Surging energy prices in Europe are hurting more than just consumers.
The price spikes have started to hit industrial activities, threatening to deal a blow to the post-COVID recovery in European economies with a triple whammy of reduced consumer purchasing power, lower industrial production, and higher operating costs.
Giant European firms, from chemicals and mining to the food sector, say sky-high gas and electricity prices are hitting their profit margins and forcing some of them to curtail operations.
Some factories have shut down because of record natural gas prices. More idling of industrial activity across Europe is likely in the coming weeks, analysts say.
Meanwhile, the record European natural gas prices are sending Asian spot prices of liquefied natural gas (LNG) to record levels for this time of the year—between peak summer demand and ahead of the winter heating season.
Europe’s tight gas market, low wind speeds, abnormally low gas inventories, and record carbon prices have combined in recent weeks to send benchmark gas prices on the continent and power prices in the largest economies to record highs. Almost daily, gas and power prices in Europe surge to fresh records, putting pressure on governments as consumers protest against soaring power bills.
It’s not only consumers that struggle with the record energy prices. Industries are starting to feel the heat, too.
CF Industries, a manufacturer of hydrogen and nitrogen products, said this week it was halting operations at both its Billingham and Ince manufacturing complexes in the UK due to high natural gas prices.
“The Company does not have an estimate for when production will resume at the facilities,” CF Industries said.
Norway-based Yara, one of the world’s top ammonia producers, is curtailing production due to the record-high gas prices.
“Record high natural gas prices in Europe are impacting ammonia production margins, and as a result Yara is curtailing production at a number of its plants. Including optimization of on-going maintenance, Yara will by next week have curtailed around 40% of its European ammonia production capacity,” the company said on Friday.
Germany’s large bioethanol producer CropEnergies AG said its operating profit for the second quarter of its fiscal year nearly halved as “The significantly higher net raw material cost and the recent rise of energy prices to record levels were the main burdens on the results.”
Also in Germany, the largest chemicals producer in Europe, BASF, and the top copper producer, Aurubis, also flag high energy prices as a significant burden on their profits and profit margins.
Major industrial companies in France, such as top sugar producer Tereos and starch producer Roquette Freres, tell Bloomberg that record-high energy prices are putting inflationary pressure on their financials and on “every other cost.”
All those headwinds for Europe’s industry could be just the beginning, especially if the coming winter in Europe and Asia turns out colder than usual, driving up further demand for gas and power.
Industries in Europe face the risk of blackouts in a cold winter, Goldman Sachs warned this week.
“Under such an outcome, the only balancing mechanism would be a significant further rally in European gas and power prices reflective of the need to destroy demand, with curtailed power demand in the industrial sector through blackouts,” Goldman’s analysts said in a note carried by Bloomberg.
A slowdown in the industrial sector is one of the last things Europe needs right now, just as its economies have started to rebound from the pandemic.
Moreover, competition from Asia on the LNG market could mean that Europe may not get too much additional LNG supply. Spot prices in Asia are at record highs for this time of the year, but buyers are paying regardless, concerned that the natural gas shortage globally could worsen as the winter season approaches.
“Asia is panicking a little bit because they had a really bad winter last year,” Ogan Kose, managing director and global lead for Integrated Gas at Accenture, told Bloomberg this week.
Utilities and industries in Europe, and probably governments, are hoping for a mild and windy winter, otherwise, the natural gas supply crunch could last through the end of the first quarter of 2022.