High natural gas prices will add to the pressure on margins and cash flows of European companies, which are already at risk for natural gas shortages, rising inflation and waning market sentiment on slower economic growth, says Fitch Ratings. Prices remain heavily influenced in the near term by decreased Russian gas supplies to Europe.
Dutch Title Transfer Facility (TTF) next hour gas price currently trades at around /mcf (/MWh). This contrasts sharply with /mcf in early June, a YTD average of /mcf, Fitch’s assumption for 2022 of /mcf, and our long-term price assumption of /mcf.
Recent price increases were driven by lower shipments via the Nord Stream 1 pipeline and the risk of lower liquefied natural gas (LNG) supplies following an accident in June at the Freeport LNG terminal in the U.S. Further price volatility could result from planned regular maintenance of Nord Stream 1, which will start on July 11 and is currently planned to last 10 days. Lower flows in one pipeline are usually balanced out by higher flows elsewhere, but that may not be an option this time since flows of natural gas from Russia via Slovakia continue to be lower than earlier in 2022 and in 2021. German authorities have also voiced concerns about whether flows via Nord Stream 1 will be resumed after the maintenance is completed.
European gas demand in industry decreased 6% yoy in October 2021-March 2022, according to the IEA, as TTF prices increased more than fivefold to /mcf from /mcf. The IEA forecasts that European natural gas demand will shrink by 9% yoy in 2022.
If Russian gas flows following the Nord Stream 1 maintenance do not resume, Fitch would expect intensification of energy saving measures, higher prices and potentially reduced production in some industries, especially in late autumn and in winter. We estimate that the shortfall in natural gas will not exceed 10% of annual European consumption, although the actual amount will depend on factors such as weather that are difficult to predict. While the logic of gas rationing is embedded in local regulation, the details on the impact for specific issuers or the merit order for industries is more difficult to estimate. We also understand that certain EU countries are entering into bilateral agreements on gas supply in case of emergency in line with EU framework for security of gas supply.
Utilities exposed to the gas value chain, and particularly those involved in import and transit of Russian gas, are among companies that have taken the greatest hit so far from rising European natural gas prices, but the overall impact varies depending on operating model or geographic location. Uniper SE is in talks with the German government about a potential bailout due to losses on supply contracts when purchases are realised at high spot prices. For integrated utilities, the impact is mitigated by business diversification and often better profitability in some other segments, such as electricity generation. Generators, especially clean ones, are benefitting from the current scenario, though this advantage is limited by increasing political risk, which could imply the clawback of extra profits deriving from extremely high market prices.
The impact on other industries has been limited to date. Refining, chemical, fertiliser and industrial companies have largely been able to pass on higher natural gas prices through product prices, but they may find it more challenging to increase prices further without causing reducing demand. Fertilisers companies with high concentrations of assets in Europe face risks of reduced production and competitiveness compared with non-European competitors. Companies in ceramic and /aluminium industries would be mainly exposed to shortages of natural gas supplies. Other industries, including brewing and food processing have lower requirements. Upstream oil and gas companies are, on the other hand, the largest beneficiaries of the current market situation.
