It's not just gas that's going up

10/01/2021 | 06:24am

Price inflation, supply chain disruptions and idling factories... These has almost become the new normal this year, with the semiconductor crisis and the explosion in freight prices. And there is more to come, as the energy crisis in Europe adds its own set of problems, not just confined to the energy sector.

Winter is coming. The smell of gas is still strong in Europe, where the main references are setting new records almost daily. The old continent is paying dearly for the liberalization of its gas market and its dependence on foreign sources. The consequences are already being felt within the industry, where some energy companies cannot avoid bankruptcy, but also outside, since the explosion in gas prices makes heavy fuel oil more competitive for producing electricity. This shift in demand from gas to oil could push the price of a barrel towards the USD 80-100 zone according to IFP Energies nouvelles.

Evolution of the main natural gas futures contracts (expiring January 2022) in Europe (equivalent to USD 200 per barrel of oil) - source: ICE

Snowball effect. The consequences of soaring gas prices are not limited to the energy sector. Although it may seem somewhat counter-intuitive, energy price inflation could tighten the supply of some fertilizer-intensive food commodities. The fertiliser market, already battered by Hurricane Ida in the US and regulatory tightening in China, is now being hit hard by rising gas prices in Europe, a key input in fertiliser production. Last week, the UK government came to the rescue of one of its national fertilizer champions, which had announced a cut in production of almost 50%. As a result, the prices of the main fertilizers (DAP, potash, urea, etc.) have risen considerably, by around 60% since January 1, to the great dismay of agricultural producers.

The price of DAP fertilizer exceeds 700 USD per ton - source: DTN

Beijing is stepping up its involvement in rare earths. China is increasing its annual rare earth production quotas to meet demand boosted by the economic recovery. Set at 168,000 tonnes, these quotas have jumped by 20% compared to last year and are divided between six state-owned companies that Beijing aims to reorganize. Three of them are listed on the Shanghai stock exchange: China Minmetals Rare Earth Co, China Northern Rare Earth Group and Xiamen Tungsten Corporation.

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