A natural gas shortage across Europe has created supply-chain shocks, as seen in the food industry, where problems continue to worsen. European natgas prices are at insane levels, triggering a domino effect of output reduction or closures of fertilizer plants on the continent.
Last month, two of the U.K.'s largest fertilizer factories producing 45% of domestic demand closed, and one shortly reopened with government aid. By late month, Austrian fertilizer producer Borealis AG slashed ammonia output after the cost natgas compressed margins in an industry facing tight supplies.
As the dominos fall, SKW Piesteritz, Germany's largest ammonia producer, announced a 20% reduction in ammonia production due to the record-high natgas prices on Tuesday.
"The level that has now been reached no longer enables economically sensible production, so that we are forced to take this step," the company told Bloomberg in an emailed statement.
"Without government action, there is a risk of production being halted shortly," the statement continued.
We've seen this story play out when U.K.'s C.F. Industries shuttered two plants last month because of soaring natgas prices and caused an immediate disruption to the food industry. Then the government swooped in with emergency orders to restart at least one of the plants.
As a refresher, natgas is used to synthesize ammonia for nitrogen fertilizers for the farm industry, and a byproduct is CO2, used heavily in the food industry, for food packaging to stunning animals at slaughterhouses to bubbly soda pop.
Bloomberg's Mike Dennis created an infographic of European natgas prices and the events surrounded by rising prices.
The main reason behind the natgas price surge is the dramatic reduction in gas flows from Russia. Europe's top supplier, Russia, into Germany's Mallnow via the Yamal-Europe pipeline, plunged 28% Y/Y as of Sept.
Meanwhile, European politicians have been trying to pin the cause of Europe's energy crisis on the Kremlin and Gazprom in hopes of deflecting from their woeful mismanagement of the continent's energy grid. Russia announced this week that the Nord Stream 2 natgas pipeline has begun filling with gas in the first line while awaiting approval from Germany regulators, which could take months while the continent's natgas stockpiles dwindle below seasonal averages ahead of winter.
This means that the shortage of basic chemical materials can increase food inflation, just as the global economy could be stumbling into a stagflationary period.