German chemical and biotech giant BASF has announced that it will be reducing its production of ammonia in response to surging gas prices, AgriCensus reported.

Ammonia is used to produce nitrate fertilisers such as ammonium nitrate (AN).

“We are reducing production at facilities that require large volumes of natural gas, such as ammonia plants,” BASF CEO Martin Brudermüller was quoted as saying during a media call on 27 July following the release of the company’s results for the second quarter of this year.

The higher energy costs would be passed on to consumers and farmers could expect a sharp increase in fertiliser costs next year, he added.

According to the company, the gas bill for its European production sites during the second quarter of 2022 has increased by around €8M (US$8.17M) compared to the same period last year.

The company said that, where possible, it would substitute natural gas for alternative energy sources such as fuel oil while increasing ammonia purchases from external suppliers to compensate for immediate supply gaps.

BASF also said that it expected to be able to maintain operations at its Ludwigshafen production site “at a reduced load” if the German government activated the “emergency” phase of its response plan to natural gas shortages.

Under the emergency plan, all participants in the German market are obliged to take coordinated action to avoid gaps in supply and to achieve the target storage level of 85% by 1 October.

European gas prices had surged following an announcement at the end of July by Russia’s Gazprom that it would reduce daily gas deliveries to Germany and other central European countries via the Nord Stream pipeline to around 20% of the pipeline’s capacity, AgriCensus wrote.

Germany currently imports approximately 55% of its gas from Russia with most of it being delivered via the Nord Stream 1 pipeline, according to the report.

BASF’s announcement followed a statement from leading Norwegian fertiliser producer Yara International that it was reducing fertiliser production at several plants. At the time of the report Yara International had cut output to 1.3M tonnes/year of ammonia and 1,700 tonnes/year of finished fertiliser.

Against this backdrop, the European Commission (EC) has proposed dropping tariffs on two key ingredients used to manufacture nitrogen fertilisers in a bid to reduce production costs for farmers, Olive Oil Times reported on 25 July.

According to market research firm Chemanalyst, the average price of ammonia has risen steadily over the past few years, increasing from approximately US$215/tonne in September 2020 to US$1,200/tonne by the end of March this year. Urea prices also rose in the same period, although less dramatically.

The dramatic price increases were due to a combination of factors, including Russia’s invasion of Ukraine, the closure of Chinese ports in response to outbreaks of COVID-19 outbreaks, inflation and rising natural gas prices, Olive Oil Times reported Chemanalyst as saying.

Natural gas is a key ingredient in ammonia production, while China is one of the world’s largest producers of urea.

Last year, the EU imported 2.9M tonnes of ammonia and 4.7M tonnes of urea, the report said. Belarus, Russia and Ukraine are among the top 10 exporters of anhydrous ammonia and urea to the EU, according to World Bank data.

The conflict in Ukraine had severely reduced the country’s production of both products, Olive Oil Times wrote, while the EU had also imposed retaliatory sanctions on producers in Belarus and Russia. Russia has also curbed its anhydrous ammonia exports to other parts of the world, further squeezing the market.

While several of the other main suppliers of these ingredients to the 27-member bloc benefited from free trade agreements with the EU, a substantial amount came from other countries subject to tariffs ranging from 5.5%-6.5%.

“To increase stability of supply, it is appropriate to temporarily enlarge the geographical scope of supplying countries beyond those who benefit from a free-trade agreement, as supply is currently concentrated in a relatively small number of preferential suppliers,” the EC wrote in its proposal.

The EC had added that the tariff reduction would help the EU create a more diversified portfolio of ammonia and urea imports, which would shield farmers from region-specific price fluctuations and stabilise long-term prices, the report said.

The proposal will now be passed to the Council of the European Union, which helps coordinate the adaptation of Europe-wide legislation in each member state, for review, according to the report.