Right now, we can see with our own eyes how European producers of mineral fertilizers are faced with the most severe crisis associated with the fact that the cost of their products is based on the gas component. Even under conditions of normal gas prices, the cost of purchasing it is up to 70 percent of the cost of the finished product. What can we say about the situation when the prices for natural gas rise abnormally high – as, for example, now. European manufacturers are massively reducing or even suspending production. And in the foreseeable future, there are no positive prospects for them: Vladimir Putin said that the gas deficit in Europe could amount to a gigantic 70 billion cubic meters. And such a deficit will not even cover an urgent launch “Nord Stream – 2 “.
At the same time, this situation creates excellent opportunities for the Russian chemical industry to generate additional income, which has access to many times cheaper raw materials. But it also creates risks for Russian farmers: if measures are not taken in advance to prevent excessive export of fertilizers from the country, agriculture may face a shortage of fertilizers in the spring. That at the end of the season will inevitably lead to a drop in the harvest.
The situation in the European sector of the production of mineral fertilizers is now really awful. American company CF Industries Holdings was the first to shut down its two British plants in mid-September due to the high cost of gas. Yes, Britain is no longer in the EU, but this has not ceased to be a European consumer of fertilizers.
Then it went heap.
Just a couple of days la-ter, a major Norwegian producer of mineral fertilizers Yara International announ-ced a 40 percent cut in am-monia production at its European plants. Then, production was cut sequentially due to the high cost of gas from Fertiberia in Spain and OCI in the Nethe-rlands. And Lithuanian Achema refused to resume the work of its ammonia plant. A little later, a rather big European manufacturer Borealis AG announced a reduction in production. And finally, by the end of September, chemical giant BASF surrendered, deciding to cut ammonia production at factories in Antwerp and Ludwigshafen in Belgium and Germany.
It is almost certain that production cuts and plant shutdowns will continue in Europe in the future. After all, most European producers receive gas under long-term contracts. The gas price in these contracts is determined according to a formula that, thanks to the efforts of the Europeans themselves, is now more closely tied to spot gas prices on the European market than to the price of oil and fuel oil. Moreover, the price according to the formula is calculated with a lag of a couple of months. That is, if in September spot prices in Europe confidently exceeded $ 800 per thousand cubic meters, then somewhere in November the contract prices will exceed $ 600. Accordingly, if in October the spot prices were already $ 1100 plus, then in December they will reach $ 900 in long-term contracts. So the funniest gas prices for most European consumers are still ahead. The only question is how long such prices will be delayed. But one way or another – European producers will not have time to saturate their market with fertilizers of their own production.
At the same time, the Europeans, even at the best of times, do not cover their needs with their own production. More than ten percent of consumption, which is about two million tons in the active ingredient – nitrogen, they buy on the side. Today they run the risk of producing six to seven million tons less than usual. Accordingly, these six to seven million tons will constitute an additional deficit in Europe.
It can be covered by producers with access to cheaper gas. First of all, at the expense of the Russians, as well as at the expense of their colleagues from Belarus, Kazakhstan and Uzbekistan. True, all of the above-mentioned producers, according to experts, have idle capacities at most two million tons. Europeans will be able to buy some small volumes in North Africa.
But even when working at the limit of the capabilities of Eurasian and African producers, it will be absolutely impossible to cover the entire European deficit.
Moreover, the hour is not even, the deficit in the region may increase by another 1.5 million tons or even more. Rumor has it that the Ukrainian authorities are going to lift the embargo on the import of Russian fertilizers. Previously, they were considered too “aggressive” and banned for import, as well as gas for direct purchases. Now, Kiev seems to be ready to come to the conclusion that Russian fertilizers can still be imported – apparently, unlike Russian gas, they are not so harmful and smelly. If the embargo is lifted, local producers will immediately “lay down” – even when importing very small volumes of Russian fertilizers. The price of imported fertilizers will differ too strikingly from locally produced products.
It is not surprising that, against the background of all that is happening, the quotations of shares of the largest Russian fertilizer producers have jumped up in recent months. For example, Phosagro shares rose by almost 32 percent from early August to mid-October and only bounced back slightly in recent days. And the prices – say, for urea – on the European market have doubled since May.
In winter, almost all of Europe and, possibly, the “agrarian superpower” Ukraine, which has joined it, will line up for Russian fertilizers.
But this very moment is fraught with risks: after all, manufacturers will be interested in maximum sales to premium markets with high prices, which the markets of European countries will definitely be this winter. And this is where government regulation should play an important role. Turkey, for example, which is an importer of gas but receives it at lower prices than Europe, recently introduced a temporary ban on the export of fertilizers altogether. Of course, there is no reason for Russia to impose a complete ban, because its own production is excessive.
But it is important to structure the process control in such a way as to reap a double benefit: to sell surplus fertilizers with a good margin, and, by providing domestic farmers with them at affordable prices, to get a crop at a lower cost than competitors.