Looming Energy Crisis Could Jeopardize Industrial Production This Winter

Looming Energy Crisis Could Jeopardize Industrial Production This Winter

October 13, 2021

From China and India to Europe and North America, rising energy costs have been an increasingly common theme during the past month. Regional authorities in China, for example, have rationed power supply, requiring hundreds of chemical factories and electronics plants to halt operations. This evolving energy crisis has its origin in the shortage of two key power producing fuels – natural gas and coal. 

The supply crunch has been exacerbated by various environmental factors since the summer of 2021. Heat waves in concert with drought put pressure on electric systems in China, Brazil, North America, and the Mediterranean during the June-August period. While heat waves increase electricity demand for air conditioning, droughts decrease hydro-electric generation, leading to higher use of and demand for fossil fuels. 

The situation in Europe has been the most critical and is likely to bear the highest risk over the coming months as winter approaches. During the warmer season (April to October) of the year, supplies of heating elements such as natural gas and petroleum products are built up prior to the winter heating season. Supplies typically reach the annual low point in April and peak in October. For winter heating demand, the key component is natural gas which is used to generate one-fifth of Europe’s electricity. Nearly all of Europe’s natural gas is imported from outside the region, namely from Russia, Norway, Qatar, and Algeria. 

Going into this winter, Europe’s natural gas reserves are at their lowest levels in history for this time of the year. This is due to a myriad of reasons including less power generation from renewables such as wind, a strong economic rebound following COVID-19 lockdowns, higher maintenance on facilities which were delayed due to the pandemic, and reduced natural gas imports from Russia, the main supplier of natural gas to Europe. In 2020, 94 percent of the available storage for natural gas was full; in 2021 it stands at 75 percent, as the season to fill up gas reserves comes to completion.  

In light of this unprecedented situation of low energy reserves, the extent of power shortages and higher costs incurred will largely depend on how cold will this winter be and how much demand will be generated. In a warmer-than-normal winter scenario, heating demand will be low and the region will likely be able to get through the season without significant issues. In a colder-than-normal winter scenario, heating demand could surpass available supply, causing even higher energy prices that could curtail industrial production and transportation activities. 

Even moderately cold weather – i.e., numerous weeks of below normal temperatures across the heart of Europe – could have implications and stress the system. Implications for energy prices and potential price spikes will likely be greater if cold weather affects the region early on between November and December, as concerns will rise as to whether Europe will have enough supply to make it through the entire winter season.

Energy-intensive sectors at highest risk of disruption

The record-high natural gas prices have already led to supply chain disruptions in energy-intensive sectors from fertilizer production to food making and metal processing across Europe. Further demand increases could broaden the impact on other, unaffected industries. Last month, fertilizer producers in the UK and other parts of Europe cut their output or temporarily shut down production due to rising prices for natural gas – a key input in fertilizer manufacturing, which have made operations unprofitable in the region. While U.S.-based CF Industries, which makes hydrogen and nitrogen products, shut down its UK facilities, Norwegian fertilizer maker Yara International AS reduced production output of ammonia by 40 percent at its European plants. It also planned to halt ammonia production at its Ferrara, Italy plant from mid-October.

Other major chemical companies reducing their ammonia production due to high gas prices in Europe were BASF SE (Germany & Belgium); SKW Stickstoffwerke (Germany); Borealis (Austria); Fertiberia (Spain); OCI (Netherlands); and OPZ (Ukraine).

Energy-Intensive Manufacturing Industries at High Risk of Disruption
Agrochemicals
Chemicals
Food and beverage making
Steelmaking
Metal processing
Glass
Ceramics
Paper

Due to the challenges in the fertilizer sector, agriculture and food processing companies have faced the threat of a shortage of CO2, a by-product of ammonia manufacturing, in recent weeks. In the UK, meat processors and carbonated drink manufacturers were within a few days of having to shut down operations due to a lack of CO2 supply, until CF Industries reached a deal with the UK government to allow it to resume production. 

Disruptions have also been reported at energy-intensive zinc producers and steel mills. Nyrstar Netherlands, which produces zinc coatings used on steel and as an ingredient in plastics, batteries, and pharmaceuticals, has been running below full capacity for a few hours per day due to high electricity prices. In the UK, British Steel Ltd. and other steelmakers have also begun reducing production at certain times of the day when energy prices are at their peak, while charging an extra USD 25 a metric ton due to increased costs. 

As winter approaches, other major consumers of natural gas such as the petrochemicals, glass, ceramics, and paper industries could also be forced to reduce their energy consumption by cutting production for hours or days at a time. Most recently, energy-intensive industry representatives in the UK and Germany have warned that they could be forced to shut down production – some within a few days – due to soaring wholesale gas prices.

Further output cuts likely as winter approaches

As European governments discuss short-term bilateral and multilateral solutions to the energy shortage, including lowering taxes or setting up a strategic gas reserve to bolster their suppliers, the extent to which industrial manufacturing may experience disruption throughout the winter will largely depend on how low winter temperatures will fall. Larger corporations are more likely to be able to mitigate the impact of energy price increases, either by absorbing higher production costs, diversifying gas supplies, shifting production to other regions, or financially hedging products that shield them from sudden price jumps. 

While certainly a possibility, it remains unlikely that European governments will order energy-intensive industries to shut down operations as has recently been the case in China, in particular large chemical factories which have been classified as systematically important by national authorities. However, a lack of profitability could force other energy-intensive sectors to decide to cut output during certain times of the day when energy prices are at their peak or even stop production entirely, causing knock-on effects throughout various manufacturing supply chains. The CO2 shortage in the UK which was caused by the shutdown of the largest ammonia producer and threatened food and beverage supply chains has illustrated the interdependencies, in particular with chemicals sector. Further cuts to ammonia-producing sites in the coming months could also cause CO2 shortages for the food and beverage making sectors in Europe. 

Recommendations

In light of the wide-ranging impacts across various industries, customers with regional supply chain dependencies in the affected sectors are advised to keep abreast of the latest weather-related developments. Everstream Analytics’ Applied Meteorology team provides predictive and real-time weather impact insights that enable companies to react faster to changing weather forecasts, thus creating a competitive advantage. 

To increase sub-tier visibility  and to quickly assess impacts such as those caused by severe weather events, organizations should also consider investing in technological solutions capable of mapping out supplier networks and providing greater end to-end visibility. This includes mapping supplier networks beyond Tier 1 that can support supply chain managers to understand new patterns and manage external risks. 

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