Russia is reconsidering the supply of shock forces to the chemical and fertilizer groups

The war in Ukraine is wreaking havoc on global supply chains. Western sanctions in response to the invasion, price shocks resulting from Russia's weaponization of energy, and disruptions to shipments of goods have halted normal procurement practices. The reverberations are being felt across global industries - but the effects on the chemicals and agribusiness sectors have been particularly severe.

"Energy-intensive industries and European fertilizer producers are the two groups most affected," says Sebastian Bray, chief chemicals analyst at German investment bank Berenberg. "Any chemical company that is power or gas intense has generally not done well over the past few months."

The world had become dependent on Russia for much of the energy and raw materials powering the food chain and global industries. Although accounting for less than 3 percent of global GDP, Russia, Ukraine and neighboring Belarus play a large role as producers and exporters of agricultural goods, minerals, fertilizers and energy.

Russia is the world's leading supplier of fertilizers and their basic components. It accounts for about 45 percent of the global ammonia nitrate market, 18 percent of the potash market, and 14 percent of global phosphate fertilizer exports. 

Svein Tore Holsthor, chief executive of Norwegian chemicals group Yara International, one of the world's largest producers of nitrogen-based mineral fertilizers, says the disruption following the Ukraine invasion was swift and deep - adding pressure to already tight market conditions. . Even before the war, global fertilizer supplies were stretched by COVID shutdowns, labor shortages, and general instability.

"The value chain was incredibly integrated," he says. "When you look at the map - where Europe is, where Russia is, where the natural resource locations are - these chains have been built up over decades. Even during the coldest parts of the Cold War, these products kept flowing so trade kept going And it all changed radically in just a few days.

Products kept flowing even during the coldest parts of the Cold War. it changed in a few days

Although no direct sanctions have been imposed on food and fertilizer products from Russia, Western countries say the war has cut off Ukraine's food exports and Moscow is blaming the sanctions for restricting its shipments.

The invasion and those Western sanctions have increasingly blocked access to suppliers, while Russia's suspension of gas flows to Europe has pushed up energy costs. Large amounts of natural gas are needed to produce fertilizer components such as nitrogen and ammonia: this accounts for about 80 percent of the production cost. But gas prices have risen 200 percent in Europe this year, hitting a record high in August (though wholesale gas prices have declined as nations build up reserves).

Several chemical companies in Europe - including sector giants Grupa Azzotti, Acema and CF Industries - have responded to the turmoil with shutdowns and cutbacks. Europe has lost nearly half of its ammonia capacity and 33 percent of its nitrogen fertilizer operations, according to industry researcher CRU Group. Fertilizer production in the region has been reduced by more than two-thirds.

Yara had to cut its ammonia production by 65 per cent on economic grounds. Roughly 30 million British thermal units (MMBtu) of gas are used to produce 1 tonne of ammonia. So, if Russia pays $2 for gas, Holsther says, the variable cost of producing ammonia in Russia is about $60. But this contrasts with the rest of Europe. In August, the respective prices were $80 and $3,000. "It wasn't a minor negative of a few dollars that made this decision," Holsther says. "It was extremely unprofitable."

The drop in gas prices has enabled Yara to resume some production, but Holsther says the future is uncertain: "We have to be very careful not to let this develop to such an extent that we lose control of the European fertilizer industry." Destroy the important parts."

Dwindling fertilizer supplies are adding to inflationary pressures from already high consumer prices and raising concerns that the inevitable decline in crop yields will make the global food crisis worse. Talks are underway to extend a UN-brokered deal with Russia to allow the flow of food and fertilizers from Ukraine beyond this month.

Holsther expects the supply shock to be a reckoning for the world's dependence on Russia. , using energy and food as weapons of war," he says. "It's a big wake-up call for all of us that we need to build a new food system, less dependent on Russia."

Germany is often cited as an example of Europe's precarious relationship with Russia. Before the invasion of Ukraine, 55 percent of Germany's gas came from Russia and last year, Germany was the third largest chemical exporter by value, after China and the US. Now, the industry is struggling to compete in the global market.

European sellers have been among the worst hit, says Bray, because products are often priced on a global basis. "This limits the ability for chemicals produced in Europe to pass on the high cost to end consumers, as customers can buy the product much cheaper elsewhere, or simply cannot afford it."

Germany's BASF, the world's largest chemical company by revenue, was hit by both rising gas prices and limited availability and the high cost of naphtha, made from crude oil and used for resins and plastics. For the first nine months of 2022, the company's natural gas costs in Europe were €2.2 billion higher than last year. In response, BASF has to downsize in this area.

Germany's BASF is permanently cutting operations after natural gas prices rose 2.2 billion euros this year © Sean Gallup/Getty Images

Then, this week, the Paris-based International Energy Agency warned that diesel, another key commodity for chemical groups, could be the next focus of Europe's energy crisis. 

"Higher diesel prices are fueling inflation, exerting pressure on the global economy and world oil demand," it said - after EU sanctions on Russian oil imports came into force in February "for non-Russian diesel barrels". Competition will be fierce".

Industries in Europe are looking for alternatives to reduce dependence on fossil fuels and build resilience. 

BASF says it is "working to reduce dependence on fossil energy, especially gas" in the medium term.

"We need to build renewable energy at a pace we've never seen before," Holsther says. Yara is developing a "green", fossil-free fertilizer that will be fueled by hydropower. A pilot plant is underway in Norway and the fertilizer is expected to hit the market next year.

Bray believes the energy crisis will eventually spur Europe's investment in renewable energy but it will be a "difficult transition period". 

"There is also a cost in buying more gas, shutting down plants and in the outlook for European economic growth," he says. "It may be a case of near-term to mid-term pain and some long-term benefit to it."