Industry keeps secrets close to chest amid calls for Russia energy embargo

08 Apr 2022 --- The surge in gas prices is pushing costs for companies at an unprecedented pace, with fears the energy standoff with Russia may significantly impact production of basic food and nutrition supplies.

Members of the European Parliament (MEPs) have called for “an immediate full embargo on Russian imports of oil, coal, nuclear fuel and gas” in a resolution adopted with 513 votes to 22 and 19 abstentions.

Amid recent fears countries such as Germany and Austria would have to ration their power supplies, NutritionInsight speaks to industry players to understand the implications for their operations.

BASF, which includes a human nutrition division, outlines that for the company’s European sites, the additional costs resulting from the further increase in natural gas prices amounted to around €1.5 billion (US$1.6 billion) in 2021, says Philipp Roßkopf, corporate media relations at BASF.

Of this, €800 million (US$900 million) was incurred in the fourth quarter alone.

MEPs say sanctions can be rolled back if Russia takes steps toward restoring Ukraine’s territorial integrity and removes its troops.Continuous supply “essential”
Roßkopf underscores that natural gas simply cannot be substituted in chemical production in the short term, either as a raw material or as an energy source.

“A reduction in natural gas supply to less than half of current demand would result in a complete cessation of operations. If production is significantly curtailed or discontinued, significant impacts on the basic supply of the population – not only in Germany – and thus on the community can be expected.

“A shortage of natural gas would therefore have a double impact on chemical production,” Roßkopf adds.

“On the one hand, there would no longer be enough energy available for the production processes, and on the other, natural gas would be missing as an important starting material for the manufacture of products.”

Closely guarded secrets
Though NutritionInsight invited multiple sources to comment, most companies chose not to delve into the impact gas price volatility could have on their operations. 

One industry source spoke on condition of anonymity to explain that businesses tend to keep details like this “close to the vest” because it could provide a sense of how each operates. 

“All of those are closely guarded secrets and are deemed proprietary by each company.” 

An obvious cost lies in transportation, whether via trucks or fleet, with prices getting passed to consumers, they add.

Inflationary pressures adding to impact
According to Roßkopf, BASF has had to pass on the higher raw material and energy costs through price increases. Last month, the company implemented a 20% price hike in vitamin E pricing, citing “market conditions and the current geopolitical situation.” It specified it was facing additional cost escalations related to energy, raw materials and logistics.

Earlier this week, Chr. Hansen’s CFO Lise Mortensen, told NutritionInsight it is responding to the higher cost inflation evident across industry with “proactive pricing measures” and adjusting its outlook by upgrading its organic revenue growth target.

“Price increases will impact all our business areas and are to compensate for accelerating input cost inflation. We have seen substantial cost increases across all major spend categories, including raw materials, energy and logistics.”

Glanbia also specified “effective pricing actions” were implemented during the second half of 2021, to help mitigate growing inflationary pressures, which is expected to continue throughout 2022. 

Brands in premium nutrition categories are expected to have to work even harder to retain their customers, according to a recent UK and US survey, as companies and consumers alike are feeling the onslaught of the supply chain crisis and inflation.

Lithuania is the first EU country to abandon Russian gas imports, urging other countries to follow suit.

Cutting back production
Though MEPs highlight the Russia energy embargo should be accompanied by a plan to ensure the EU’s security of energy supply, the fact remains that the continent has been Russia’s primary market.

Currently, Russia supplies around 40% of the EU’s gas needs. In an attempt to reduce Europe’s reliance on Russian energy, the US and EU have signed an agreement that will see the US provide the EU with extra gas, equivalent to around 10% of the gas it currently gets from Russia, by the end of the year.

“In Europe, BASF uses about 60% of the natural gas it purchases to generate energy (steam and electricity) needed in production. About 40% of natural gas is used as a raw material to produce important basic chemicals and in the value chains that build on them, a wide range of products for almost all industrial sectors,” Roßkopf adds.

“If the amount of natural gas supplied to BASF were to be significantly reduced, we would have to cut back on the production of important basic chemicals and downstream products. The result will be that all downstream customer industries would be affected and in the processing industry, the production of many important substances for daily use would have to be reduced.”

The impact of the Russian invasion of Ukraine has compounded years of supply chain crises created by the COVID-19 pandemic, extreme weather and criminal activity. Food ingredient prices are predicted to continue rising globally throughout 2022, with many experts warning of knock-on consequences of famine, political turmoil, social unrest and economic recession.

By Andria Kades