output to around 35 percent of capacity.

As a consequence, Yara effectively reduced its annual production capacity across its European production sites by the equivalent of 3.1 million tonnes for ammonia and 4.0 million tonnes for fertilizers (1.8 million tonnes urea, 1.9 million tonnes nitrates and 0.3 million tonnes NPK).

“Yara will where possible use its global sourcing and production system to optimize operations and meet customer demand, including continued nitrate production using imported ammonia when feasible. Yara will continue to monitor the situation and adapt to market conditions going forward,” the company said at the time.

As the end of August, ICIS was reporting widespread disruption to ammonia and nitrogen fertilizer production across Europe linked to soaring wholesale gas prices. Partial or full shutdowns or reduced production rates (Figure 1) were reported at the following sites:

• Yara Sluiskil and OCI, the Netherlands
• CF Fertilisers Ince, UK
• BASF Ludwigshafen and SKW, Germany
• Fertiberia Huelva, Spain l Yara Ferrara, Italy
• Petrokemija, Croatia l Azomures, Romania
• Grupa Azoty Tarnow and Pulawy, Poland
• Achema, Lithuania.

“At least 50 percent of European ammonia capacity has been curtailed. The reality is likely higher than this. The repercussions could be extraordinary and expand well beyond agriculture and fertilizers,” Chris Lawson, CRU’s head of fertilizers, said on 27th August.

Additional to the above list, CRU was also reported that Anvil had ceased production in Poland, Duslo in Slovakia was also facing downtime, and that Austrian producer Borealis had partly shut down its French production unit.

Half a million tonnes of lost production capacity

According to CRU, the planned shutdowns announced in late August 2022 represented a cut in Europe’s installed nitrogen capacity of 400,000 tonnes per month – across urea, AN, calcium ammonium nitrate (CAN) and urea ammonium nitrate (UAN). It estimated that Europe would be operating less than half of its installed capacity for these products as the northern hemisphere’s summer ended and autumn began.

Argus separately calculated a total European nitrogen production loss of half a million tonnes per month. It estimated that 17.85 million t/a of Europe’s ammonia production capacity was offline at the start of September.

However, this unfolding crisis was affecting some fertilizer products more than others, reported Argus. It expected less than 30 percent of regional UAN capacity to be operating by the start of September 2022. The relative abundance of cheaper US supply was, however, likely to replace some – although not all – of this lost volume. Regional AN output, meanwhile, was likely to have been cut by half, with CAN down by between one third and one half.

“Unlike UAN, there is much less spare capacity outside Europe for dry nitrates and so buyers have been turning to ammonium sulphate and urea imports for replacement supplies,” commented Argus.

“On urea, European-wide production appears to be operating at less than a quarter of normal capacity,” Argus added. “Of more than eight million t/a of potential production capacity, just two million t/a is planned to remain operational – mostly Yara but also Germany’s BASF, Borealis and Spanish producer Fertiberia.”

Ammonium sulphate, mostly produced as a by-product of caprolactam manufacturing, was also badly affected, suggested Argus, with shutdowns and cuts to operating rates in Belgium, the Netherlands, Germany and Poland reducing European output to around half of maximum capacity.

Replacing lost European output

So, how could Europe make up for this large-scale loss in nitrogen output?

“Combined, all the lost production in Europe represents around 500,000 tonnes of nitrogen/month,” commented Argus. “If all that were converted to imported urea demand, it would mean almost 1.2million tonnes per month of additional urea imports – four times the normal rate.”

Yet Europe would simply be unable to import that much urea, suggested Argus, for logistical and other reasons. In any case, meeting even a small fraction of this demand would be an overwhelming challenge for the global urea trade. While China could theoretically boost international urea supply using its major reserve capacity, the continuing suppression of Chinese urea exports since 2021 is a policy that remains in place.

With supply inelastic, a more likely scenario, suggested Argus, was an extended period of demand destruction for nitrogen fertilizers – particularly in those markets without significant grain exports and/or fertilizer subsidy support. Such a scenario would result in major adjustments to nitrogen trade flows.

A return to profitable ammonia production?

The good news for producers was that European natural gas availability and pricing both began improving in early December.

“Prompt prices at Europe’s most liquid gas hub, the Dutch Title Transfer Facility (TTF), have progressively dropped over the past seven weeks as mild weather, limited demand and LNG imports remained quick,” Argus reported at the end of January. “As Europe approaches the end of winter and forecasts suggest more mild weather, the immediate risk of a gas shortage has lessened dramatically in recent weeks.”

This started to make European ammonia production look economically viable again.

“European ammonia production costs fell below import prices in late December, and were estimated at $660/t for northwest European plants, excluding carbon costs as of 27th January,” said Argus. “Northwest European import prices are trading $170/t above the cost of production, at $830/t cfr duty free.”

Despite rapid price falls, European natural gas prices at the end of January remained historically high and elevated compared to other gas-producing regions, noted Argus:

“Argus’ TTF everyday prices so far this year have been assessed at around e64/ MWh on average, almost half the roughly e121/MWh average last year. However, they still remain dramatically above historical levels of roughly e17/MWh in 2017, e23/MWh in 2018, e13.50/MWh in 2019, e9.35/MWh in 2020 and e46/ MWh in 2021.

“European gas prices also remain well above benchmark prices in other major gas-producing and consuming markets like the US, Iran, Russia and Oman.”

A change in fortune?

As already stated, CRU was reporting that at least 50 percent of European ammonia capacity was curtailed at the end of August last year. Yet November 2022 saw an upturn in fortunes with the reversal of some curtailments.

With regional natural gas prices falling, Lawson was much more upbeat. “A turn of fortune for European nitrogen producers: lower spot gas prices mean profitability has returned. We now estimate that 37 percent of ammonia capacity is curtailed, down from the peak of 67 percent.”

Yet the prospects for a return to production normality remain mixed. Indeed, European ammonia producers had largely failed to respond to falling European gas prices, Argus said at the end of January, with the caveat: “That …could change if gas prices decline further and the next planting season spurs stronger demand for fertilizers.”

In an end-January update, Argus reported that:

“Yara’s Ferrara plant in Italy remains shut, but the firm is mulling a restart in February. Ameropa’s Azomures plant in Romania has yet to announce a restart, while Borealis’ plants in France and Austria continue to run at reduced levels.

“Fertilizer producer CF, which operates plants in the UK, switched to importing ammonia in August and continues to do so, having received several shipments this month, while Borealis also pointed towards the continued imports of cheap feedstocks and sufficient existing stocks at plants as a reason for muted ammonia production.”

Argus also reported high stock levels across key European ammonia import hubs as January ended, with most buyers having already sourced their requirements before gas prices began to fall. High inventory levels at Antwerp and Rotterdam, for example, had created a backlog of 50,000 tonnes of ammonia waiting outside the port. This glut removed the immediate incentive for European producers to recommence ammonia production.

Major falls in Polish production

According to figures published at the end of January, Poland’s ammonia production fell by 19 percent in 2022. The country is one of Europe’s largest producers. Grupa Azoty operates four production sites in the country, while PKN Orlen runs one at Wloclawek through its subsidiary Anwil. Together, these sites have a combined ammonia production capacity of more than 2.9 million t/a.

“The 32 percent decline in Polish ammonia output in the second half of the year was much steeper than the six percent in the first half, as high gas prices forced a reduction and then shutdown of Polish ammonia output.,” reported Argus. “In outright terms, [Polish] ammonia production fell to 858,000 tonnes from about 1.25 million tonnes.”

Yara ramps up its European ammonia output

Yara’s European ammonia production was once again operating at 65 percent of its capacity by the second week of February. The company did, however, end up cutting its European ammonia output by 1.7 million tonnes last year – equivalent to 35 percent of its regional capacity. Its European weighted-average gas cost was an eyewatering $31.80/mn Btu in 2022, up from $11.70/mn Btu in 2021.

Yara says the resumption of ammonia production in Europe depends on its profitability, saying it “will not produce or sell at negative margins”. Yara is fortunate to be able to access external ammonia sources and, with Russian output unavailable, the company shifted to ammonia supplies from the Middle East, north Africa, North America and the Caribbean in 2022.

Shut ammonia production unlikely to return?

Some expert industry observers are questioning how much of the ammonia production shut down on the back of high European natural gas costs last year will ever return. Speaking last October, Andreas Gocke, global lead for chemicals at Boston Consulting Group (BCG), predicted that Europe’s ammonia producers would remain under strain as the prices of the natural gas feedstocks they relied on were unlikely to return to levels seen prior to the war in Ukraine.

“[Before the war] The entire cash cost of ammonia production in Europe was already bad, but [with current gas prices] there is a brutal translation: there is no chance anymore for cost-competitive production of ammonia in Europe,” Gocke told delegates at the European Petrochemicals Association (EPCA) 2022 annual meeting.

“We have modelled how the European natural gas price could develop [and] we will not get back to the levels we had in 2019 – this has very strong implications,” concluded Gocke.

In addition to fertilizer industry impacts, he predicted a wider production downturn in other parts of the European chemicals industry, including downstream products such as polyamide 6 (PA6) and the ammonia by-product carbon dioxide (CO2 ), which is used by the food and drinks industry and other industrial sectors.

The policy response

European Commission president Ursula von der Leyen unveiled the EU’s plans for electricity and gas markets in a speech on 14th September. These included ‘solidarity contributions’ to energy-intensive industries, windfall taxes on excess profits, and a cap of e180/MWh on some power producers. While Europe’s fertilizer industry agreed with these necessary measures, representatives argued they did not go far enough.

Trade association Fertilizers Europe welcomed the commission’s promise to explore further options such as an alternative gas benchmark and a natural gas price cap. The association said that the proposed solidarity contribution mechanism “might provide an immediate relief to energy-intensive industries” as long as it was implemented quickly. However, rapid agreement on further steps was also necessary, in its view, as some changes required time that “our industry doesn’t have”.

Outlook for the year ahead

While gas prices are now much lower than last year’s peaks, Europe’s energy crisis was not yet over, CRU predicted in its 2023 outlook:

“Energy markets face a trilemma of competing issues – energy security, affordability and the required transition to clean energy,” said CRU. “The war in Ukraine has been a key driver of current pressures and, while natural gas prices have fallen back in recent weeks, the energy crisis is far from over.”

CRU also warned of volatile gas prices and possible permanent capacity closures in Europe with some energy-intensive industries migrating to other regions.

“There is a high probability European gas prices will once again move above current levels and remain volatile. The European industry has cut its consumption of gas considerably, with widespread curtailments of capacity in energy- or gas-intensive sectors,” CRU added. “If high and volatile prices persist, many of these curtailments will become permanent or the industry could relocate.”

Despite energy security concerns and high energy prices, factors which should be conducive to greater investment in low-carbon production technologies, industrial decarbonisation has been held back in the short-term, suggested CRU, because of the need to address more immediate and pressing energy supply problems.

In its top 10 calls for the fertilizer market in 2023, CRU said:

• European nitrogen production will continue to be plagued by high gas prices. But government support and ample supply from elsewhere will see prices decouple from marginal costs. Demand is set to recover, albeit modestly.
• The momentum behind low-emissions ammonia will continue, and supply-side subsidies may be more forthcoming in response to the US inflation reduction act.
• Nitrogen prices will linger below marginal cost. European nitrogen production costs are expected to increase again in 2023. TTF gas prices are projected to remain high as Russian gas supply is slashed. But nitrogen prices are expected to decline, decoupling from costs due to ample supply, with 2023 urea Middle east f.o.b. prices forecast at $556/t, down from $675/t in 2022.
• Expect some government support for producers in Europe. The likelihood that European governments will provide financial aid to distressed nitrogen producers will further support the decoupling of nitrogen prices and costs. With support for fertilizer and its by-products (pure CO2 ) being prioritised. This will help maintain the operations of unprofitable plants and boost European nitrogen supply.

CRU expects European gas prices to average e150/MWh in 2023. Although well below last August’s high of e338/MWh, this predicted price remains eleven times higher than 2019 levels:

“This autumn the TTF European gas benchmark price slid dramatically from its August peaks, pushed down by robust EU gas storage levels. This has reduced some of the pressure on economies in Europe, and led some commentators to argue that the end of the energy crisis is in sight. However, we think this is premature and believe there is a high chance of prices moving above current levels and remaining volatile.”

“More of Europe’s gas supplies will come from LNG, which is more likely to be sold in the spot market instead of through long-term contracts. Although the European Commission is proposing to cap the wholesale price at e275/MWh, this would only have an effect in the most extreme circumstances, and has still not been agreed by all member states.”

European industry weighs up production shift

The US is an obvious location for new ammonia production, commented Yara’s CEO Svein Tore Holsether in mid-January, while stopping short of announcing any new investments there. Speaking to Argus, Holsether said Yara had received offers to relocate to the US in response to Europe’s high energy prices:

“We already have ammonia production in Freeport, Texas. We are evaluating further production opportunities in the US through Yara Clean Ammonia. But we’re not yet at a point where we are announcing a specific investment with a location.”

“It would be a natural place. I see this happening in our industry. Look at announcements on where new ammonia production is being considered. For sure it’s the US. That’s a direct result of the incentives [Inflation Reduction Act] being put in place to build this industry.”

Earlier in January, Yara announced modifications to its ammonia terminals in Germany to enable the company to raise its import capability to three million tonnes.

“We’re the world’s largest ammonia trader. And we have 12 ammonia ships, terminals and production across the world,” Holsether said. “We’ve been using that flexibility to bring ammonia in to compensate.”

Yara has been lobbying the EU to remove bureaucratic hurdles preventing the expansion of renewables. Holsether wants to see a quick and massive renewables build-up to power European green hydrogen and green ammonia production.

“It’s not happening fast enough. Too much bureaucracy, red tape. We have to be prepared for a situation where we need to bring in hydrogen from the outside. Here Yara can play a role using ammonia as the hydrogen carrier,” he said.

Norway was the “natural place” for renewables expansion to happen, suggested Holsether, thanks to its abundant hydropower resources. “But it is not happening fast enough,” he said.

The energy situation in Europe is currently much better than expected, said Holsether. In his view, a lot of this was down to the mild winter weather, the good response of industry and households in reducing their energy consumption, as well as new routes for bringing natural gas into Europe.