Higher electricity costs in the EU will have a significant impact on earnings, Trend reports with reference to the US JP Morgan Bank.
“Our biggest concern continues to be energy security, with TTF natural gas rising further to €205/MWh this week. Our already recessionary economic forecasts for our region are based on a price of €150/MWh, which suggests that there may be material further downside risk to our growth targets if current pricing is maintained, with a serious threat of a deep stagflationary recession,” reads a report released by JP Morgan.
Further, the energy crisis has broadened well beyond just reductions in Russian gas exports to Europe.
“French nuclear power continues to be well below capacity, the high-pressure weather system which is currently bringing high temperatures is driving increased demand for air conditioning and lower wind power generation, and coal shipments to Germany have been disrupted by low water levels in the Rhine River. Consequently, electricity costs have risen even faster than gas, and, in our view, this likely to be the most significant metric for corporate energy costs. Once hedges are reset, or cost pass through mechanisms are implemented at the national level, we believe the impact on earnings and margins could be significant,” said the Bank.
JP Morgan notes that this impacts almost every cyclical sector.
“Obviously, it has a direct impact on energy-intensive industries including chemicals, steel/glass/concrete producers (and consumers such as autos and building materials), and manufacturing. Additionally, if households have to budget more for heating and fuel bills, we would expect an indirect shock from lower discretionary spending affecting other cyclicals such as consumer goods, retail, and transport. This would also likely spill over into bank non-performing loans on both mortgage and corporate loan books, while weaker business sentiment would affect advertising spending hitting media and technology,” reads the report.