Rising costs 'heavy' European petrochemical producers

Recently, the price of natural gas in Europe has been rising all the way, and it has promoted the continuous rise of downstream electricity prices. As a major electricity consumer, the operations of European petrochemical producers have been deeply affected, and some sub-sectors that use natural gas as raw materials can no longer bear the pain of rising costs. As an upstream industry in the economic industrial chain, in the coming months, European petrochemical producers may pass on higher costs to customers, which may continue to push up inflation in Europe.

European electricity prices are soaring

The soaring price of natural gas in Europe has become a hot topic in Europe and even the world. At the beginning of August this year, European natural gas prices rose by 1,000% compared to the lows in May last year, and compared with the beginning of the year, natural gas prices also rose by 250%. Since September, the surge in natural gas prices in Europe has not eased, but has repeatedly set new highs. European natural gas prices have risen by more than 130% since the beginning of September, which is as much as 8 times the same period last year. Especially on October 6th, European natural gas prices skyrocketed again. The Dutch natural gas futures price, regarded as the weather vane of natural gas prices in Western Europe, exceeded US$1,200 per thousand cubic meters for the first time, soaring 22%, setting a record high.

Accompanying the surge in natural gas prices is the general increase in electricity prices in Europe. Since the beginning of this year, electricity prices in major EU economies have generally more than doubled from a year ago. The price of electricity in the UK in September this year was almost 7 times that of the same period last year; the price of electricity in Spain has risen by more than 200% since the summer of this year; the wholesale price of electricity in Germany has also risen by more than 60%. In mid-September, the European Electricity Exchange’s German 2022 futures electricity price reached 100 Euros for the first time.

Fertilizer giants are severely impacted

As the electricity supply in Europe is still stable at present, the price of natural gas and electricity has risen this time, and the most serious impact is on the fertilizer industry. Natural gas is the main raw material of the fertilizer industry, and the sharp increase in natural gas prices has caused some fertilizer companies to announce production cuts.

At present, fertilizer giants such as Yara, Borealis and OCI of the Netherlands have announced production cuts. Yara International Group, Europe’s largest fertilizer producer, said on September 17 that record European natural gas prices are affecting the profitability of synthetic ammonia production. Therefore, it is reducing the production of many of its plants and plans to reduce European synthetic ammonia production by 40%. . A Yara spokesperson said in an interview with the media that Yara’s nitrogen fertilizer production capacity in Europe is about 4.9 million tons per year, and about 2 million tons are affected this time, involving factories in the Netherlands, Italy, the United Kingdom and France. The company's plants in Germany and Norway have planned maintenance and will further reduce production capacity. The Dutch fertilizer giant OCI said that high production costs led to the partial closure of the ammonia production unit at the Herron plant. Austria-based Borealis said on September 23 that it is reducing its production of synthetic ammonia in Europe and will "further analyze the situation of its plants in Austria, France and the Netherlands."

IHS Markit predicts that the total closed ammonia production capacity in Europe is 4.6 million tons per year.

Petrochemical producers intend to pass on costs

Unlike the fertilizer industry, electricity prices have risen but there is no shortage, and petrochemical companies in the non-chemical fertilizer industry have no plans to reduce production. However, the petrochemical industry is a big power user after all, and European petrochemical producers cannot bear the pain of rising costs. In the coming months, European petrochemical producers aim to pass higher input costs to customers.

Actually, European petrochemical producers have already started to pass on costs this year, but the situation is more difficult now. Earlier this year, due to the soaring logistics costs driven by global supply chain problems, the price of petrochemical products rose to high levels, but it was still manageable. European chemical producers passed high costs on to consumers. But now, the second surge in imported costs within a year may be unbearable for consumers and affect their consumption. This, in turn, may lead to a reduction in downstream industry activity and ultimately slow down the economic recovery.

Insiders in the petrochemical industry have mixed feelings about the prospects of the petrochemical market. The source said that if petrochemical producers can pass on the high costs to consumers in the next few months, then production cuts will not occur. A large European caustic soda producer said: "We are a huge energy consumer group. The surge in natural gas and electricity prices has affected our cost base. This is very obvious, and of course it will affect supply. The only viable solution is the product. The price increase is not only caustic soda, but also polyvinyl chloride.” According to this manufacturer, some caustic soda producers may plan to increase contract transaction prices by at least three digits in the next few months.

A trader in the Spanish caustic soda market said that its negotiations with customers are still in progress, and it is expected that manufacturers are unlikely to reduce production unless they are pressured by customers who are unwilling to accept higher prices. The trader said that the price is not only determined by the seller, but also jointly determined by the seller and the buyer, but he also admitted that high electricity prices are putting a lot of pressure on the industry.