How Europe’s Energy Crisis Could Turn Into A Food Crisis

Authored by Irina Slav via OilPrice.com,

Runaway energy inflation has taken a toll on European industry, but another threat is looming.

Europe’s two biggest fertilizer suppliers, Russia and Belarus have retaliated against European sanctions by cutting off fertilizer exports.

The fact remains that the global food chain, especially its European links, is not in a good place right now.

Runaway energy price inflation has wreaked havoc on European industrial activity, with the heaviest consumers taking the brunt. Aluminum and steel smelters are shutting down because of energy costs. Chemical producers are moving to the United States. BASF is planning a permanent downsizing.

There is, however, a bigger problem than all these would constitute for their respective industries. Fertilizer makers are also shutting down their plants. And fertilizer imports are down because the biggest suppliers of fertilizers for Europe were Russia and Belarus, both currently under sanctions.

Both countries have retaliated against the sanctions by cutting off exports of fertilizers to Europe, and European officials repeating that fertilizer exports are not sanctioned is not really helping. 

Russia accounts for 45 percent of the global ammonia nitrate supply, according to figures from the Institute for Agriculture and Trade Policy cited by the FT. But it also accounts for 18 percent of the supply of potash—potassium-containing salts that are one of the main gradients of fertilizers—and 14 percent of phosphate exports.

Belarus is a major exporter of fertilizers, too, especially potash. But Belarus has been under EU sanctions since 2021 on human rights allegations, and unlike Russia, it has seen its fertilizer industry targeted by these sanctions. This has made for an unfortunate coincidence for Europe and its food security.

“The value chains were incredibly integrated,” the chief executive of Norway’s Yara International, a fertilizer major, told the FT this week. 

“When you look at the map — where Europe is, where Russia is, where the locations for natural resources are — these chains have been created over decades. Even during the coldest parts of the cold war, these products kept flowing so business was running. And that all changed radically in the course of a few days.”

Like with gas, although prone to acting before thinking, the EU has started looking for alternative fertilizer supplies. Morocco is one option, Euractiv reported earlier this month, as the country already supplies some 40 percent of Europe’s phosphate. This figure could even increase substantially.

Central Asia is another option, and more specifically, Uzbekistan. Uzbekistan exports fertilizers mostly to Asia and some Middle Eastern countries at the moment, but this may well change after an EU-Central Asia ministerial get-together, which is taking place right now in Uzbekistan.

So, on the one hand, local fertilizer production has been decimated by sky-high energy costs. On the other hand, sanctions have elicited a response from Russia that was probably not expected, although it should have been: exports have been slashed, leaving import-dependent Europe vulnerable to food shocks, and exposing yet another dangerous dependency.

There does not seem to be an immediate solution to the problem, and there may not be for a while. Even if Europe finds sufficient replacements for all Russian and Belarusian fertilizer imports, its bill will swell in a way similar to its gas bill when it switched from Russian pipeline gas to LNG. And this will feed inflation 

The Institute for Agriculture and Trade Policy, a sustainable farming advocacy, warned in a recent report that the world is “addicted” to chemical fertilizers. Advocacy aside, however, the report said that fertilizers are getting quite expensive.

“G20 nations paid almost twice as much for key fertiliser imports in 2021 compared to 2020 and are on course to spend three times as much in 2022 — an additional cost of at least US$ 21.8 billion. For example, the UK paid an extra US$ 144 million for fertiliser imports in 2021 and 2022, and Brazil paid an extra US$ 3.5 billion,” it said.

Of course, a big part of this inflation is due to energy cost inflation since fertilizer production is an energy-intensive process. The fact remains that the global food chain, especially its European links, is not in a good place right now.

Russia continues supplying fertilizers to African countries, for example, but African countries haven’t imposed sanctions on Moscow. And Europe can’t really do a U-turn and remove sanctions because that will be the end of any reputation the EU has left.

Someone who subscribes to the IATP’s argument that the world is dangerously addicted to chemicals might see an opportunity in this fertilizer crisis. The Dutch government may actually embrace it as it pushes for a 70-percent reduction of nitrogen emissions from farming—a push that ignited mass farmer protests in the country.

Yet the recent events in Sri Lanka suggest that shaking off the fertilizer dependence might be unwise, especially if done suddenly. In this sense, the fertilizer addiction is as strong as the fossil fuel addiction some say humankind is suffering from. The silver lining is that a crisis prompted by overwhelming dependence on external suppliers could result in becoming less dependent on these suppliers, one way or another.

Tyler Durden
Tue, 11/22/2022 – 03:30

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