Wholesale prices are rising
Natural gas prices in the UK and Europe are rising to record levels which is impacting fertiliser, feed and domestic energy prices. In the last 6 months they have risen by over 50% which is putting significant pressure on suppliers. Yesterday, CF Fertilisers, which is responsible for 40% of the UK’s domestic fertiliser supply, announced soaring prices were forcing it to shut its two plants in Cheshire and Teesside. CF have said, “they do not have an estimate for when production will resume.”
Why are wholesale prices increasing?
- Prolonged cold winter
- Rising demand
- Lack of wind
- Supply disruption
Prolonged cold winter
Last winter saw prolonged cold weather in Europe and record cold temperatures in Northeast Asia. This led to very high gas prices both in Asia and Europe as gas stocks in Europe have taken longer to replenish. Significant Liquid Natural Gas (LNG) volumes “displaced” from Europe to Asia, particularly China.
Increased Asian gas demand during summer has further limited LNG imports to Europe and driven prices upwards. As more businesses reopen fully after the coronavirus economic slowdown and we head towards the peak winter months, demand will increase further.
Lack of wind
The UK is increasingly using renewable sources of energy such as wind and solar to generate energy, but unseasonably calm weather has meant wind farms have not produced as much energy as expected. This is consequently pushing up the price of traditional fuels such as natural gas and electricity.
Despite the UK’s increase in renewable energy, we still import a large proportion of gas. Supply from Russia is significantly lower than usual which is leaving storage levels at record lows. Furthermore, droughts in China and Brazil have led to lower hydropower generations, meaning there’s more competition for gas which is having an inflationary effect.
A fire at an interconnector between Britain and France on Wednesday exacerbated disruption further as it will reduce imports from France until March according to National Grid. This resulted in an increase of over 18% in the already record UK day-ahead price.
What does the future look like?
Whilst no one has a crystal ball there are signs that the current conditions will subside and prices will cool off. Windier conditions are forecast from the end of September which will reduce the demand for energy generated from traditional fuels. Russian LNG storage levels are currently low which is causing concern in the market, however this could be offset by the completed Nord Stream 2 Pipeline into Germany at the beginning of 2022, as well as Norway’s Troll gas field now coming back online following a period of maintenance. New UK interconnectors with Norway and France are also set to go live by the end of 2021, which will potentially increase import to the UK by 3000 MWh compared to last winter.
What we’re doing to help Members
The inflationary pressures on the wholesale market are considered transitory and the long-term outlook is for prices to abate. That’s why we are not committing our Members to three-year contracts from the beginning of October, when the current contracts expire. Instead, Sophie Britch and your AF Energy team are making a shorter 6-month commitment before moving to buying electricity in smaller increments. Sophie said, “Rather than re-tendering the whole AF energy portfolio on a single day, we will be purchasing energy for Members in increments. This means we can buy at the best possible times. We will even be buying a proportion of our portfolio’s energy requirements up to 3 years in advance, helping us to mitigate market volatility risk for Members.
From April, if the market drops substantially during a twelve-month contract, the ‘flex’ contract also gives us the ability to sell back some of the energy that we have purchased and buy it back at the better price. If this does happen, we would be able to provide Members with a price adjustment.”
Yesterday, CF Fertilisers, which is responsible for 40% of the UK’s domestic fertiliser supply, announced soaring prices were forcing it to shut its two plants in Cheshire and Teesside. CF have said they “do not have an estimate for when production will resume”. With prices for ammonium nitrate already up circa £100/tonne on last year, the closure of the CF plants in the UK is unprecedented with indications that European manufacturers may be following suit. We expect the initial shockwave to ease over the weekend and hope to be able to provide members with a degree of clarity on the situation as next week unfolds. We estimate that this has left a 35-40% shortfall in the market and consequently we are working with suppliers across the globe to fulfil the potential shortfall.
Matt Kealey, Head of Crop Production, said, “This is a perfect storm for the fertiliser industry, and we are working flat out to help Members. Our independence and vast supply network mean we are negotiating hard for alternative supply at competitive rates. We have gone one step further and are working with other buying groups to see how we can pool our resources to ensure Members are not left short and are able to maintain the quality of their crops.”
AF Livestock & Feed
The potential impact in the reduced supply of ammonium nitrate is likely to impact on the availability and price of alternative nitrogen sources such as urea. Feed grade urea suppliers have been notifying us of potential shortages as a consequence. Kristian Dunham, Head of Livestock, said “We are advising Members to speak to us now about their winter requirements. Also, Members should consult their nutritionist and consider alternative quick-release protein options.”