CO2 supply agreement reached as chemicals sector suffers climbing costs

UK industry has reached an updated agreement to ensure supplies of CO2 keep flowing as a trade group survey warns of growing pressure on the chemicals sector.

The supply agreement was announced by the UK Government’s Department for Business, Energy and Industrial Strategy, which was forced in September last year to step in and pay for CF Industries to keep producing CO2 at its Billingham ammonia complex after escalating energy prices forced the fertiliser manufacturer to halt operations. A month later, the Government waived competition law to allow downstream industrial gas users to agree a short-term price-fixing deal to keep supplies flowing, but that deal ended this week.

The Government announced on 1 February that a new deal has been struck but has not revealed any further details. Downstream users have warned that a shortfall in CO2 threatens food production where the gas is used to stun animals sent for slaughter and in packaging to extend the shelf-life of some foods.

The British Meat Processors Association said news of an agreement is a relief but cautioned that it will impact food prices.

“Although our members are still waiting to find out the price level that’s been agreed, this will become clearer once new orders and contracts start to be processed. Higher CO2 prices will certainly add to food price inflation but, for the meat industry, particularly the lamb/beef producers, it’s not a significant component of overall costs. However, when many input costs go up at the same time (for example energy and wages) it will inevitably start to put pressure on food prices. The longer-term concern would be if CF Industries decided to pull out of UK production in the future but, given the fluctuation in energy and other input prices, it’s hard to predict when or if that might happen.”

Chemical sector survey results

This week, Steve Elliott, CEO of the Chemicals Industry Association (CIA), said: “With energy prices increasing by at least 500% for many companies over the past 12 months, raw material costs rising by an average 30% and shipping delays showing little sign of easing, these are the most challenging times in recent memory for UK chemical businesses.”

The CIA’s quarterly survey of 45 chemicals businesses including multinationals and SMEs, conducted in January, revealed that more than 95% of respondents had seen raw material costs increase in Q4 and 79% expected them to rise again this quarter. 89% of respondents said energy costs had increased in Q4 and 71% expect them to increase again through Q1 2022.

Tom Warren, CIA’s Head of Economics, said: “The costs for a trade-intensive sector are also escalating, with 74% of respondents reporting that the cost of importing increased in Q4 2021 while 67% reported increases in the cost of exporting – a situation not expected to improve in Q1 2022.”

Elliott said: “The scale and cumulative impact of these rising costs will inevitably put pressure on investment decisions for UK chemical businesses, many of which are headquartered overseas. Whilst it’s true that many of these price rises are also being felt around the world, we do urge the Government to act now to address costs which are within its control. The coming weeks will confirm if that can be achieved in the regulatory area as we reconsider the current design of UK REACH and we believe a similar approach should be taken to address increasingly uncompetitive gas, electricity and carbon costs for one of the UK’s critical manufacturing industries.”

48% of respondents said they expect sales will increase this quarter while 11% expect a decrease. The CIA said after five successive quarters of new orders growth and improvements in capacity utilisation, both metrics displayed a small contraction in Q4 though it said they are expected to bounce back this quarter.

Elliott said: “It is perhaps remarkable then that the industry continues to show some growth – a tribute to the fantastic performance delivered by every worker in our sector, right across the UK.”