Barclays says the EU is heading for a “deep recession.” Goldman Sachs calls the situation in Europe “dire”. At this point, FTSE Europe is going to become a distressed asset. Its latest problem: fertilizer shortages.
Europe has been in crisis mode for two years, maybe more if you want to count the post-2008 Great Recession and the Brexit — UK’s exit from the European Union. The latest one is well known: energy. The other one is food, and the inputs needed to grow it, many of which are oil and gas derivatives or require massive caloric inputs for production. These crises are due to policy failures and the Russian war with Ukraine. Here’s the latest in a line of shoot-self-in-foot EU “accomplishments”.
On August 25, Yara International of Norway said it will cut output of nitrogen-based fertilizer in the face of soaring natural gas prices, putting more pressure on food inflation in a region wrecked by high commodity prices.
Other fertilizer companies in Europe are temporarily ceasing operations due to high input costs – mainly natural gas. This is only getting worse because Gazprom is no longer shipping gas via Nord Stream, the Russia-to-Germany pipeline that was one of the main sources of imported natural gas for Western Europe. This is Putin’s punishment of Europe for supporting Ukraine.
Yet, natural gas prices are recently fallen as speculators cash out following huge run ups in prices this year. The UKs lifting of its fracking ban and talk of a return to nuclear energy have also helped lower prices.
Natural gas prices will have to keep falling. They are still up by more than $100 per megawatt hour from where they were in June.
That impact is being felt in the newly shrinking fertilizer business.
Poland’s Grupa Azoty and PKN Orlen announced plans to stop producing nitrogen-based fertilizers in August, along with Yara. CF Fertilizers of the UK just stopped producing fertilizer back in September 2021, citing input costs associated with fossil fuels.
A September 6 op-ed in Newsweek hit the mark: Europe’s Energy Crisis is Turning into a Food Crisis.
About 70% of the cost of producing fertilizer is the price of natural gas. Europe needs these prices to keep falling.
According to the CRU Group, a business intelligence firm specializing in commodities, fertilizer producers in the EU are losing about $2,000 for every ton of ammonia they produce. (Ammonia, made of one atom of nitrogen and three atoms of hydrogen is a key component in making fertilizer.) In early 2021, a ton of ammonia was costing farmers in Western Europe about $250 per ton. That same fertilizer today is selling for about $1,250 per ton.
Russia Locked Out in Almost Every Way
Russia has been locked out of the market, but the higher prices being fetched for its products — like fertilizer — mean companies are weathering sanctions, for now.
Russia accounts for roughly 10 % of global production and 20% of international fertilizer trade. A United Nations deal in early September to unblock shipments of Ukrainian and Russian fertilizer and grain at Black Sea ports was the biggest breakthrough in the war so far. Russia’s government said that the deal was not enough. It does little to remove restrictions and bottlenecks deeper along the supply chain.
There are no direct bans on Russian fertilizer, but there are indirect sanctions – such as sanctions on individual company owners, business executives at these companies, finance, machinery, spare parts, and the logistical sanctions on shipments via the sea and the rail through the Baltic States.
Russia had retaliated against Europe in March for sanctions by temporarily halting fertilizer exports. They changed their tune when it became clear that clients in other countries that may be buyers of that fertilizer via Europe would be in big trouble –in Africa, for instance.
Russia has imposed restrictions on its some fertilizer exports in the past. They did this in November 2021 to shore up supply for local farmers.
The fertilizer market didn’t signal a crisis then because there was no threat of natural gas prices going haywire. That ended when war broke out in Ukraine in February.
Since, there have been numerous detours of Russian fertilizer and raw materials necessary for their production especially in Latvia, Lithuania, and Estonia. Those three Baltic states have been in a Cold War with Russia over the last 10 years. Rail transit through those countries, as well as transshipment through their ports, is restricted. This is one of the main routes for the supply of Russian fertilizer into Europe. For example, 80,000 tons of fertilizer are stuck at Port in Estonia and present a huge threat to the local community.
Russia lacks the port terminals to get around these restrictions. The supply chain was set up for distribution through the Baltics and cannot be changed easily. Russia has limited export capacity there as well.
On August 10, 2022, the European Union trade commission published an update on Russian sanctions. The updated FAQ included rules relating to the carriage of certain cargoes from Russia, including coal and other solid fossil fuels as well as fertilizers. It told insurers and shipping companies that bans on companies servicing exports of some fertilizers applies to shipments anywhere in the world. Those sanctions extend to financing and insurance by EU companies, irrespective of the origin of the company performing the transfer – meaning a European-headquartered company sourcing raw materials in Russia would face sanctions risk. This puts Russian fertilizers in a sort of purgatory, with access to seaborne routes a compliance nightmare. Ukrainian grain is now getting out of the country and finding its way to Europe.
The largest Russian fertilizer companies – none of them sanctioned – are also hamstrung financially to conduct business operations because their bank accounts in Europe have been frozen. In some cases, European banks reluctantly accept payments in fear of getting hit with sanctions fines. Left with a restricted ability to conduct financial transactions, Russia’s fertilizer trade becomes a three-legged horse hobbling towards a European agriculture market that still wants it to make it across the finish line.
In some cases, personal sanctions on individuals linked to companies makes it off limits, or less attractive to importers. Vladimir Rashevskiy resigned as Chief Executive Officer of EuroChem Group on March 15, 2022, following sanctions imposed by the EU.
The company’s founder, Andrey Melnichenko, was also sanctioned. Switzerland’s official attitude towards the company based on the sanctions of those two individuals was that if the company fails, it fails.
“EuroChem, as a Swiss company, is legally bound to comply with Swiss law, including sanctions,” Switzerland’s State Secretariat for Economic Affairs told Reuters in June. “It is up to Eurochem to take the necessary measures within the Swiss legal system to allow the company to continue to exist.”
Samir Brikho, EuroChem’s chairman, said about the sanctions policy that, “We note the announcements by the European Commission in recent days, but we are yet to experience any degree of protection and see a disconnect between EU goals and reality.”
EuroChem is not alone.
Uralkali, one of the world’s largest producers of potash, is also free from sanctions, but its majority shareholder, billionaire Dmitry Mazepin, a well-known Formula-1 fan, is not. He ceded control of the company in March, cutting his stake to 48%.
PhosAgro’s CEO Andrey Guryev had to do the same thing. He is sanctioned, too.
On August 20, 2022, UN Secretary General Antonio Guterres announced that the United Nations was working with the United States and European Union to overcome obstacles to Russian fertilizers reaching world markets.
“There are a certain number of obstacles and difficulties that need to be overcome in relation to shipping, to insurance and finance. Getting more food and fertilizer out of Ukraine and Russia is crucial to further calm commodity markets and lower prices for consumers,” he said.
Russia’s biggest companies are worried that sanctioned executives, even those who have stepped down or relinquished ownership, will make things harder for them to do business with Europe.
Russian Foreign Minister Sergei Lavrov said on September 6 that he was speaking to the United Nations about the food and fertilizer issues but lacks credibility as Russia’s chief advocate of the war in Ukraine.
“We’re continuing to work through a number of hurdles within the existing sanctions regimes to facilitate the export of Russian grain and fertilizer,” U.N. spokesman Stephane Dujarric said earlier this month.
Last month, Interfax news agency cited Russian trade minister Denis Manturov as saying that fertilizer exports fell 7% in the first half of the year.
But thanks to higher prices, Russian companies are doing okay. These are off limits for US investors. PhosAgro, which used to trade on the London Stock Exchange and watched its share price collapse from a high of GBP23.64 on February 16 to 0.05 pounds, said in their August 18 earnings release that revenue for first half 2022 revenue increased by 90.9% RUB 336.5 billion ($4.4 billion). Fertilizer sales increased by 10.2% year-on-year to almost 5.7 million tons
That’s not a cash windfall for the Putin war machine, though. Proceeds from fertilizer sales account for one-tenth of a percent of the Russian budget. Sanctioning fertilizer producers while Europe and the world are starved for fertilizer makes as much sense as shooting oneself in the foot.