Global energy crisis

The gas and energy supply situation in Europe today

The energy crisis that has been going on for months is causing supply prices to rise steadily. Since September 2021, the average electricity bill has been rising continuously, due in part to the spike in the price of gas and also because of CO2 emission rights.

Some companies’ energy bills have as much as tripled and costs have had to be increased as well.

This has implications for the transformation costs of industries such as ours.

Global energy crisis: Why are gas prices rising?

Several factors are contributing to the rise in gas and energy prices in Europe.

Asia needs supply and is willing to pay more

On the one hand, Asia (especially China) is buying large quantities of gas to satisfy its demand, which grew by 20% last year. The reason behind this demand is the shortage of coal and its rising price for electricity production. The Asian JKM market continues to command higher prices than the European market, causing much of the gas to be diverted to Asia.

As a consequence, the gas that Europeans expected to arrive by LNG ship took a detour to China, as China was paying a higher price than Europe. As a result, European storage facilities have resupplied later than usual.

Russia has cut supplies to Germany

Recently, Russia has decided to stop supplying Germany via the Yamal-Europe pipeline, the largest between Russia and the EU. This puts the European community, its main customer, on the ropes.

Moreover, this relationship is becoming more complicated, because NordStream2 (the new gas pipeline connecting Russia to central Europe) does not yet have all the permits it needs to start up. This is delaying its inauguration, which will result in Germany having the lowest gas reserves this winter in the last decade.

Tensions between Algeria and Morocco

Tensions between Algeria and Morocco mean that one of the gas pipelines that connects Algeria with Spain and passes through Morocco (we are referring to the pipeline that transports gas to the Iberian peninsula via Tarifa) is currently blocked, unable to supply gas to the peninsula.

In an attempt to ameliorate this situation, Algeria is compensating by sending methane tankers.

Unless the situation improves, the upward trend in gas prices is not expected to ease up in the short term.

How the cost of energy affects transformation costs

This escalation in gas and general energy prices is leading some companies to slow down production to mitigate the financial hemorrhage caused by each energy bill that arrives, even if it is not possible to fully meet customer demand. The main companies affected by this rise are the electricity-intensive companies as well as those that are gas-intensive.

The rise in the supply price has put a strain on many electricity-intensive companies and their business margins. This has led some steel businesses to shut down temporarily, with a corresponding decrease in production.

The fear of many of these companies is that, if the rise continues, stoppages will grow accordingly, production capacity will be reduced, and many companies will be forced to close as the situation could be unsustainable.

In addition to the stoppages, the management of some companies is developing a plan to reduce production at certain times of the day when production is not profitable. The current situation makes labor adjustments necessary, and if the situation is not reversed, the stoppage will be total.