By Lars Paulsson
Nov. 13 (Bloomberg) -- European electricity prices may follow plummeting costs for fossil fuels as a looming recession cuts industrial energy demand across the continent.
Power for next-year delivery in Germany, Europe's biggest energy consumer, will fall as much as 5.4 percent to 62.70 euros ($78.49) a megawatt hour at the end of the year, according to Olaf Ter Bille, head of trading at Amsterdam-based Energy Capital Management BV. The contract tumbled 27 percent since its July peak, while oil and coal futures lost more than half their value.
``The risk is definitely on the downside, be sure about that,'' said Per Lekander, UBS AG's head of European utilities research, in a phone interview from Paris. The profit that Germany's biggest utilities, E.ON AG and RWE AG, make from hard- coal burning power plants may fall 70 percent by the end of December, based on 2009 prices, he said.
The European Commission expects economic growth in the region to fall to 0.1 percent next year from 1.2 percent in 2008. That will cut demand for power as the world's biggest steel producer, ArcelorMittal, slashes production and German automakers including Volkswagen AG build fewer cars.
``Power will fall because of less demand from industry,'' Ter Bille said in a phone interview from Amsterdam. The value of Energy Capital Management's MMT Energy Fund rose 24 percent this year through October.
Next year's power prices in Germany, which affect energy costs around Europe, have been buoyed during the past two months by utilities purchasing energy supplies for 2009 on behalf of customers, analysts and traders said. The contract traded at 66.30 euros a megawatt hour yesterday, according to ICAP Plc, the energy broker.
Buying Window Closing
``Once the buying from utilities has been done in the mid- to-end November, power prices will reflect the decline in oil prices and fundamentals in commodity markets,'' Ter Bille said.
A decline in power prices and steady coal costs would squeeze the margin utilities can make from burning coal. Taking into account carbon emission costs, that profit, the so-called clean dark spread, may fall by as much as 10 euros this year from 14 euros a megawatt hour as of Nov. 12, Lekander said.
``This will have an enormous impact'' on utilities, he said. UBS has ``buy'' recommendations on the shares of both E.ON and RWE.
More than 20 percent of Germany's electricity is generated by burning hard coal. The margin was as high as 19 euros on Oct. 27, according to data compiled by Bloomberg, as next-year European coal prices dipped below $100 for the first time in more than a year.
Steel Production Slowing
The European Central Bank cut its key interest rate to 3.25 percent on Nov. 6 from 3.75 percent as the global financial crisis pushes economies toward a recession. The International Monetary Fund predicts simultaneous economic contractions next year in the U.S., Japan and Europe next year, for the first time since World War II.
ArcelorMittal said last week its flat carbon steel production will fall by 30 percent in Europe because of weaker demand. Corus also said it will cut European steel output by 30 percent.
Steel companies are responding to falling demand from one of their biggest customers, the auto industry. German carmakers Volkswagen, Daimler AG and Bayerische Motoren Werke AG reduced production in October by 10 percent to 452,700 vehicles, according to Frankfurt-based industry group VDA, citing falling demand.
Steel plants run by Corus and ArcelorMittal are included in a European program aimed at cutting carbon dioxide emissions from about 12,000 power plants and factories.
Lower industrial output means companies will either buy fewer emissions permits or have a surplus to sell in the market, potentially lowering costs, said Hans Gruenfeld, president of the International Federation of Industrial Energy Consumers in Brussels.
Carbon Costs Fall
Emission permits prices are included in the overall cost of generating power from fossil fuels.
``Commodity prices are coming down, and that's beneficial of course, even if it is just temporary,'' Gruenfeld said. The federation is an umbrella lobby group for manufacturers that account for 40 percent of the European Union's electricity use.
Electricity is set to slip further because the traditional two-month buying period from industrial consumers is coming to an end around now, according to Dieter Hluchy, a trader at Stadtwerke Hannover AG's Enercity Trade, which supplies energy to regional industries and households in northern Germany.
``The bulk has been done as far as we can see,'' he said. ``Some customers are playing the risky card, only buying for the first month or quarter,'' expecting further declines, Hluchy said.
The German 2009 power contract could fall to 64 euros if the corresponding coal contract again drops below $100 a metric ton, Hluchy said. ``The economic situation will dictate that.''
To contact the reporters on this story: Lars Paulsson in London at lpaulsson@bloomberg.net
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