German manufacturers struggle to hedge as European gas costs spike

Prices and the policy backdrop

European gas prices climbed past 100 euros per megawatt-hour, a level not seen since the 2022 energy crisis. That earlier surge followed Russia's invasion of Ukraine, when Moscow cut pipeline deliveries to Europe and energy-intensive manufacturers in Germany scaled back output.

Since then, authorities have pushed gas buyers - among them the state-owned SEFE and Uniper SE - toward entering long-term supply deals aimed at broadening supply options and reducing sensitivity to global price volatility. Those agreements can also fix energy costs. Access still hinges on credit, collateral and how predictable a company's demand is.

Why hedging is out of reach for many

For multi-year procurements, utilities may demand either collateral or a guarantee from a bank, which makes such arrangements unattainable for some firms. EWE AG, among Germany's biggest regional utilities, said it will not sign forward contracts with any business customer that lacks a credit rating. "There is an increased risk of default in such cases, and we would require a bank guarantee as collateral," Chief Executive Officer Stefan Dohler said. Because that is often not possible, he added, many companies end up on the spot market.

Major suppliers also expect industrial clients to align multi-year gas buys with pre-sold output. That is manageable in sectors where production can be scheduled far ahead. SKW shows the challenge when demand swings.

Natural gas accounts for 80 to 90 percent of its production costs, and its customer base - primarily farmers purchasing fertilizer - usually does not place orders far ahead. Locking in gas without clear sales would create another risk, CEO Carsten Franzke said, because fertilizer needs depend on the weather and buying early ties up capital.

The squeeze on smaller operators

In Bavaria, family-owned Völpel GmbH - a three-generation dryer of organic fruit, vegetables and tea - entered insolvency at the end of September, as did ZiFood in Saxony, a subsidiary acquired five years earlier. German Völpel, the managing director, pointed to surging energy expenses and crop losses in a hot, dry summer. Both companies previously held low-cost three-year gas deals commencing in 2019, but after Russia's invasion of Ukraine those agreements were terminated, forcing them onto the spot market. "We lacked the means to enter into hedging agreements," he said.

Long-term agreements with customers limited how much they could raise prices. They got through 2022 by cutting production and using short-time work, but Völpel said cash reserves ran down when the war in Iran drove spot gas prices up to 5.7 euro cents per kilowatt-hour, five times higher.

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DiHAG Integrated Foundry Group shows how planning limits bite. Running 10 foundries, it says forecasting gas needs beyond three to five months is difficult. It has hedged about 60 percent of its demand and purchases the remainder on the spot market, which CEO Alex Lissitsa said has lifted costs by as much as 25 percent. Financing is another constraint, with bank loans "virtually impossible" just as foundries need to invest in energy efficiency, he said.

Who is covered, who is not, and why that matters

Some industrials have built buffers. Copper recycler Aurubis, filings show, has secured the bulk of its energy needs through 2027, and chemical maker Lanxess said it hedged a portion of its demand through 2028. BASF SE CEO Markus Kamieth said last month that the company is in a stronger position than many peers to absorb the price shock.

For those still exposed, the bill is building. Norwegian ammonia producer Yara, which relies on the spot market, expects fourth quarter gas costs to be 450 million dollars higher than a year earlier.

Industry groups see broader risk if high prices stick. Christian Seyfert, managing director of VIK, said, "Prices that at times exceed 100 euros per megawatt-hour are ruinous for many energy-intensive companies in the long run and pose a serious threat to Germany as an industrial hub." He noted that German manufacturers face rivals in markets like the US, where gas is much cheaper, and cannot always pass higher costs to customers, warning that prolonged price gaps could pull production and investment away from Germany.

Germany's industry federation says firms opting for spot purchases have to shoulder the risk, but cases where suppliers deny long-term contracts "can be problematic," energy expert Carsten Rolle said. He added that policymakers should examine how those businesses can get similar chances to protect themselves.

The bottom line: in your portfolio, separate the firms that have fixed energy costs into 2027 and 2028 from those riding the spot market. The first group has clearer cost visibility. The second is managing volatile inputs that have already triggered insolvencies and higher operating expenses.

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