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The surge higher in European natural gas prices predates Russia’s escalation of the war in Ukraine in February, having risen sharply in H2 2021, spiking in December, then again in March in the aftermath of the Russian invasion, and again in July. Prices have fallen back a little in September amid fears of recession and most recently Russia’s military reversals in Ukraine.

“The European sector has entered this more extreme phase of the energy crisis brought on by Russia’s weaponization of its gas exports in good financial shape, with net debt on average below pre-pandemic levels,” says Eugenio Piliego, director in corporate ratings at Scope Ratings.

“However, indebtedness is on the rise amid increasing energy and feedstock costs which put the European sector at a disadvantage particularly to US producers. In addition, such an inflationary environment is increasing the risk of recession, in which the case of the chemical sector, would necessarily lead to an overall deterioration in demand, clouding the credit outlook,” Piliego says.

Snapshot of Europe’s chemicals sector in 2022 gas shock
Exposure to main risk factors: higher energy prices, gas shortages
Source: Scope Ratings

Leaving aside the fertiliser sector, which is most exposed to high gas prices, Europe’s largest chemicals suppliers – benefiting from broad product portfolios, strong balance sheets, and geographic diversity – should still be able to ride out the energy shock as governments scramble to cushion consumers and business from the worst effects.

“Smaller chemical producers with operations reliant on natural gas and located predominantly in Europe are at higher risk of temporary closures. Generally, production sites outside Europe are considered less affected by the gas shortage risk, although gas prices in Americas and Asia have also increased in the meanwhile,” says Piliego.

Even in the most extreme of the three scenarios we of higher gas prices and supply disruptions, most of the rest of Europe’s large chemicals companies would pull through with only a modest deterioration in profitability and credit metrics.

"For those chemical segments using natural gas as feedstock – including some fertiliser producers and glassmakers – current gas prices have ruined the economics of their business in Europe. It puts them at a huge disadvantage versus American and Asian producers and will likely to lead to prolonged production stoppages,” says Piliego.

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