BASF, Covestro, etc. Warn Again! The Supply Chain May Collapse!

A shortage of natural gas could lead to the closure of some factories, leading to the collapse of the entire supply chain and industrial chain. After more than three months, German chemical giant Covestro has once again issued a warning about the possible serious consequences of the "cutoff" of natural gas.

Covestro stated in its second-quarter earnings report on August 2 that the conflict between Russia and Ukraine has fundamentally changed the geopolitical situation and has had a wide-ranging impact on the global economy. It is expected to have lingering effects on global supply chains, leading to soaring energy prices, high inflation and slowing global economic growth.

Covestro's second-quarter sales rose 18.9 percent year-on-year to 4.7 billion euros, thanks to higher product selling prices; however, earnings before interest, taxes, depreciation and amortization (EBITDA) fell due to a sharp increase in raw material and energy prices and lower sales volumes 33.0% to EUR 547 million.

In the second half of the year, macroeconomic risks increased significantly again, Covestro pointed out, especially its production sites in Germany faced extremely high uncertainty about energy costs and natural gas supply.

The German production site accounts for about a quarter of Covestro's global production capacity. Covestro is taking various measures to reduce gas demand in Germany in the short term, such as switching to oil-fired steam boilers. In addition, existing production technologies are being continuously improved and new technologies introduced to further reduce natural gas and energy consumption.

Covestro warned that rationing of natural gas over the next year could force individual production facilities to operate at low loads or even shut down completely, depending on how much gas supplies are cut. As the chemical industry is closely linked to downstream industries, a further deterioration of the situation could lead to the collapse of the entire supply chain and production chain.

At a shareholder meeting in April, Covestro said at the time that the German chemical industry and other industries must reduce their reliance on fossil fuel feedstocks, especially Russian gas, but an immediate embargo on Russian gas "could lead to The entire production and supply chain collapsed."

The chemical industry plays a systemically important role in the German industrial system: the production of almost all industrial products in the country depends on chemical products, such as automobiles, computer chips, insulating materials, pharmaceuticals, as well as detergents and cleaning agents.

According to data from the German Chemical Industry Association (VCI), the chemical industry accounts for about 15% of Germany's natural gas consumption, using about 2.8 million tons of natural gas as a chemical raw material every year, and 99.3TWh of natural gas for the production of steam and electricity, accounting for the industry's natural gas use. 27% and 73% of the amount.

Due to the reduction of gas supply in Russia, the business of many European companies has been affected.

Another German chemical giant, BASF Group, said on the 27th that it will reduce the production of ammonia, a raw material for fertilizers, to reduce demand for natural gas. Reduced natural gas supplies and higher prices are weighing heavily on BASF, as the company uses natural gas to both generate electricity and use it as a feedstock for its products.

Previously, BASF has issued several warnings that if the supply of natural gas falls below 50% of the maximum demand, BASF will have to reduce or even completely shut down the world's largest integrated chemical production base, the base in Ludwigshafen, Germany.

Not only Germany, but the European fertilizer giant Yara International (YARA) also said not long ago that due to rising natural gas prices, it has cut the production capacity of several factories, cutting ammonia production capacity by 1.3 million tons and urea production capacity by 1.7 million tons. Ton.

Recently, Russia's gas supply to Europe has been reduced again. At present, the natural gas flow of the Beixi No. 1 pipeline, which transports natural gas to Germany, has been reduced to 20% of the production capacity.