Germany's energy crisis took a turn last month after the government raised the country's gas risk level to the "alarm" phase. This translates as the catalyst on the horizon that could trigger the final “emergence” phase. Prepare for the major consequences for the German economy, as well as the new winners that will be created in investing in energy stocks.
What could trigger the “emergency” phase?????
Germany remains dependent on Russia for more than a third of its gas. It launched the initial "early warning" phase in March, preparing for a possible supply cut after Russia demanded it be paid in rubles. That cut came last month after Gazprom reduced shipments through the Nord Stream gas pipeline by 60%. This measure led Germany to raise the gas risk level to the "alarm" phase.
Phases of Germany's gas emergency plan. Source: Bloomberg
Russia is set to shut down the Nord Stream gas pipeline for maintenance for ten days starting July 11. But several German officials fear that Russia will take advantage of planned maintenance work to permanently turn off the taps. This event would leave Europe's largest economy without its main source of gas. In this way, Germany would surely activate the third and highest level of "emergency", which would imply state control of distribution. In other words, gas rationing.
Who are the losers in this scenario?😭
German consumers🛒
Citizens of Germany are facing the possibility of being left without electricity and gas to power and heat their homes. Utility bills could also skyrocket, putting a dent in your income. And the German government is planning new legislation that would spread the costs of both rising energy prices and the rescue of bankrupt energy companies (such as Uniper). In fact, the head of the federal gas networks agency warned that prices for consumers could triple if Russia completely stops shipments through the Nord Stream gas pipeline.
Evolution of gas prices in Europe. Source: 20 Minutes
The German economy minister warned that Russia's measures to reduce natural gas supplies to Europe risk causing a domino effect that could bring down the gas market. investment in energy stocks, referring to the situation of Lehman Brothers as a catalyst for the financial crisis. A complete halt to gas shipments on the Nord Stream pipeline would be the first major domino to fall.
The collapse of Lehman Brothers was the catalyst for the 2008 crisis. Source: Pinterest
German industry🏗️
Gas is essential for many industrial processes, such as the manufacture of chemicals, pharmaceuticals, metals and fertilizers, among others. The German company BASF, Europe's largest chemical manufacturer, recently declared that it will have no choice but to cut production if gas supplies are reduced, and it is very likely to be joined by many other industrial companies that, together , contribute fundamentally to German economic production.
The German economy💶
The German economy would be hit hard by large declines in industrial activity and consumer spending. The graph below shows the German central bank's estimate of possible losses to the economy due to production cuts, suggesting that the country's economic output could fall by 8,6% in the first quarter of 2023, a collapse that would would plunge into one of its worst recessions in recent history.
A possible gas rationing could strongly affect German GDP growth forecasts. Source: Bloomberg
Who are the winners in this scenario?🏆
Some coal-fired power plants are being restarted in Germany and other European countries, after the European Union gave the green light to member states to burn more coal to tackle the energy crisis. That could drive up the price of coal even more, providing a windfall to coal mining companies like Arch Resources (ARCH) and PeabodyEnergy (BTU) in the United States, Glencore (GLEN) in Europe and China Shenhua Energy (601088) Chinese Coal Energy (601898) Adaro Energy (ADRO), Whitehaven Coal (WHC) and Coal India (COALINDIA) in Asia.
But coal is only a temporary solution, and the real long-term winner is American liquefied natural gas (LNG). The conflict has prompted European companies to sign long-term LNG contracts, mainly American suppliers. Electricité de France has just published a tender to buy it from 2023, the main American supplier, Cheniere energy, has given the green light to the expansion of a terminal in Texas, Chevron has closed two 20-year purchase and sale agreements with Venture Global LNG, and the chemical giant Ineos and the German company RWE have separately announced LNG deals with Sempra Energy.
LNG demand growth forecast for the next 10 years. Source: Bloomberg
It is clear that investment in stocks in the LNG sector will see an increase in their valuations. American LNG is already flowing to Europe in record volumes as prices in the region surpass those in Asia, but it is still not enough to meet demand. According to Bloomberg New Energy Finance, global LNG demand will increase 18,4% in 2026 compared to 2021 levels. That growth will be led by Europe, while the supply boost will come from the United States. The best companies well positioned to make our investment in shares in the flourishing market of LNG are Royal Dutch Shell (SHEL), Cheniere energy (LNG) and Sempra Energy (SRE) will benefit from this increase in demand.