European Gas Prices Keep rRsing, Two Fertilizer Giants Join the Tide of Production Cuts

With supply dwindling and winter approaching, European benchmark Dutch natural gas futures hit a new record as high as €300/MWh on August 24.

In the face of rising gas prices, the world's two largest fertilizer giants, CF Industry and Yara International, have recently joined the European fertilizer production reduction trend. It is expected that more fertilizer companies will reduce production in the future.

CF Industries UK plant suspends ammonia production

Fertilizer giant CF Industries announced on August 24 that it would suspend ammonia production at its only UK plant, Billingham, in response to soaring gas prices.

The Billingham plant is a major source of carbon dioxide in the UK, a move that could reduce the supply of carbon dioxide vital to the UK food industry.

CF Industries believes that producing ammonia in the UK is uneconomical at current gas and carbon prices, with marginal costs in excess of £2,000 per tonne, while global ammonia prices are about half that level. CF Industries has not yet set an exact date for the start of the temporary shutdown of the ammonia plant.

Due to high energy costs, CF Industries announced on June 8 plans to permanently close its Ince plant in the UK and concentrate UK manufacturing operations at the Billingham plant, the UK's largest producer of ammonia, ammonium nitrate and carbon dioxide. facility.

The Billingham plant was established in 1924 with a total ammonia production capacity of 595,000 tons and ammonium nitrate of 625,000 tons; the Ince plant was established in 1965 with a total ammonia production capacity of 380,000 tons and ammonium nitrate of 575,000 tons.

The shutdown of CF is reminiscent of a year ago. In September 2021, operations at two plants in Billingham and Ince were halted due to high gas prices making it unprofitable. The Billingham plant then restarted that month after reaching an interim agreement with the UK government. The Ince factory has never reopened.

Yara further cuts production in Europe

Norwegian fertilizer giant Yara announced on August 25 that it is implementing further production cuts due to record natural gas prices in Europe, which will reduce its total ammonia production capacity utilization in Europe to around 35%.

Accordingly, Yara will reduce the annual capacity of its European production system by the equivalent of 3.1 million tons of ammonia and 4 million tons of finished products (1.8 million tons of urea, 1.9 million tons of nitrates and 300,000 tons of compound fertilizers).

Yara said it will use its global procurement and production systems as much as possible to optimize operations and meet customer needs, including using imported ammonia to continue producing nitrates where feasible.

This is not the first time Yara has cut production this year. In March, Yara cut production at several of its ammonia and urea facilities, and after margins improved, the plants began to resume production.

According to the S&P Global Chemical Economics Handbook (CEH), CF Industries and Yara International lead the way in terms of total global ammonia production capacity, with a combined capacity of more than 16 million tonnes/year in 2020.

Natural gas is an important raw material for the production of nitrogen fertilizers in European fertilizer plants, accounting for the bulk of the production cost of synthetic ammonia. On August 23, Polish state-controlled producer Grupa Azoty and PKN Orlen subsidiary Anwil suspended nitrogen fertilizer production, citing soaring natural gas prices.

The energy crisis has curbed European fertilizer production, which means less production and more reliance on imported ammonia, opening opportunities for fertilizer producers in other regions.

However, this has had a negative effect on global food production. According to a warning from the International Fertilizer Association, farmers around the world are likely to cut their fertilizer use by 7 percent next season, the largest drop since 2008. This also means a significant reduction in grain harvests and a significant increase in the risk of food crises.