Until now, probably not many people were familiar with the processes involved in fertiliser production, so the panicked reaction to the closure of two of Britain’s largest fertiliser plants must have come as a surprise to most. In the short term, it is not a question of whether farmers will have enough to put on the land, but whether the country’s meat industry will be left without carbon dioxide. In that case, within days or weeks, British slaughterhouses and processing plants would have had to be cut back to such an extent that there would have been a very rapid shortage of meat in the shops.
The explanation is that the carbon dioxide used by industry is a by-product of fertiliser production, and it’s not just for beer or fizzy soft drinks. It is used to tranquilise pigs and poultry in slaughterhouses and, together with other gases, it ensures the durability of pre-packaged food and, in dry ice form, the transport of chilled goods. CF Industries’ two fertiliser plants in England accounted for 60% of the country’s industrial carbon dioxide production before they were shut down by their US owner last week, because record high natural gas prices have made their production uneconomic.
In view of the above, it is not surprising that the UK government quickly stepped in with a multi-million-pound bailout package to get at least one of the plants restarted. At the moment, the government assistance is set for three weeks, though if no alternative solution can be found in the meantime, it will certainly be extended.
It is not impossible that that scenario will be repeated in other European countries, because fertiliser producers across the continent are suffering in the same way from high gas prices, as natural gas is their most important raw material. Norway’s Yara International has cut its European ammonia production by 40% – in simple terms, as an intermediate between natural gas and nitrogen fertilisers – and Austria-based Borealis, with plants in Austria, the Netherlands and France, has announced it is cutting back on ammonia production. According to CRU Group’s analysis, roughly half of European ammonia production is at risk after the cost of production rose from USD 188 to USD 900 per tonne, at the end of last year.
The situation is no better to the south and east of Hungary. “Due to last year’s earthquake, a Croatian fertiliser plant was out of production until the summer while, for some time, a fertiliser factory in Romania has been operating at 50% capacity, or less, due to an explosion at one of its ammonia plants. One of Ukraine’s largest fertiliser factories has recently shut down, and the line may not end there” says Dávid Bige, member of the Board of Directors of Nitrogénművek Zrt. The company’s plant in Pétfürdő and the unit in Szolnok, also part of the Bige Group, account for the entire fertiliser production in the country – more than half of the country’s consumption – and so I sat down to talk to the expert to find out what risks we face in this area here at home.
As it turned out, there is no carbon dioxide shortage in Hungary, which is probably the only country on the continent where industry uses mined carbon dioxide rather than carbon dioxide as a by-product. The domestic regulatory environment for that is “perplexingly applied” by Nitrogénművek, because the carbon dioxide produced as a by-product of ammonia production receives no subsidies so, with no better alternative, it is released into the atmosphere. Despite the fact that it is much purer than mined carbon dioxide, and in parts of Western Europe there is an effort to compress it back into underground storage, its mining is still allowed here. It probably goes without saying that that is not a suitable method of fighting climate change.
So, there will be beer and cola but, obviously, more important are the staple foods that cannot be produced in the usual quantities without fertilisers. “Without effective fertilisation, you can produce only a third of the average yield per hectare,” stresses Dávid Bige.
When I asked him about the gas price at which the point would be reached when the Nitrogen Plant would no longer be worth operating, the board member said that, compared to the then price of EUR 76 per megawatt hour, “there is still room for improvement”. However, he also said, that since no Hungarian bank is providing financing to Nitrogénművek, in extreme cases, production could become uncertain.
According to him, it is not possible to give a precise figure, if only because Nitrogénművek follows the industry-standard gas procurement structure, which means that in today’s uncertain situation, changes in gas prices are very rapidly reflected in the price of the product. This variable cost element is absolutely crucial, with gas accounting for 75-80% of the cost price of CAN fertiliser at current levels. In the last three months alone, the price of the gas needed to produce one tonne of CAN has risen from EUR 91 to EUR 227. The September gas bill at Nitrogénművek, one of the country’s largest industrial users of natural gas, will be more than ten times higher than at the same time last year.
Electricity, which has also become very expensive, is not particularly painful for them, because ammonia production also generates a lot of steam, and one of their developments is a 2.7-megawatt turbine generator based to utilise that. That will largely cover the electricity needs of the Nitrogénművek when the ammonia plant is running at full capacity. They only need to buy electricity from the grid if they need to cut back on ammonia production for some reason.
And the equally significant increase in the price of carbon emission quotas is not a big deal, only because it is almost unnoticeable in the context of the gas price. “With last year’s low gas prices, that was a significant cost, but now it is negligible. The increase in gas prices is about four times more burdensome than the increase in quota prices,” says Dávid Bige, who also gave his views on the planned reform of the quota system.
Last year’s low was only EUR 3 per megawatt-hour of gas, compared to the brutal current level of around EUR 70 or more, though the board member says that a rise to over EUR 100 cannot be ruled out. (Since the conversation, gas prices have already started to move in that direction, yesterday exceeding EUR 85.) “Today, Bitcoin does not vary as much as that. Only, in this case, people’s lives depend on it,” he remarks. By the latter, he means that, if there were a widespread shortage of fertiliser, it would simply not be possible to produce enough food to feed Hungary or Europe. That is of course an extreme case, and there is probably no government that would not intervene to avoid such a situation.
Nitrogénművek had a 40-day shutdown in the first half of the summer and a shorter one recently though, according to Dávid Bige, both were used to carry out planned maintenance. The fact that they have been able to cope with the current price environment so far is basically due to two things.
The first is that, in the 30-year history of the Bige Group, its owner - László Bige, father of Dávid Bige, Chairman and CEO of Nitrogénművek – has already performed a EUR 600-million series of developments that have enabled it to produce more efficiently than many of its regional rivals. In other words, the cost level at which they would have no choice but to shut down as a matter of economic rationality, is much higher.
The second is that, they can pass on a significant increase in gas prices to their customers. The figures for the first half of the year show that that is not entirely the case; profits (EBITDA in the case of the company) are down 45% compared to the first six months of 2020, largely because that was only partially achieved. (Another reason is the aforementioned summer maintenance, which caused a month and a half of production to be lost in the first half of the year.) Since then, the price of gas has continued to rise, so it is not surprising that while, at the beginning of the summer, a tonne of fertiliser was offered for an average of 50 thousand Forints, by the beginning of September it was 120 thousand Forints.
“Although it’s not my decision, it’s almost certain that this year we won’t have a black Friday, when we offer farmers cheaper fertiliser,” adds Dávid Bige. Experience shows that many farmers are still waiting to see if gas and fertiliser prices will fall. However, as already mentioned, further price increases are in the cards, while reducing the amount of fertiliser used is not really an option for farmers, as that will result in a smaller harvest and therefore less income. “That would trigger a negative spiral in the farms to an extent that is feared to be fatal in some cases” notes the member of the Board of Directors.
But that is not the only reason why farmers are advised not to speculate on price falls. If too many people wait too long, logistical challenges – such as a shortage of drivers, which is already occurring in this country – mean that they may not get fertiliser in time, even if they would pay 150 or 250 thousand Forints per tonne. Although Nitrogénművek has a fleet of 160 trucks, at the beginning of the year, they wished to add another 30 to help meet spring fertilizer needs. However, the vehicle manufacturer has indicated that it will not be able to deliver them before April, which will be largely too late for the spring delivery season.
“To mitigate the risks, we recommend stocking up on fertiliser for the season as soon as possible, otherwise there will be logistical disruptions, with unforeseen consequences, in the first quarter” says Dávid Bige.
However, even if all goes well in that area, it is already apparent that, along with fuel and pesticides, among other things, the rise in fertiliser prices is a factor, which forebodes further increases in food prices. It is impossible to say in advance when that will happen and to what extent, as the prices in the shops are the result of multiple bargaining process from producers, through processors, to retail chains.
Average food inflation was 3.7% year on-year in August, a more moderate rate than the 4.9% average inflation rate. However, the expected trend is illustrated by the national bank’s September inflation report, which shows that while unprocessed food prices will rise by only 2.6% this year, they are expected to rise by 6% next year. And that is a change of such magnitude that even the very efficient sourcing methods of discount chains cannot easily make it disappear.