Soaring energy prices could cripple the European economy


Soaring energy prices in Europe are not just affecting consumers. The price spikes have started to hit industrial activities, threatening to deal a heavy 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 companies, from chemicals and mining to the food sector, say sky-high gas and electricity prices are hitting their profit margins and forcing some to cut operations.

Some factories have closed due to record natural gas prices. Further industrial slowdown across Europe is likely in the coming weeks, analysts said.

Meanwhile, record European natural gas prices are sending Asian liquefied natural gas (LNG) spot prices to record highs for this time of year, between peak summer demand and approaching peak season. winter heating.

The tight gas market in Europe, low wind speeds, unusually low gas stocks and record high carbon prices have combined in recent weeks to send benchmark gas prices to the continent and electricity prices. in the largest economies at records. Almost daily, gas and electricity prices in Europe are hitting new records, putting pressure on governments as consumers protest against soaring electricity bills.

It’s not just consumers who are battling record high energy prices. Industries are also starting to feel the heat.

CF Industries, manufacturer of hydrogen and nitrogen products, noted this week it halted operations at its Billingham and Ince manufacturing complexes in the UK due to high natural gas prices.

“The company has no estimate of when production will resume at the facilities,” CF Industries said.

Norwegian company Yara, one of the world’s largest ammonia producers, is cutting production due to record gas prices.

“Record natural gas prices in Europe are having an impact on ammonia production margins and as a result, Yara is reducing production at several of its plants. Including the optimization of ongoing maintenance, Yara will have reduced by next week about 40% of its ammonia production capacity in Europe, ”the company said. noted Friday.

The large German producer of bioethanol CropEnergies AG noted its operating profit for the second quarter of its fiscal year almost halved, as “the significantly higher net cost of raw materials and the recent rise in energy prices to record levels were the main bottlenecks to results. “.

Also in Germany, the largest producer of chemicals in Europe, BASF, and the largest producer of copper, Aurubis, have also flag high energy prices as a significant burden on their profits and profit margins.

Large industrial companies in France, such as leading sugar producer Tereos and starch producer Roquette Frères, told Bloomberg record energy prices are putting inflationary pressure on their finances and “all other costs. “.

All of these headwinds for European industry could be just the beginning, especially if the coming winter in Europe and Asia turns out colder than usual, leading to increased demand for gas and gas. ‘electricity.

Industries in Europe face risk of power outages in cold winter, Goldman Sachs warned this week.

“In such a result, the only balancing mechanism would be a further significant increase in European gas and electricity prices reflecting the need to destroy demand, with reduced demand for electricity in the industrial sector by power outages. ‘electricity,’ Goldman 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 after the pandemic.

In addition, competition from Asia in the LNG market could prevent Europe from obtaining too much additional LNG supply. Spot prices in Asia are at record highs for this time of year, but buyers are paying anyway, fearing the global shortage of natural gas could worsen as the winter season approaches.

“Asia is panicking a bit because it had a really bad winter last year,” said Ogan Kose, managing director and global head of Integrated Gas at Accenture. Bloomberg this week.

Utilities and industries in Europe, and possibly governments, are hoping for a mild and windy winter, otherwise the natural gas supply crisis could last until the end of the first quarter of 2022.

By Tsvetana Paraskova for OilUSD

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