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Recent press reports (click here) suggest that Russian gas flows via the Nord Stream 1 pipeline are likely to resume from 21st Jul’22 (albeit at less than its capacity), after the completion of scheduled maintenance. This, in our view, is a positive for several European chemicals producers that were under severe threat of complete shutdowns, in case of further Russian gas cuts (click here). However, we believe natural gas availability could continue to be a challenge during the upcoming winter season amid dwindling inventory levels of natural gas in EU underground storage sites. As a result, going forward, prices of several natural gas based chemicals such as ammonia, and nitric acid could continue to remain high while prices of the ethylene chain (ethylene oxide, ethylene di-chloride, ethylene glycol, etc.) and the methanol chain (formaldehyde , acetic acid, ethyl acetate, methyl amines, etc.) chemicals could rise again after the recent correction (refer Exhibit 1). In India, ammonia and nitric acid producers include GNFC, and Deepak Fertilisers. Methanol chain chemicals are produced by Laxmi Organics, Jubilant Ingrevia, Balaji Amines, etc.

* Limited availability of natural gas has kept several chemical prices elevated: Russian gas supplies to the European Union have been falling since the beginning of Jun’22 (refer Exhibit 2). Natural gas is used to manufacture several basic chemicals such as ammonia, ethylene, methanol, etc. Due to limited availability of natural gas, ammonia prices have been consistently rising since the last couple of months. This has resulted in price increases for several downstream products of ammonia such as urea, nitric acid, amino acids, acrylonitrile, formamide, etc.

* Increase in natural gas prices result in higher cost of production for several chemicals: Increase in natural gas prices could have a two-fold impact on the cost of production of several chemicals, a) when natural gas is used for process power as a utility (excluding electricity prices) and b) when methane is used as a raw material. Basis several industry estimates, the highest total impact on rising natural gas prices could be seen on acetylene, acrylic acid, ammonia, 1,2- butanediol, and acrylonitrile among others in that order. The only chemical that shows a decrease in production cost due to increase in natural gas price is Tetrahydrofuran (THF). Balaji Amines has highlighted in one of its conference calls that it would be one of the first producers of THF in India (click here).

* European gas inventories to decide the price trajectory of natural gas and, in turn, chemicals: European natural gas inventories are currently below the 5-year average (refer Exhibit 3). Last winter (Oct-Nov’21), inventories were significantly below the 5-year average levels. Moreover, there was power rationing in China, and Covid restrictions in several countries in addition to logistics issues. As a result, European gas prices jumped to USD 60/mmbtu (refer Exhibit 4). This led some European chemical majors to curtail production of several chemical and fertiliser units indefinitely (click here, here, and here); there was also a sharp jump in prices of several basic chemicals (refer Exhibit 6). Keeping this in mind, the EU Council has adopted a regulation that states that underground gas storage on member states’ territory must be filled to at least 80% of capacity before the winter of 2022/2023. As a result, industry estimates suggest that EU natural gas inventories could be slightly higher than the 5-year average levels in the upcoming winter (refer Exhibit 5). However, any incremental disruption of Russian supplies could derail the EU’s plan and lead to a situation similar to Oct-Dec’21, when prices of several basic chemicals rose significantly. Hence, in our view, natural gas-based chemical prices could remain elevated till the supply situation in the EU improves. This could benefit several Indian basic chemicals manufacturers of ammonia, nitric acid, ethylene di-chloride, etc. Moreover, elevated gas prices could also lead to higher energy costs specifically in Europe. This could trigger a shift from Europe to India for several specialty chemicals.

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