European Natural Gas prices surged on Tuesday to €295 per megawatt hour, and subsequently retreated, following Russia’s warning that it could cut supply in response to European sanctions.

Since Russia invaded Ukraine, natural gas futures prices, like those of most other commodities, have soared and are highly volatile.

This has prompted renewed concern that the cost of manufacturing nitrogen fertiliser in Europe is set to soar.

Natural gas is the main ingredient in nitrogen manufacturing, accounting for 80% of the cost.

Based on the Irish Farmers Journal Urea Manufacture Cost model, Tuesday morning’s European gas price of €220 per megawatt hour would result in an estimated urea price of roughly €1,900/t for farmers.

A gas price of €18 per megawatt hour, indicative of prices last spring, would result in an estimated urea price of €375/t for farmers.

How the model works

The model (Table 1) generates urea manufacturing costs based on different natural gas prices.

It reflects the impact natural gas price has on farmgate prices. A producer’s margin has been assumed at €100/t. Producer refers to large international companies that are primary producers of nitrogen. An additional €100/t has been added as an estimate to cover Irish importer and merchants supply chain costs and margins. This figure varies over time, reflecting handling, transport, packaging and palletising costs, all of which increased in the past 12 months.

Fertiliser availability is already a growing concern as Russia is essentially locked out of the market.

Soaring gas prices look set to exacerbate an already fragile situation, pushing nitrogen costs to what would be unsustainable levels. As most fertiliser for the current season has been purchased and imported, current surging gas prices are unlikely to significantly affect the market this spring.

Gas prices between now and autumn will determine next season’s nitrogen prices.

Egyptian granular urea prices for March were trading at $950/t (€873/t) on Tuesday, up from $850/t (€766/t) last week.