European gas and power prices have shot up in recent days to fresh record highs, which could prompt another wave of shutdowns in energy-intensive industries.
European gas prices broke records on six consecutive sessions before softening somewhat today. Argus assessed the front-month contract at Europe's benchmark Dutch TTF hub at €284.95/MWh on 22 August, up by 15pc from the day before and almost twice as high as at the start of July.
Europe's power prices have been on a parallel trajectory. The German fourth-quarter base-load power contract hit €780/MWh yesterday, up from €630/MWh at the previous close.
The intertwined surge in gas and power prices early this week was partly driven by Russian state-controlled Gazprom's announcement late on 19 August that flows through the Nord Stream pipeline to Germany will halt for three days from 31 August for maintenance. This latest announcement has reignited fears that supplies through the pipeline will come to a permanent standstill sooner rather than later.
A deepening crisis in the power sector has further supported prices. Extremely low water levels on the Rhine river in recent weeks have restricted coal supplies in Germany, reducing the extent to which coal can be substituted for gas in the power sector. Meanwhile, depleted hydropower reservoirs across the region because of severe droughts point to limited generation from this source into the winter, while low availability of the French nuclear power plant fleet has required France — typically an exporter of power — to turn to net power imports.
On top of that, fears of more utilities going bankrupt because of eye-watering wholesale gas and power prices may have further contributed to soaring prices. And extremely high outright gas prices translate into higher margin requirements from brokers and exchanges, which can force some companies to unwind positions, and in doing so drive prices higher.
Energy-intensive industry at risk
The renewed surge in Europe's gas and power prices raises the likelihood of further widespread industrial plant closures.
Rising gas and power prices and the risk of rationing are a continuing concern for Europe's chemical industries. Many producers are intensive users of gas as both a fuel and feedstock, but so are customers further downstream the chemicals supply chain.
Producers may resume initiatives to pass through increases in contract prices or surcharges, but this will be met by resistance from consumers. Supply and demand will both be more volatile because of the increase in costs and in the event of energy rationing. Many producers are already substituting fuels where possible and optimising production levels.
Feedstock replacement is more challenging. Should the impacts become more serious, they will spread through the chain because of the interconnectedness of the industry. Even those with apparently low direct exposure to gas and power costs can be impacted in their supply chain.
If gas prices are sustained at these higher levels, this will also threaten the future of EU fertiliser production. Farmers are price-sensitive on urea, even in today's elevated crop price environment, and so regional fertiliser producers have struggled to compete with imports of ammonia and solid nitrogen fertiliser produced in countries where gas prices are at a fraction of European hub prices.
There is a small surplus of nitrogen fertiliser capacity outside the EU, which means the market is likely to balance through the inevitable demand erosion in poorer regions that will result from the EU paying up to secure supply.
Alongside fertilisers and chemicals, Europe's energy-intensive metallurgical sector is also particularly exposed to surges in energy costs, as producers grapple with extremely thin margins while downstream demand is hit by multiple inflationary pressures. Several producers of ferro-alloys, steel, base and minor metals have begun to idle factories in recent weeks, trying to limit their exposure to further volatility.
And high gas and power prices feed through strongly into oil refinery costs, not only through power generation but also through hydrogen, which is extracted from gas and used in some essential refinery units. Two key energy-intensive processes are hydrocracking, which converts heavy products into lighter fuels, and hydrotreating, which desulphurises these fuels to conform to environmental standards.
