EU Industrial Demand Uptick Could Be Short-Lived

Industrial natural gas demand in Europe has picked up in recent weeks following lower gas prices, raising questions over how the region will cope in a tightly supplied global market if the bounce in consumption is sustained. Significant industrial capacity remains shut in Europe and is expected to remain so until there is more confidence over price levels and demand for end-products, experts say. Industrial consumption made up around 23% of the EU’s total gas demand in 2021, according to Energy Intelligence calculations.

Oslo-based fertilizer producer Yara painted a mixed industrial demand picture during its fourth-quarter results last week. It said it has kept 35% of its European ammonia production capacity on line at 1.7 million tons, unchanged since October. The company increased its finished fertilizer curtailments from 0.9 million tons in October to 4.7 million tons as of Jan. 31, equivalent to 28% of its European capacity. However, Yara noted that lower gas prices have led to a recovery in nitrogen production, citing industry consultants suggesting European production is running at 70% of capacity. The company also suggested fertilizer demand could increase as farmers delayed purchases last year due to higher prices.

The front-month futures contract at the Dutch TTF, Europe’s gas benchmark, has been trading under €60 per megawatt hour ($18.80 per million Btu) since late January, lower than €73.50/MWh a year ago and a fraction of the €300/MWh-plus levels seen in August. Analysts at investment bank SEB recently suggested that some industrial players could lock in prices so their gas demand going forward is less sensitive to price spikes.

Demand Denting Restarts

A sustained turnaround in industrial production is not only dependent on gas prices. “European producers will restart if gas prices remain low and fertilizer prices allow sufficient margins, which is the case at the moment,” according to Shruti Kashyap, principal analyst, nitrogen at consultancy CRU Group. “However, companies are looking for some stability and confidence in gas prices along with a demand response before they restart operations. As of now, Europe is sitting on high-priced inventory, which is making demand lackluster at the moment,” Kashyap says. At current gas price levels, it is cheaper to produce ammonia instead of importing it for downstream products, she adds. Around 36% of Europe’s ammonia capacity is currently off line, compared to a peak of around 70% in September, CRU data shows.

The picture is similar in the chemicals sector, which accounts for roughly 10% of total EU gas consumption, with brimming inventories of finished chemicals products and soft demand keeping tabs on production restarts. “While declining energy costs have provided a short relief, we have observed high levels of stocks of finished chemicals products and a drop in chemicals demand. It is also important to note that energy prices are still above pre-energy crisis levels and the gap with competing regions is still significant,” a spokesperson for European chemicals trade association Cefic tells Energy Intelligence.

Premature Warnings

Warnings of permanent closures of European industrial capacity have yet to materialize significantly. Europe’s major industrial trade associations warned in a letter addressed to the European Commission in September that “there was no business case to continue production” in light of higher energy prices and there was no certainty for future developments.

In Europe’s fertilizer sector, Kashyap does not anticipate capacity shutting down “due to food security concerns.” In the chemicals arena, petrochemicals giant Ineos announced this week it secured €3.5 billion ($3.8 billion) in financing for a new cracker in Belgium, which it claims is the “largest investment in the European chemicals sector for a generation,” suggesting there is still a future for chemicals production in the region.

Europe’s supply-demand balance during the 2022-23 winter period was helped by involuntary and voluntary curtailments of gas consumption from industrial players and households. The EU agreed to cut gas consumption across the bloc by 15% between August 2022 and March 2023 compared to the five-year average, with August-November demand effectively falling around 20%. The mandated demand cuts are expected to be extended after they expire next month, as consumption needs to remain lower in response to limited additional gas supply this year.

The EU needs to fill storage to 90% of capacity by Nov. 1 and despite expectations of inventories exiting winter at levels above the five-year average of 33% full, the task to restock will be difficult as Russian gas flows are currently 60 million cubic meters per day — a fraction of the 284 MMcm/d imported over the same period last year. If Russia cuts flows further, deeper demand cuts may be necessary, according to Brussels-based think tank Bruegel.

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European Nitrogen Production Plants