Demand destruction hits European gas market

Gas demand from industry in major European gas-consuming countries has begun to fall as an increasing number of plants that produce steel, chemicals and other products either curtail output or close in response to record-high wholesale prices.

According to Argus analysis, industries in Germany, the Netherlands, Spain, Italy, France, Poland, the UK and Portugal consumed a combined 3.27 TWh/d of gas last week — the lowest for calendar week 41 since at least 2017, including during the Covid-19 lockdowns of 2020 and 2021.

That weekly figure is about 8pc lower than the 3.57 TWh/d consumed in the same period last year and 4pc below the three-year average of 3.42 TWh/d.

As of last week, industrial gas demand in these eight economies this year had averaged 3.55 TWh/d, slightly higher than the same period in 2020 and 2017, but shy of the averages of 3.56 TWh/d in pre-Covid 2019 and 3.69 TWh/d in 2018.

In recent months, industrial gas consumption trends in the eight countries — which represent the bulk of that type of European demand — have defied seasonal norms and suggest that a variety of energy-intensive firms will continue cutting operations in the coming weeks and months (see European, German demand graphs).

In a typical calendar year, gas consumption by major European industrial economies follows a U-shape, hitting a post-new year high around February, gradually declining toward an annual low during summer holidays in July and August, then recovering to a second peak before Christmas.

This year, industrial gas use generally followed seasonal trends until mid-September when demand abruptly fell by over 100 GWh/d to low levels unseen in recent years, before continuing on a diminished upward trajectory.

At that time, wholesale gas markets were rallying, with front-month benchmarks at the Dutch TTF and UK NBP hubs steadily rising toward peaks of €117-120/MWh on 5 October, in the face of winter supply concerns, low storage inventories in key markets and rallying LNG prices.

UK weighs on demand

While most countries have experienced lower industrial demand to some degree, the UK emerges as a driving force behind this wave of demand destruction, when established industrial consumers cut or effectively stop using gas (see UK demand graphs).

Rallying gas prices prompted a handful of industrial consumers across the continent to reduce operations last month, including CF Industries, which announced plans in mid-September to temporarily close two UK fertiliser plants.

Around the same time, while industries across Europe considered their options, a number of UK steel plants and Spanish silicon producer Ferroglobe either stepped down or idled plants, citing higher power prices, driven in part by costly in-feed from gas-fired plants across Europe.

Front-month gas prices have eased somewhat this week to €85-95/MWh, but remain more than four times higher than at the start of 2021. Accordingly, the spectre of demand destruction looms over the UK and its European neighbours, with Spanish steelmaker Sidenor Group announcing it would temporarily take its Basauri plant off line at the start of this week.

It is unclear how far European demand will fall, as different businesses are coping in different ways.

The UK-based Major Energy Users Council (MEUC), which represents large-scale consumers such as Network Rail and Transport for London, told Argus that while long-term energy supply contracts have helped businesses weather the storm, their forward positions are anything but certain.

"I am not aware of any member reducing output or closing, in fact in most cases they cannot contemplate doing so," MEUC technical director Eddie Proffitt said. "In most cases, members take a sensible approach to energy buying, hedging various volumes going forward... the increase is hitting them, but not for the whole of their bill."

But as fixed-price contracts near expiry, some MEUC members shopping for energy have only been able to source quotes from their current suppliers at "massive increases", he said. "There are even requests for deposits or parent-company guarantees," he added.

While certain industries, including glass making, are reportedly considering substituting fuel oil for natural gas in certain processes, sustained high gas prices suggest a combination of further demand destruction and higher retail prices for certain products.

by Jeff Kuntz

Weekly European industrial gas demand TWh/d

Weekly German industrial demand TWh/d

Weekly UK industrial gas demand mn m³/d