Why the calculus for fertiliser production in Europe has changed

Hello and welcome to Energy Source, coming to you from a chilly Brussels where the even deeper chill in the air comes from acute concern over how Donald Trump’s play for Greenland will turn out.

The US president on Saturday threatened 10 per cent additional tariffs on eight European countries, rising to 25 per cent in June, in retaliation for sending a small military detachment to Greenland.

Energy markets remain pretty sanguine but the outlook is not pretty for Europe’s already suffering industrial base.

Even the export-heavy machine parts industry in Germany has backed calls from France for Europe to consider retaliating with its most powerful trade weapon, which could block US companies from accessing the EU’s single market.

That could weigh heavily on European industry. But there is another less-considered energy angle to the debate too.

The Institute for Energy Economics and Financial Analysis published figures yesterday showing that by 2030 the EU could be reliant on the US for 80 per cent of its LNG imports. That’s almost double the proportion of total gas that the EU was importing from Russia before the full-scale invasion of Ukraine.

“An over-reliance on US LNG, the most expensive LNG for EU buyers,” would contradict EU plans to enhance “EU energy security through diversification, demand reduction and making energy more affordable”, IEEFA said.

Certainly, making energy more affordable is a critical priority for the fertiliser industry, which has called out the EU for wavering on its decarbonisation policy, as we report below.

EU risks self-defeating pivot on carbon border tax

A seemingly innocuous sop to European farmers has triggered fears of a U-turn that fertiliser industry executives have warned could have acute consequences for the energy-intensive sector and cause them to pull investments from decarbonisation projects.

The European Commission said earlier this month it was exploring a temporary suspension of the EU’s Carbon Border Adjustment Mechanism — a levy on the emissions of products imported into the bloc — for fertilisers to curb costs if they suddenly rise too high. CBAM, which came into force on January 1 but was first proposed in 2021, taxes high-carbon imports to ensure European companies paying for expensive carbon allowances aren’t undercut by dirtier, cheaper rivals.

For the fertiliser industry, whose production costs are 60 to 80 per cent based on natural gas prices, removing this shield risks changing the calculus for operating in Europe from difficult to impossible.

Svein Tore Holsether, chief executive of Yara International, one of the world’s biggest fertiliser producers and buyers of natural gas, told Energy Source that the mere suggestion of a suspension has upended years of planning. “Which boardroom can make a decision based on expected policy when it takes seven days to create uncertainty?”

Yara had been preparing its business model for CBAM for seven years, Holsether said. He has now warned that if imported CO₂ becomes free again in the event of CBAM being suspended for fertilisers, investing in low-carbon production in Europe makes no financial sense.

“We’re deindustrialising Europe, and we’re creating new dependencies,” Holsether said.

The uncertainty has had an instant impact on calculations over capital investments. Yara was reconsidering a major low-carbon ammonia project in Louisiana, intended to supply greener feedstock to Europe, Holsether said, because the business case relies on CBAM levelling the playing field. Without CBAM, “it would still have a profitability. But not high enough to justify the investment.”

The company could also reconsider investments in Europe, if the EU backed away from its commitment to carbon pricing, Holsether said. Yara has recently invested about €200mn ina carbon capture plant atSluiskil in the Netherlands.

For Petr Cingr, chief executive of SKW Piesteritz, Germany’s largest ammonia producer, CBAM already had holes.

For instance, CBAM covers ammonia and fertilisers but not other “technical” substances such as nitrogen, melamine and AdBlue, which is used to cut harmful emissions in diesel cars, making these downstream products cheaper and opening up a loophole in the system, Cingr said.

He also argued that European industries were to some extent fighting physics as they tried to maintain competitiveness in a decarbonised world.

A solar installation in Oman yields 6,000 hours of sunshine annually, compared with just 1,800 in central Europe. With European electricity costs often set by the marginal price of gas plus carbon certificates, European producers are structurally uncompetitive.

“If you have a patient which is already dead, you can give him the best medical treatment . . . but in the end, the patient is still dead,” Cingr said.

SKW has already closed one ammonia facility in France and is negotiating to close another, with German lines potentially next. If the alternative is importing ammonia, Cingr noted that this would only increase emissions. If Europe outsources production to China — where the energy mix relies heavily on coal — global emissions for that ammonia could rise by 47 per cent, he argued.

The irony of the Commission’s potential pivot is that it may undermine the very strategic autonomy it seeks to protect.

By decreasing local margins through high carbon costs while potentially waiving border taxes for foreign competitors, Europe risks handing market share to the lowest bidder, the CEOs argued. Cingr noted that Russia remains a dominant exporter and Europe has continued to buy fertiliser from the country because it is “very cheap”.

“We destroyed the strategic autonomy in Europe on energy,” Yara’s Holsether said. “Now, why do that for food security?”

He argued that instead of suspending CBAM, the EU should collect the carbon revenues and recycle them directly to farmers to cushion the blow. This would protect the agricultural sector without destroying the investment case for green industry.

The CBAM move has triggered fears of ripple effects across other parts of EU green policy. Already, four German MEPs have requested that the chemicals industry be exempted from the bloc’s emissions trading system.

“This could set a dangerous precedent,” Leon de Graaf, acting president of the Business for CBAM Coalition, said. (Alice Hancock and Susannah Savage)

Power Points

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• The great oil head fake: despite today’s oversupply, crude is poised to rise, writes Rana Foroohar.

• A new report suggests the EU should relax its targets for the phaseout of polluting cars in order to better support the industry.

Energy Source is written and edited by Jamie Smyth, Martha Muir, Alexandra White, Rachel Millard, Malcolm Moore and Ryohtaroh Satoh, with support from the FT’s global team of reporters. Reach us at [emailprotected] and follow us on X at @FTEnergy. Catch up on past editions of the newsletter here.