While the Russian invasion of Ukraine has largely fallen from the daily headlines, the economic effects of the conflict are still being felt worldwide. Prior to the conflict, the European Union (EU) imported 40% of its natural gas from Russia, with Germany as their largest consumer. Nearly 1/3 of Germany’s natural gas was supplied by Russia prior to the attack and occupation of Ukraine. Sanctions on Russian exports coupled with pipeline shutdowns have thrown Germany and other EU nations into an unprecedented energy shortage.
With the heating season rapidly approaching in Europe and the already astronomically high cost of energy, the chemical industry has valid cause for concern. Gas prices continue to reach record highs. Combined with inflation, the energy situation in Europe has been described as “dire” by analysts (1) while European currency valuations drop.
Chemical production is an energy-heavy process, requiring massive amounts of power on a constant and consistent basis. With many major chemical manufacturers located in the EU, the energy crisis will continue to have widespread effects. Some manufacturers have already declared full or partial force majeures, though others have been working to become less dependent on natural gas. Germany-based Evonik, one of the largest specialty chemical producers in the world, recently announced that they would be substituting up to 40% of its natural gas with liquefied petroleum gas (LPG). (2) Covestro, another major chemical manufacturer based in Germany, is actively attempting to reduce its gas requirements to prevent shutting down sites due to gas rationing. They are warning others in the industry that this rationing could result in the “collapse of entire supply and production chains.” (3)
While changes like this may help in the long run, the chemical industry in this region is just making its way out of an additional obstacle: drought. As a result of record high temperatures and low rainfall, the Rhine River had fallen to dangerously low levels, impacting the transit of raw materials out of the chemical plants along the river. Germany depends on the Rhine for 80% of its water freight (4). Earlier in August, parts of the river fell to levels that made it impossible for heavy barges to traverse the waterway.
The area hit hardest by the drought was near Kaub, home to BASF, the world’s largest chemical producer. BASF made immediate adjustments, developing ships that are adapted to low water, and increasing rail transport. Europe, like the US, has struggled with driver shortages, making road transport extremely difficult during this disruption of river transport. In addition to challenges of finding and procuring road freight, the cost of replacing river transport has been astronomical, with around 40 trucks being required to haul the content of just one barge. As of today, the Rhine water levels are increasing, but the impacts of climate change may make this an ongoing or permanent issue that is likely to continue to affect the chemical industry and the global supply chain.
The European market has a massive impact on the chemical industry worldwide. Energy costs, fuel shortages, and climate change are just a few of the major issues that are currently hindering growth and creating instability in the EU market. This can quickly have a domino-effect around the globe, as supply chains tighten to their breaking point. As we approach the heating season, energy and fuel production – especially the distribution of natural gas from Russia to the EU – will be key areas to watch while planning for future raw material orders.