A Teesside fertiliser factory might seem an unlikely linchpin for the UK food industry. But when CF Industries last week closed the plant along with another in Cheshire, the supply chain crisis prompted by a sudden carbon dioxide crunch caught both the government and the company off-guard.
“We were haemorrhaging cash. I was unaware of the [CO2] situation,” the US group’s chief executive Tony Will told the Financial Times. “We were as surprised as anyone by the dependent and critical nature of our CO2 to the UK’s industry. That’s why I jumped on the plane to meet with the government.”
CF shut the plants because surging prices of natural gas, from which their primary output of ammonia derives, had made them uneconomical. However, it unwittingly cut off much of the UK’s supply of food-grade CO2, a byproduct of ammonia production that is critical to sectors from beer and soft drinks to food packaging and meat.
While the Teesside plant is set to reopen after a government support package was agreed, CF said it would remain online only until alternative CO2 supplies can be found. The saga has exposed the critical roles of CO2 and CF in keeping the nation fed. Industry groups are calling for change to make the supply chain more resilient.
“We need more than a temporary fix,” said Gavin Partington, director-general of the British Soft Drink Association. “It can’t be right that a company whose products are critical to the food and drink supply chain can be allowed to close without adequate warning.”
Despite its key role in the food industry and other sectors such as nuclear power where it used as a coolant, the fact CO2 is a niche resource generated as a byproduct from industries with independent supply and demand dynamics is a big part of the problem.
CO2 is also generated by bioethanol production, anaerobic digestion and brewing; it is purified, liquefied and distributed by industrial gas companies including Japan’s Nippon Gases, Air Liquide, Linde-owned BOC and Air Products.
The crisis has not hit other countries so acutely. Christopher Carson, managing director of BioCarbonics, which supplies CO2 from biogas plants, said the reason “the CO2 crisis is always worse in the UK is because the UK is an ‘island’, so when one of the large domestic CO2 plants go down, you have to gear up a very long and expensive supply chain to import from the continent”.
The UK food chain has become more dependent on CO2 in recent decades because of increased use of the gas to stun livestock for slaughter after animal rights campaigns prompted the end of electrical stunning, according to Zoe Davies, chief executive of the National Pig Association. Meanwhile, use of CO2 in modified atmosphere packaging has grown rapidly.
UK supplies of the gas have been fragile since the winter of 2005-06, when manufacturer Terra Nitrogen halted production at an ammonium nitrate facility in Severnside because of high gas prices. Terra in 2007 formed a joint venture with chemicals group Kemira called GrowHow, which also took in the Billingham and Ince sites, and closed the Severnside plant.
The competition regulator approved that deal subject to the sale of selected assets despite what it said was “a substantial lessening of competition” in markets including CO2. CF subsequently bought GrowHow.
Until last week CF Industries, headquartered in a suburban office park north of Chicago, was little known in the UK. Founded in 1946, it is one of the largest global nitrogen fertiliser producers and is known as an uncompromising operator.
When this year’s big freeze in Texas sparked a surge in gas prices, it sold existing gas contracts it could not use for a $112m gain.
CO2, like other industrial gases, is sold under long-term supply contracts to end users. But Cliff Cain, president of consultancy Edelgas Group, said it was the least profitable of “all the gases in the industrial gas world . . . it’s a heavy molecule and gas, so transportation becomes too expensive”.
It is also hard to store for longer than two weeks because it has to be liquefied but then boils off, said Carson, adding: “The supply chain very quickly empties out.”
A previous carbon dioxide shock came in 2018 when scheduled plant outages and technical problems coincided with a heatwave and the World Cup, which pushed up demand for beer and carbonated drinks. Abattoirs switched to slower electrical stunning and wholesalers rationed beer. Risk consultants Global Counsel for the Food and Drink Federation said the episode was “a wake-up call that we need to make the UK’s CO2 chain more resilient”.
Since then, large brewers have reduced their dependence on commercial CO2 by capturing it themselves from the brewing process.
Global Counsel’s 2019 report proposed other measures to strengthen the supply chain. But little has changed, said Lilah Howson-Smith, senior associate at the group.
“It has been crowded out quite a lot by other things like Brexit and now Covid. It’s just not been the priority,” she said. But recasting the supply chain will not be quick or straightforward, analysts say.
“You could look to diversify supply,” Howson-Smith said. “What that would require is the scaling up of carbon capture and utilisation, which is ongoing but it’s not a commercialised technology.”
Andrew Saunders, agriculture director at Pilgrim’s UK, a pork producer owned by Brazilian meat giant JBS, said the Billingham plant’s reopening was “a short-term fix for a long-term problem”.
Nick Allen, chief executive of the British Meat Processors Association, said that “if a market-based solution is to be found, it will probably involve longer-term higher prices for CO2, which will be sustainable for some but not all users.”
According to CF’s Will, “$900 is the gas cost in a tonne of ammonia and the last trade in the ammonia market that was done was $700 a tonne”. While fertiliser prices are expected to rise, he said there was a limit to how much farmers would pay.
He said CF would not be making any profit from the restart and was working with the government on finding alternative sources of CO2, including imports, but that he would not run the plants while it was uneconomic to do so. Fertiliser companies are closing production in Europe, where one big distributor says CO2 shortages are looming.
In the short term, a food industry executive said the government might allow the use of non-food-grade carbon dioxide for animal and bird slaughter.
Further CO2 supplies are expected from Ensus, a bioethanol refinery also in Teeside that is the next biggest source of CO2 in the UK after CF Industries. It has been on scheduled maintenance since last week but is expected to restart next week.
Grant Pearson, commercial director, said he hoped the refinery’s reopening meant the shortage of CO2 in abattoirs “goes away or is at least reduced”.
But the food industry and retailers are calling for a longer-term solution. Richard Walker of Iceland this week dismissed the government’s response as a “short-term sticking plaster”.
Allen of the British Meat Processors Association, meanwhile, warned that CO2 would not be the last unexpected “pinch point”.
“There’s so much consolidation going on in the food supply chain, all driven by the desire for cheap food. There will be other critical points in there that we haven’t even thought about,” he said.
Reporting by Judith Evans, Emiko Terazono, Jim Pickard, Harry Dempsey and Jonathan Eley in London and Claire Bushey in Deerfield