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The Russian Gas Squeeze and Its Implications for the European Chemicals Sector

A complete Russian natural gas cut-off scenario is becoming increasingly likely by the day and the associated elevated prices and potential gas rationing this winter would have widespread consequences for European corporates. With the upcoming start of the heating season, alternative energy sources and storage may not be sufficient to cover the shortfall in gas flows from Russia if demand-reduction measures prove to be too little too late and the upcoming winter is colder than average. Among the most exposed companies are those in the chemical sector that are heavily reliant on natural gas both for feedstock and power generation needs. This commentary assesses some of the implications of a further escalation of the natural gas crisis for a group of chemical companies that have the most exposure to the commodity and production facilities in Germany, a country historically heavily reliant on Russian natural gas. While the impact will undoubtedly be felt, certain factors may alleviate some of the burden, such as ease of access to alternative sources of input and energy, essentiality of products, and contractual agreements such as hedging.

Key highlights include:
-- Despite efforts to curb demand and fill storage facilities ahead of this winter, elevated prices and rationing will reverberate not only through the chemicals sector but also the rest of the European corporate sectors.
-- Certain factors may lessen the impact of a further escalation, although to varying degrees. These include the essentiality and criticality of the products and operations, which would ensure continuity of gas supplies in a rationing situation. Flexibility in energy sourcing, proximity to liquefied natural gas import terminals, as well as contractual agreements such as hedging would also help certain companies weather the crisis.
-- With natural gas prices likely to stay elevated in the near future, margin declines are set to accelerate in the second half of 2022 and into 2023.

“European chemical companies face the highest risks related to a further escalation of an already-drastic natural gas situation as they are exposed from both a feedstock and power generation perspective, and elevated input prices have started eating into their margins”, notes Amaury Baudouin, Vice President, European Corporate Credits at DBRS Morningstar. “Certain factors would help lessen the impact, but many of them are outside the companies’ control”, Baudouin added.