Winter is coming but a smorgasbord of positive natural and man-made interventions means the EU will likely avoid blackouts.
With gas supplies tight and electricity prices high, Europe is at the sharp end of the energy crisis. However, a warm winter will help to avoid blackouts and extreme rationing in the coming months. So far, Europe has secured LNG imports from diversified suppliers and hopes to further reduce demand via a mix of voluntary and mandatory consumption for industry and households across member states. Measures are working; reserves are building. EU gas imports from Russia have gone from 40% to less than 10% in less than a year. Meanwhile, winter reserves for the bloc as a whole are back up to a reassuring 90% – a two- to three-month surplus at the beginning of October.1
In our view, consumption cuts should be permanent to ensure energy security in the mid term. A prolonged war is predicted which means a hard wean off Russian supplies will force Europe into the arms of a tight and volatile short-term spot market for fueling needs. That means Europe’s own energy bill will remain high through 2023 and likely 2024 as new reserves, devoid of Russian inputs, are built.
Increased infrastructure buildout of renewable generation, storage capacity and distribution will take time, and while Europe waits, LNG imports must fill the gap. Short-term relief for small enterprises and lower-income households (already stressed from high inflation and rising interest rates) is coming. So far, the EU has earmarked 300 billion in relief funds, and member states have launched their own mix of price caps, subsidies and funding facilities.
But though government intervention is needed to buffer consumers and diminish recession risks, it could also intensify gas shortages if not executed correctly. High prices work to reduce consumption but capping prices will reduce this effect as some member states have experienced in recent months.2 An EU-wide price cap is still under discussion and distorted price signals are chief among concerns.
We believe the EU should favor the discriminating Dutch approach, where prices are capped to a point after which consumers pay the full market price. This would blunt the impact of high energy prices for households while also blunting excess consumption. Moreover, barring a harsh winter in North Asia, we believe China’s access to abundant Russian gas as well as domestic economic slowdown will reduce global competition and keep gas supplies flowing towards Europe.
China’s access to abundant Russian gas as well as domestic economic slowdown will reduce global competition and keep gas supplies flowing towards Europe.
Energy discipline has replaced fiscal prudence as the new EU mantra, but not all states face the same constraints and the impact will be uneven across member states. Natural geography, national fuel mix, regional temperatures, and storage capacity differences will heavily influence winter’s wrath for member states.
Cold snaps in the north may necessitate higher gas demand, while warmer climes in the south may ease energy pressures. Strong winds can replace gas for sea-facing Germany and the UK but won’t help land-locked Eastern states such as Bulgaria, Slovakia and Hungary, all heavily dependent on piped Russian gas. Meanwhile, France’s energy solvency depends on nuclear power coming back online. Finland and Sweden have near-zero gas storage capacity but have ample hydropower from waterways and biomass from forests. Despite early rhetoric and wrangling, energy sharing agreements will emerge, further reducing shortage risks for individual members.
Though blackouts will likely be averted, bankruptcies may not. As with countries, the energy price impact will also be uneven across sectors and companies and energy-intensive companies are bearing the brunt of the hit. Earnings for energy intensive sectors such as utilities, metal processing and chemicals will be hit first, with second round effects in food, hospitality and transport.
Too big to fail utilities are leaning on government support, while bigger companies with large cash buffers have reduced output. Chemical and base metal producers are switching to lower-priced coal for energy and shutting down unprofitable production.
The ability to pass costs onto customers has largely shielded companies with high-margin sectors or premium products. Low-margin, hyper-competitive industries such as aviation, food and retail services, where raising customer prices means losing market share, will be squeezed even thinner. Some have cleverly shifted costs to consumers unaware. Paper and pulp producers – also among the top energy intensive industries – are making toilet paper sheets shorter and narrower while food-related companies – hit indirectly by higher fertilizer and commodity prices – are reducing serving sizes.
Destructive waves are reverberating across supply chains. From glass and aluminum to sugar and ammonia, industrial production curbs are tightening raw material supplies and stoking additional inflation in products further downstream.
Though companies are adapting, closures are inevitable, especially in small and medium-sized operations that lack scale and cash. In Germany, per end of August, insolvency and closures were up 26% compared to a year earlier.3 Furthermore, Eurozone growth is expected to shrink in the last half of the year and continue to fall in 2023, as high inflation, high costs and low consumer spending reduce earnings.
A period of creative destruction has begun hastened by energy scarcity and explosive volatility. Those that relied on inefficient, inflexible legacy infrastructure run on legacy fuels will find it increasingly difficult to survive as unforeseen crises and risks emerge. Moreover, the energy intensity of upstream extraction and refining of resources has meant energy scarcity is threatening input scarcity across raw, refined and finished materials.
A period of creative destruction has begun hastened by energy scarcity and explosive volatility.
First the good news. Renewable power procurement was already increasing in 2021 and energy insecurity of firms should support more growth in the mid- to long term. Meanwhile, capex investments in technologies that are energy-, input-, and process efficient should also accelerate as industries and households adapt to scarcity as the new normal. EU mandates on rooftop solar and energy-efficient heat pumps will accelerate these trends. Moreover, upstream and downstream forces along with earmarked EU funding will push investments in dynamically connected smart grids that allow households, communities, companies and member states to efficiently use and share energy.
The bad news is that energy, input and investments costs will remain high, so energy consumption must remain disciplined. However, crisis is often the catalyst of change. Governments, consumers and companies shouldn’t let this one go to waste.
1 Reuters website as of 11. October 2022. https://graphics.reuters.com/UKRAINE-CRISIS/EUROPE-GAS/zdvxozxzopx/
2 Bruegel, European natural gas demand tracker as of 5. October 2022. https://www.bruegel.org/dataset/european-natural-gas-demand-tracker
3 Reuters, Germany energy price shock triggers insolvency wave. September 20, 2022.
This information is for informational purposes only and should not be construed as an offer to sell or an invitation to buy any securities or products, nor as investment advice or recommendation.
The contents of this document have not been reviewed by the Monetary Authority of Singapore (“MAS”). Robeco Singapore Private Limited holds a capital markets services license for fund management issued by the MAS and is subject to certain clientele restrictions under such license.
An investment will involve a high degree of risk, and you should consider carefully whether an investment is suitable for you.
Warning/Important note: This website contains information which is only available to qualified investors as defined below. If you are not a qualified investor, please click “I Disagree” to leave the website.
By clicking on "I agree", I declare that:
1 - This website may only be accessed directly or indirectly by the following persons in Singapore:
1) “institutional investor” under section 304 of the Securities and Futures Act (Cap.289)(“SFA”), which means:
(i) the Government; (ii) a statutory board as may be prescribed by regulations made under section 341 of the SFA; (iii) an entity that is wholly and beneficially owned, whether directly or indirectly, by a central government of a country and whose principal activity is (A) to manage its own funds; (B) to manage the funds of the central government of that country (which may include the reserves of that central government and any pension or provident fund of that country); or (C) to manage the funds (which may include the reserves of that central government and any pension or provident fund of that country) of another entity that is wholly and beneficially owned, whether directly or indirectly, by the central government of that country; (iv) any entity (A) that is wholly and beneficially owned, whether directly or indirectly, by the central government of a country; and (B) whose funds are managed by an entity mentioned in sub-paragraph (iii); (v) a central bank in a jurisdiction other than Singapore; (vi) a central government in a country other than Singapore; (vii) an agency (of a central government in a country other than Singapore) that is incorporated or established in a country other than Singapore; (viii) a multilateral agency, international organisation or supranational agency as may be prescribed by regulations made under section 341 of the SFA; (ix) a bank that is licensed under the Banking Act (Cap.19); (x) a merchant bank that is approved as a financial institution under section 28 of the Monetary Authority of Singapore Act (Cap.186); (xi) a finance company that is licensed under the Finance Companies Act (Cap.108); (xii) a company or co-operative society that is licensed under the Insurance Act (Cap.142) to carry on insurance business in Singapore; (xiii) a company licensed under the Trust Companies Act (Cap.336); (xiv) a holder of a capital markets services licence; (xv) an approved exchange; (xvi) a recognised market operator; (xvii) an approved clearing house; (xviii) a recognised clearing house; (xix) a licensed trade repository; (xx) a licensed foreign trade repository; (xxi) an approved holding company; (xxii) a Depository as defined in section 81SF of the SFA; (xxiii) an entity or a trust formed or incorporated in a jurisdiction other than Singapore, which is regulated for the carrying on of any financial activity in that jurisdiction by a public authority of that jurisdiction that exercises a function that corresponds to a regulatory function of the Authority under this Act, the Banking Act (Cap.19), the Finance Companies Act (Cap.108), the Monetary Authority of Singapore Act (Cap.186), the Insurance Act (Cap.142), the Trust Companies Act (Cap.336) or such other Act as may be prescribed by regulations made under section 341 of the SFA; (xxiv) a pension fund, or collective investment scheme, whether constituted in Singapore or elsewhere; (xxv) a person (other than an individual) who carries on the business of dealing in bonds with accredited investors or expert investors; (xxvi) the trustee of such trust as the Authority may prescribe, when acting in that capacity; or; (xxvii) such other person as the Authority may prescribe.
2) “relevant person” under section 305(1) of the SFA, which means:
(i) An accredited investor; (ii) a corporation the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; (iii) a trustee of a trust the sole purpose of which is to hold investments and each beneficiary of which is an individual who is an accredited investor; (iv) an officer or equivalent person of the person making the offer (such person being an entity) or a spouse, parent, brother, sister, son or daughter of that officer or equivalent person; or (v) a spouse, parent, brother, sister, son or daughter of the person making the offer (such person being an individual).
3) any person who acquires the units [in a collective investment scheme] as principal if the offer is on terms that the units may only be required at a consideration of not less than $200,000 (or its equivalent in a foreign currency) for each transaction, whether such amount is to be paid for in cash or by exchange of units in a collective investment scheme, securities, securities-based derivatives contracts or other assets, and if the following condition is satisfied: (i) the offer is not accompanied by an advertisement making an offer or calling attention to the offer or intended offer; (ii) no selling or promotional expenses are paid or incurred in connection with the offer other than those incurred for administrative or professional services, or by way of commission or fee for services rendered by any of the persons specified in section 302B(1)(d)(i) to (vi) of the SFA; and (iii) no prospectus in respect of the offer has been registered by the Authority or, where a prospectus has been registered (A) the prospectus has eAccxpired pursuant to section 299 of the SFA; or (B) the person making the offer has before making the offer 1. informed the Authority by notice in writing of its intent to make the offer in reliance on the exemption under this subsection; and 2. taken reasonable steps to inform in writing the person to whom the offer is made that the offer is made in reliance on the exemption under this subsection.
4) Or otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.
If you are not any of the types of persons described above, you are not authorized to enter this website and you should leave this website immediately.
2 Terms and Conditions
You acknowledge that you have read these Terms and Conditions (“Terms”) prior to accessing the website located at www.robeco.com/sg (“Website”) and you agree to be bound by the Terms. If you do not agree to all of the Terms, you are not an authorised user and you should not use the Website. The Website is owned by Robeco Singapore Private Limited (company registration number: UEN. 201541306Z), which is licensed by the Monetary Authority of Singapore (“MAS”) pursuant to the Securities and Futures Act (Cap.289) (“SFA”) of Singapore, and is managed by Robeco Singapore Private Limited and/or its affiliates (collectively, as “Robeco”). The Website is intended for and should be accessed by institutional investors or accredited investors (as defined under Section 4A of the SFA) of Singapore. The Website is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject the Robeco to any registration or licensing requirement within such jurisdiction. It is your responsibility to observe all applicable laws, rules and regulations of any relevant jurisdiction. The content contained in the Website is owned by Robeco and/or its information providers and is protected by applicable copyrights, trademarks, service marks, and/or other intellectual property rights. You may not copy, distribute, modify, post, frame or link the Website, including any text, graphics, video, audio, software code, user interface, design or logos. You may not distribute, modify, transmit, reuse, repost, or use the content of the Website for public or commercial use, including all text, images, audio and/or video. Robeco may terminate your access to the Website for any reason, without prior notice. Neither Robeco, nor any of its associates, nor any director, officer or employee accepts any liability whatsoever for any loss arising directly or indirectly from the access of the Website. You agree to indemnity and hold Robeco, its associates, directors, officers or employees harmless against any and all claims, losses, liability, costs and expenses arising from your use of the Website due to violation of the Terms. Robeco reserves the right to change, modify, add or remove any parts of the Terms at any time and for any reason. The Terms shall deemed to be effective immediately upon posting. The Terms shall be governed by, and shall be construed in accordance with, the law of Singapore.
The Website has not been reviewed by the MAS. Accordingly, the Website may not be accessed directly or indirectly to persons in Singapore other than (i) to an institutional investor under Section 304 of the SFA, (ii) to a relevant person pursuant to Section 305(1), or any person pursuant to Section 305(2), and in accordance with the conditions specified in Section 305, of the SFA, or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.
Nothing in the Website constitutes tax, accounting, regulatory, legal or investment advice. The Website is for informational purposes only and should not be construed as an offer to sell or an invitation to buy any securities or products, nor as investment advice or recommendation or for the purpose of soliciting any action in relation to Robeco’s businesses, or solicitation by anyone in any jurisdiction in which such an offer or solicitation is not authorised or to any person to whom it is unlawful to make such an offer and solicitation. Any reproduction or distribution of information from the Website, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited. By accessing to the Website, you agree to the foregoing.
The funds referred to in the Website are for information only. It is not a recommendation or investment advice, nor does it mean the funds is suitable for all investors. The contents of the website is not reviewed by the MAS. Any decision to participate in the funds should be made only after reviewing the sections regarding investment considerations, conflicts of interest, risk factors and the relevant Singapore selling restrictions. You should consult your professional adviser if you are in doubt about the stringent restrictions applicable to the use of the Website, regulatory status of the funds, applicable regulatory protection, associated risks and suitability of the funds to your objectives.
Any decisions made based on the information contained in the Website are the sole responsibility of yours. Any investments made or to be made shall be with your independent analyses based on your financial situation and objectives. The investments and strategies contained in the Website may not be suitable for all investors and are not guaranteed by Robeco.
Investment involves risks and may lose value. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future. The value of your investments may fluctuate. Past performance is no indication of current or future performance. The Website may contain projections or other forward looking statements regarding future events or future financial performance of countries, markets or companies and such projection or forecast is not indicative of the future. The information contained in the Website, including any data, projections and underlying assumptions are based upon certain assumptions, management forecasts and analysis of information available on an “as is” basis and without warranties of any kind, whether express or implied, and reflects prevailing conditions and Robeco’s views as of the date published or indicated, and maybe superseded by subsequent events or for other reasons. The information contained in the Website are accordingly subject to change at any time without notice and Robeco are under no obligation to notify you of any of these changes. Robeco expressly disclaims all liability for errors and omissions in the information presented in the Website and for the use or interpretation by others of information contained in the Website.
Robeco Singapore Private Limited holds a capital markets services licence for fund management issued by the MAS and is subject to certain clientele restrictions under such licence. An investment will involve a high degree of risk, and you should consider carefully whether an investment is suitable for you.