Chemical Industry in Dire Straits from European Energy Crisis

Europe: The energy crisis in Europe is causing significant disruption to its industries. Over the past few months, a drastic drop in Russian gas supplies has resulted in a huge spike in electricity costs for countries across the continent.

This crisis is particularly hitting energy-intensive industries like Steel, Aluminium and other metals - such production has already started being cut back. Similarly, chemical companies are likely to be affected due to their reliance on energy resources too.

European chemical producers face a severe threat due to recent cuts in Natural gas supplies from Russia. The production of energy-intensive chemicals such as Ammonia, Caprolactam, Methanol and Melamine has already been reduced by more than half in some cases out of the total available capacity. If these supply reductions continue, the repercussions on European chemical production could be devastating.

Europe accounts for roughly 20% of the world's Ammonia production, and a significant capacity shutdown could lead to an increase in Ammonia-based chemical and fertilizer prices worldwide. Unfortunately, this may spell trouble for agrochemical and fertilizer makers around the globe.

The cost of goods like crops may increase if producers must bear higher costs due to the rise in Ammonia prices. Two major producers of Ammonia in India are Gujarat Narmada Valley Fertilisers Chemicals (GNFC) and Rashtriya Chemicals Fertilisers (RCF). Deepak Fertilisers is also set to commission their new Ammonia plant by August 2024, potentially increasing the production capacity of this key fertilizer component. This could lead to increased costs throughout the supply chain and, eventually, higher prices for consumers.

Caustic soda requires an energy consumption of 2,300-2,450 kWh/tonne to produce, translating to a variable cost of Euro 1,000-1,100/tonne. This could put pressure on production in Europe, where Caustic soda makes up 15-20% of global production. As a result, the market for Caustic soda is expected to remain tight; India's Gujarat Alkali, Chemfab Alkali, Punjab Alkali and Meghmani Finechem are some of the country's producers. On top of this, other energy-intensive chemical markets such as those for Caustic soda and Soda ash may also remain in tight balance.

Grasim Industries is likely to be one of the beneficiaries of an upcoming Caustic soda and Epoxy growth surge. The company plans to expand its production by more than 30% from FY22 to FY25, as well as doubling its epoxy output, providing a major boost in volume growth.