Industry fears price shock due to Ukraine crisis

Dusseldorf, Berlin, Zurich Russia’s threatening backdrop is in place: The gas price for Europe could double, warned Dmitry Medvedev, ex-president and Putin confidant, after Germany stopped the commissioning of the Nord Stream 2 gas pipeline. And the threat could hit the German economy to the core. After all, after chasing records last year, energy prices had just eased somewhat – before prices shot up again after the escalation in Ukraine.

Since then, the gas price has climbed in spot trading by twenty percent to EUR 87 per megawatt hour (MWh). The electricity price on the futures market rose by seven percent to just under EUR 150 per MWh. “Companies are very worried about developments in the Ukraine – also with a view to energy prices,” reports Wolfgang Hahn, who advises major customers on purchasing. Many are currently trying to secure acceptable conditions.

More and more customers are even concerned that the gas supply could be interrupted. “That would be a catastrophe,” says Ulrich Bettermann, who has taken precautions with his installation technology company. OBO Bettermann has secured liquefied gas (LNG) from Qatar for the galvanizing plant in Menden, Sauerland.

The energy costs are likely to drive up other prices in a chain reaction – such as those of fertilizers, aluminum and paper. “Despite the extremely high level, we expect further cost increases. And that will lead to higher product prices on the shelf,” announces Martin Krengel, head of the hygiene paper manufacturer Wepa.

For the current year, the company from Arnsberg in North Rhine-Westphalia calculates unplanned additional costs of a whopping 90 million euros in the energy bill. “We expect that there may be further cost increases, particularly due to the political turbulence – despite the already extremely high level today,” says Wepa boss Krengel with a view to the Ukraine crisis.

Economists are already fearing a new surge in inflation. “The high energy prices will drive inflation for a longer time,” says economics expert Veronika Grimm.

Gas: worry about next winter

“The market reacts nervously to every piece of news from Russia and the Ukraine,” says energy consultant Wolfgang Hahn, describing the sensitivities. Anyone who wants to stock up on gas for delivery in 2023 on the futures market currently has to pay just under 58 euros per megawatt hour (MWh).

After Russian President Vladimir Putin recognized the Ukrainian provinces of Donetsk and Luhansk, which are controlled by the pro-Russian military, as sovereign states, the price rose by five euros. It is thus significantly removed from the level at the end of 2021, when the annual contract was even traded for 90 euros. A year ago, the MWh did not even cost 20 euros.

The threat of a Russian gas supply stop is currently losing its fright because the heating season is coming to an end and the winter has been rather mild so far. “The gas storage facilities are now at the same level as last year,” says Fabian Huneke from the analysis company Energy Brainpool. But there are “very clear signs” that the market is adjusting to a long-term high price level.

So far, experts have assumed that gas prices will return to a more or less normal level in 2023. “However, this crisis threatens to intensify, and that would also delay the reduction in prices,” says the expert.

Major customers are already looking ahead to the coming winter, i.e. the next heating period: will it be possible to refill the gas storage tanks over the summer? Will imports from Russia remain stable – or will deliveries via Ukraine or Nord Stream 1 be throttled?

Eon boss Leonhard Birnbaum warns in the event of a complete failure of Russian gas supplies: “Some companies would have to be shut off from the supply as of today.” The acute effects would not be so drastic, Birnbaum told the weekly newspaper “Die Zeit” with reference to that End of the heating season: “But next winter, the energy industry could probably no longer easily supply a number of industrial customers.”

How to proceed if there is not enough gas on the market has been laid down by the industry in the “Gas Crisis Prevention” guideline. In the event of a “overriding national gas shortage”, gradual shutdowns take effect. It would first hit companies whose contracts already stipulate such measures. However, these customers can also be compensated for this interruption in delivery. If that is not enough, it is the turn of gas-fired power plants, which are not absolutely necessary for the stability of the power grid. After that, however, it could also affect system-relevant power plants – and ultimately even “protected end consumers” – i.e. private households.

Like entrepreneur Ulrich Bettermann, many companies are hoping for additional imports of liquefied natural gas (LNG) to reduce dependence on Russia. EU member states are also working flat out to procure additional LNG. According to the market research company Icis, in January Europe still got almost half of its gas imports via pipeline, but also 32 percent in the form of LNG.

However, it still has to pay more for it than for Russian pipeline gas. Compared to natural gas from Siberia, LNG is more than twice as expensive in terms of production and transport costs alone. “There are different market assessments of how much Russian gas could be replaced by LNG,” says expert Huneke: “But it is also clear that natural gas prices of less than ten euros per MWh, as in 2020 with LNG, will definitely no longer exist.”

Electricity: Companies play it safe

Many energy consumers from the economy are currently faced with a difficult question: Should they wait and see whether energy prices will level off at the old level again – or should they secure the current prices in view of the Ukraine crisis? After all, they are a long way from the old listings, but also well below the record values ​​​​of the past year.

The contract for electricity deliveries in the following year is currently just under 150 euros, almost three times as high as at the beginning of 2021, but also well below the 324.60 euros that had to be paid on December 22nd.

Exactly this calculation is currently driving a medium-sized company from North Rhine-Westphalia who wants to remain anonymous. The mechanical engineering company, which has a turnover of almost two billion euros, gambled away last year and hoped in vain for a trend reversal on the electricity market. Instead of the previous 50 euros, more than 200 euros per MWh would be due in new contracts.

The medium-sized company is now acting on a short-term basis, only signing a contract for the second quarter last week in the hope of falling prices. But that was before the escalation in the Ukraine: now the company is considering stocking up for the longer term.

“There is no panic in wholesale yet – but everyone is expecting a significant increase in energy prices,” says consultant Hahn: “There was hope for a relaxation on the price front.” He still advises companies to buy electricity and gas to proceed in a structured manner, i.e. to buy in tranches. However, you should currently protect yourself more than too little.

“Companies should rather play it safe,” says Hahn. And according to his experience, the companies are already reacting: “Many who actually wanted to wait and see are now securing tranches.”

Oil: Ukraine crisis and high demand

The situation on the oil markets remains tense: After the price of European Brent oil fell briefly on Wednesday morning, it rose again by the afternoon to around $98.30 per barrel (around 159 liters), 1.8 percent higher than on Tuesday. The danger of an oil price crisis has not been averted, said Carsten Fritsch, Commerzbank’s commodity expert: “Uncertainty remains high.”

Fritsch sees the danger that Russia will reduce deliveries of oil and gas in response to the sanctions. Russia is currently the third largest oil producer after the USA and Saudi Arabia. In the commodity futures markets, traders continue to pay unusually high premiums for oil for immediate delivery. This is a sign that the market is undersupplied.

The Ukraine crisis is just the straw that broke the camel’s back. The economic recovery after the corona crisis is likely to raise oil demand to a new record level, as analysts at UBS expect, for example.

Chain reaction in other markets

However, the distortions on the energy markets are also having an impact on other markets. When the Ukraine crisis drives up electricity, gas and oil prices, it is primarily companies that use a lot of energy during production who feel it. These include steel manufacturers, aluminum producers, and the paper and cement industries.

The fertilizer market, for example, reacted directly to the escalation of the Ukraine conflict and the foreseeable rise in gas prices. Spot market prices there already rose on Wednesday. In the production of preliminary products such as ammonia, gas is used both as a raw material and as an energy supplier.

Numerous manufacturers had already throttled production in the autumn because of the high gas prices because it no longer paid off. The result: Farmers, in turn, did not have enough fertilizer for the current cultivation of their fields and had to buy them expensively. The price of fertilizer is currently more than three times as high as it was in 2019.

More on the Ukraine conflict

This is helped by the fact that Russia significantly restricted the export of products for nitrogen fertilizers last year in order to secure supplies for its own agriculture. The country is the largest exporter of ammonium nitrate in the world. Concerns about persistently expensive fertilizers that are only available to a limited extent, in turn, are driving grain prices on the world markets. This was also observed on Wednesday.

Inflation: economists at odds

Energy costs have been a main driver of inflation in recent months. And the current developments in Ukraine have triggered further price increases. However, economists disagree as to whether this will continue in the long term. “If the conflict does not escalate further, there would be little impact on inflation,” said Ifo President Clemens Fuest. A war, on the other hand, would create great uncertainty and would be a clear price driver.

The economist Veronika Grimm, on the other hand, considers the current escalation to be an inflation factor. “Not least because of the escalating conflict, energy prices are likely to be higher for a long time,” she said. Due to long-term contracts, it will take some time before the increased wholesale prices are passed on to companies and consumers and increase their costs.

There was hope that things would normalize by the middle of the year. Global material shortages had driven inflation in recent months, in January the rate in Germany was 4.9 percent. In recent weeks there have been increasing signs that supply bottlenecks are easing and that the inflation rate could normalize again. According to Grimm, this hope is now dwindling as a result of the Ukraine crisis.

Collaboration: Anja Müller, Bert Fröndhoff Catiana Krapp, Klaus Stratmann

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