The resumption of Russian gas flows through the Nord Stream 1 pipeline after a 10-days annual maintenance period does not eliminate risks of a future gas supply cessation, Fitch Ratings says. Furthermore, the current low levels of supply at 40% of capacity are keeping gas prices high and maintaining pressure on the profitability and cash flows of European corporates which may increase further as the heating season approaches.

Gas supplies to Europe through Nord Stream 1 restarted on 21 July, calming immediate fears that Russia would not resume supplies. However, Gazprom has reportedly warned its European customers of ‘force majeure’ circumstances that prevent it from guaranteeing future supplies. This, along with previous public warnings that Russian supplies may be reduced further, exposes European companies to risks of further supply disruptions or a halt to supply.

We expect the countries most dependent on Russian gas to accelerate energy savings measures, which could reduce production in some industries. The European Commission has already asked all EU counties to cut their gas use by 15% from August 1 until March to prepare for further disruptions in Russian gas deliveries.

Germany is the EU country most dependent on gas supplied via Nord Stream 1 and reduced volumes affect German companies, with the impact potentially becoming more severe in the event of a complete cut-off leading to gas rationing. However, no details have been published by regulators on the merit order and gas volumes that would be made available to each sector or company if there is rationing. Industries that use gas most intensively, including glass and ceramics, paper, metal processing, basic chemicals, food and fertilisers, represent about two-thirds of Germany’s industrial consumption of natural gas.

Utilities across most European countries have taken the greatest hit so far from rising natural gas prices, but the impact varies depending on the operating model and geographic location. Uniper is the most visible casualty of the gas stand-off and is in talks with the German government about a bail-out as it is not able to pass on high spot prices to customers. The impact on integrated utilities is mitigated by the diversification of their business and often higher profitability in other segments, such as electricity generation. The performances of most generators, particularly clean ones, are benefiting from high electricity prices, although this advantage is limited by growing political risk, including windfall taxes, which have been implemented or considered by some European governments.

Chemicals and fertilisers producers are the most exposed among our rated natural resources companies to risks of high gas prices and a supply cut-off, mostly due to their dependence on gas both as feedstock and in energy generation to operate key production assets.

Corporates in the heavy manufacturing sector will face increased supply chain risks in the event of an abrupt halt of Russian gas as some of their main suppliers are heavy gas users. However, we believe that many rated companies in the sector have business models or mitigation plans that could offset any potential rating pressure arising in this scenario.

More broadly, most European corporate sectors will be affected by slow economic growth, or even a recession, in the event of Russian gas supply cessation, particularly in Germany and some central and eastern European countries.
Source: Fitch Ratings