On Wednesday, August 30, Russia halted all natural gas deliveries via the Nord Stream 1 pipeline. Supposedly, this was a planned maintenance that will last 3 days. Russia had been operating Nord Stream 1 at 20% of capacity, while waiting for the delivery of a repaired turbine from Canada.
One year ago, the Dutch TTF gas futures contract for October 2022 delivery was priced at 28.80 euros per 1 megawatt day. On August 26, the contract hit a record high of 346.52 euros. As of the August 31 close, the price stood at 239.91 euros, a drop of 30.8% in 5 days. German and French electric futures prices have also hit all-time records.
German economic minister, Robert Habeck, said that companies have worked hard to reduce gas consumption in recent months by switching to alternative fuels like oil, making processes more efficient, and reducing output. But some companies have “stopped production altogether” with businesses that have a large energy component being the most susceptible. The Budel zinc smelter in the Netherlands will be placed on care and maintenance from September 1 “until further notice.” Norsk Hydro also announced plans to shutter an aluminum smelter in Slovakia at the end of September.
The dire situation of European energy is now reflected in consumer confidence surveys. German consumer confidence is at an all-time low of -36.5, whereas the normal range had been between 0 and 10 prior to 2020. German producer prices increased 37.2% in July 2022 from a year earlier. Excluding energy, German producer prices, increased 14.6% from the prior year.
Apparently, Russia and Ukraine were prepared to negotiate a peaceful settlement in April. Prime Minister of the United Kingdom, Boris Johnson, went to Kiev that month. According to Ukrainska Pravda, Johnson had two messages for President Zelensky:
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- Putin is a war criminal and should be pressured, not negotiated with, and
- Even if Ukraine is ready to sign some agreements with Putin, the UK and US are not.
And so, the war in Ukraine continues.
China has increased its imports of Russian natural gas substantially this year. During the first six months of 2022, China increased liquified natural gas (LNG) volumes by 28.7% compared to the prior year. China also imports natural gas from Russia via the Power of Siberia pipeline and the volumes imported via the pipeline increased 63.4% during the first half of the year. There are several reports of Chinese (formerly Russian) LNG cargoes being sold to Europe. So, Europe is willing to buy Russian natural gas from China, transporting it on ships with LNG capabilities. This is an expensive alternative to Nord Stream pipeline deliveries, but it does get around the economic sanctions imposed on Russia.
The profits from acting as an intermediary natural gas deliveries are very attractive. News sources indicate that Sinopec has sold 45 cargoes of LNG to Europe year-to-date. Profit estimates from reselling Russian LNG to Europe using China as an intermediary range from tens of millions of US$ to over $100 million for a single LNG cargo shipment. ZeroHedge writes that the embargo on Russian energy has failed spectacularly, and: “Worse, while Europe could buy Russian LNG for price X, it instead has to pay 2X, 3X or more, just to virtue signal to the world that it won’t fund Putin’s regime, when in reality it is paying extra to both Xi and to Putin, who is collecting a premium price thanks to the overall market scarcity.”
Unless there is a break in the geopolitical situation, this coming winter in Europe will experience inadequate heat and food for its residents, as well as a dramatic decline in economic production. There are likely to be many European business failures and bank insolvencies as well. The repercussions are likely to be global in nature.
If you have any questions or comments, please contact me.
Sincerely,
Robert G. Kahl
CFA, CPA, MBA