Gas crisis continues to weigh on industries in Europe

Russia’s invasion of Ukraine sparked a major crisis in European gas markets that continues to impact energy-intensive industries today. While gas prices peaked in 2022, they remain significantly higher than their pre-crisis average.

The European Union (EU) responded to Russia’s aggression by rapidly reducing the bloc’s reliance on Russian fossil fuels. Regulators set new storage capacity targets, introduced gas consumption limits, and established a gas-purchasing facility to curb prices. At the same time, EU countries replaced Russian gas with imports of liquid natural gas (LNG).

It was a strong response and, to a large extent, it worked. In 2021, Russia accounted for nearly 40% of the value of natural gas imports into the EU from non-EU countries. By the second quarter of 2022, this had fallen to less than 23%.

But there was a price to pay for this success, and energy-intensive industries are still paying it. While imports of Russian gas nosedived, gas prices soared, putting sectors like chemicals, metals and steel, and paper at a disadvantage compared to global competitors.

Prices have eased since their peak in 2022, but are unlikely to return to pre-war levels anytime soon. So what does the future hold for gas supply in the eurozone? Is the crisis over, and are energy-intensive sectors out of the woods?

Chemicals and metals look to short-term growth

Europe is certainly far less reliant on Russian gas than it was just two years ago, with supply boosted by LNG imports from around the world. The US was the largest supplier in 2023, representing around 40% of total EU imports.

At the same time, demand has fallen significantly. According to the International Energy Agency (IEA), gas use in European industry fell by almost 25% in 2022, with reduced demand from energy-intensive industries accounting for over half of that figure.

Importing LNG is more expensive than piping gas from Russia, and it requires its own transportation and storage infrastructure. In August 2022, the Title Transfer Facility (TTF) gas price spiked at USD 70 per million British thermal units (Btu), an increase of more than 350% year-on-year. As costs soared, energy-intensive industries in the eurozone suffered production losses of over 10%.

But the peak quickly passed and the situation rapidly improved. As more efficient and cost-effective LNG supply chains were established, prices started to fall. A drop of 68% in 2023 has been followed by a 22% reduction so far in 2024. Energy-intensive sectors are starting to see clear blue sky through the breaking clouds.

“While prices remain above historic levels, costs have decreased enough to support a gradual recovery in production of energy-intensive sectors like chemicals and metals and steel in the short-term,” says Theo Smid, senior economist at Atradius. “After two years of contractions, production in these energy-intensive industries is finally forecast to grow again.”

Demand from buyers adding to growth

To be precise, chemical production in the eurozone is predicted to grow by 2.9% this year and 2.2% next, according to Oxford Economics. Metals and steel will level off in 2024 before growing by 3.4% in 2025.

“The outlook for the chemical industry in the eurozone is certainly looking more positive after an uncertain period,” says Olaf Gierlichs-Steffens, senior underwriter and Atradius global trade sector expert for the chemicals industry. “Industry chiefs will be hoping that energy prices continue their downward trend and that growth is not stalled.”

The rebound of these sectors is not just down to falling gas prices, however. Growing demand from key buyers is playing a part, along with an increased need for the chemicals that contribute to sustainable products and solutions. There are now clear signs that destocking pressures are easing rapidly for energy-intensive sectors.

In addition, falling gas prices have helped close the cost gap with US competitors. In that, European producers have been aided by higher labour costs in the US and a strong USD.

But not all energy-intensive industries are seeing these green shoots of recovery. The pulp and paper industry is forecast to grow by just 0.3% in 2024 after a 8.4% contraction in 2023. Inflation and higher interest rates remain a serious challenge for the sector, alongside long-term trends like digitalisation and packaging reduction targets.

A shaky long-term outlook for energy-intensive sectors

Away from pulp and paper the short-term picture is cautiously optimistic, but the longer-term outlook remains uncertain. Despite recent falls, energy prices are likely to stabilise at a level above the pre-crisis average, weakening competitiveness in the long term.

“The degree to which growing demand translates into rising domestic output rather than imports over the coming quarters will offer important clues in determining just how much of a structural hit Europe has suffered,” says Smid.

Taking a longer view, Oxford Economics forecasts that both chemical and basic metals production in Europe will grow by just 0.6% between 2022 and 2028, compared to worldwide growth of 2.4% and 2.2% respectively.

The risk of de-industrialisation in Europe

This forecast may or may not prove pessimistic, but much remains uncertain at the moment. One result of Europe’s response to Russian aggression is a greater likelihood of gas price volatility.

With EU demand soaring, the LNG market is effectively operating at high capacity. Without much slack in the system, gas prices will be especially sensitive to changes in global demand. Europe has become a baseload rather than a balancing market for LNG, making it more vulnerable to price fluctuations.

For energy-intensive sectors, higher prices lead to higher production costs, impacting profitability and the ability of many businesses to invest for the future. That is a significant risk, because the transition to clean energy will demand major upfront expenditure, even if it reduces the reliance on gas in the longer term.

In some cases, increased costs might be passed onto customers, but businesses that are unable to spread the burden of higher gas prices could struggle with cash flow. That, in turn, may present a credit risk to suppliers. In the longer term, some businesses may choose to move out of Europe altogether.

“Currently there is no evidence of de-industrialization when we look at industry across the board,” says Smid. “But it could happen in the more energy-intensive sectors, especially if energy prices stay elevated.

“Many businesses in energy-intensive industries are announcing plans to adjust their production strategies to ensure economic viability, but it remains to be seen if all producers will survive.”