Rain Industries announced a temporary shutdown of its unit in Europe on the back of an energy-related crisis. The company said it is looking at a contingency plan for other European units in anticipation of natural gas storage and price spikes.
The sharp spike in European energy prices continues to have a bigger impact across sectors. Cut in Russian gas supplies have resulted in a sharp jump in electricity costs in Europe and this has impacted the production of energy-intensive chemicals like ammonia, methanol, melamine, etc. In some cases, production has been cut by more than 50 percent.
BASF in its second half outlook for this year did indicate that risk could arise due to gas shortage in Europe and this will be compensated by higher planned capacity utilisation at sites outside of Europe.
As per the report by Bloomberg, CRU Group Estimates that Europe now has lost half of its ammonia capacity, and 33 percent of nitrogen fertiliser operation. Now that is a big number considering that you are contributes roughly 20 percent of total global ammonia production.
To produce one tonne of ammonia, around 36 MMBtu of natural gas is consumed, and every $1 per MMBtu increase in gas price would mean that ammonia’s variable costs will increase by $36 per tonne. So with gas prices increasing by say $50 to $70 per MMBtu in Europe, variable costs of ammonia production have increased by $1500 to $1,800 per tonne.
Now in the Indian context, companies like GNFC and RCF are some of the producers of ammonia, but it does not stop here. Ammonia is used to produce nitric acid, ammonium nitrate and due to the higher costs cost of production of nitric acid, it has increased by $200 per tonne to around $600 to $800 per tonne.
Aarti Industries uses nitric acid as raw material and to shield themselves they did announce setting up a nitric acid plant. In terms of producers, Deepak Fertilisers, GSFC and GNFC are the nitric acid producers in the country.
Industry sources are suggesting that other chemical plants like melamine, caprolactam, methanol are also running at lower capacity in Europe. Now, this has been confirmed by some of the Indian chemical players as well.
Meghmani Finechem told CNBC-TV18 that caustic soda prices are expected to stay at higher levels due to energy prices in Europe. Aarti Industries said that Indian chemical players are benefiting due to production issues in Europe and that is something that could be the big theme.
Morgan Stanley did indicate in July that since European peers are facing challenges with respect to gas costs this could benefit Asian and particularly Indian chemical players, which are well positioned to take market share. Whether Indian chemical players will grab this opportunity or not, only time will tell.