Commodity Tracker: 5 charts to watch this week

Various developments in the power sector feature in this week's Commodity Tracker, with focus on Japan's nuclear power generation and Germany's gas consumption. Methanol price negotiations and green hydrogen ironmaking costs are also in focus.

1. Japanese nuclear power generation set to increase

What's happening? Two nuclear reactors return from maintenance in December, bringing combined 2.36 GW of additional capacity online just in time for the upcoming winter power demand peak. Based on the current maintenance schedule, power generation from nuclear plants should be 8.6 aGW for Q1 2023, which is an increase from 7.3 aGW for Q1 2022.

What's next? Further increase in nuclear power generation will take place for 2023. The first new restart in two years will provide further increase in generation in June 2023 when Kansai Electric starts operations of Takahama No.1, with Takahama No 2 scheduled for the following month. Nuclear generation from April to September in 2023 will average 9.8 aGW, which is almost double from 5.1 aGW observed for the same period in 2022.

2. RePowerEU funding agreement seen bearish for EUA prices next year

What's happening? Talks between European Union's institutions reached agreement Dec. 13 that the RePowerEU initiative should raise Eur20 billion through a combination of frontloaded EU Emissions Trading System auction volumes and allowances reserved for the EU Innovation Fund. The funds will go towards some Eur300 billion of support planned to accelerate renewable energy deployment and energy efficiency measures across the EU. The ultimate aim of the package is to remove the need for Russian gas supplies by 2027 via aggressive energy transition policies.

What's next? While an increase in EU Allowances auction supply twinned with weakening manufacturing demand are expected to place bearish pressure on 2023 EUA prices, current prices remain supported as plans to use the Market Stability Reserve to fund RePowerEU were dismissed. EUAs have been averaging nearly Eur88/MWh month to date. "We expect EUAs will remain supported into January where a further 1% reduction in month-on-month auction volume is anticipated," S&P Global Commodity Insights analyst Michael Evans said Dec. 15. In the longer term, meanwhile, provisional agreement by EU negotiators Dec. 18 reforming the ETS will see a material tightening of EUA supply to 2030, reflected in a December 2025 EUA price nearing Eur100/mtCO2 on the ICE exchange Dec. 19.

3. German gas consumption on the rise

What's happening? German gas consumption continues to rise and is now at levels close to the four-year average despite Berlin continuing to advocate for gas savings of at least 20% to get safely through the winter. Gas demand was just 5% lower than the 2018-2021 average in the week Dec. 5-11 as temperatures dropped, though consumption was still only 12% down once adjusted for the weather.

What's next? Germany's storage sites are still filled to more than 90% of capacity, but concerns remain that if demand is not curtailed the country could face physical supply shortages later in the winter, especially if the weather is cold. In addition, without Russian gas deliveries, there are fears that filling gas storage sites next summer could be difficult, adding to pressures in winter 2023/24.

4. European methanol players enter contract price negotiations for Q1 2023 while marker is on uptrend

What's happening? The European methanol market entered contract price negotiations for Q1 2023 the week of Dec. 16, with market participants expecting an agreement to be reached the week of Dec. 19, while the market is facing a notable volatility. The European spot price has mostly been on a downward trajectory since the beginning of Q2, reaching Eur290/mt on Dec. 1, the lowest point since Dec. 1, 2020. A rebound in prices was seen in H1 December, ahead of the first contract settlement for 2023. This uptrend mostly came on the back of firm spot buying activity that reduced the length in Northwest Europe. The Q4 contract price was agreed at Eur505/mt, down from Eur520/mt in Q3 and Eur505/mt in Q2. Q2 European contract price was the highest since S&P Global Commodity Insights data started monitoring the methanol ECP in 1994.

What's next? European methanol sellers and buyers are to negotiate the Q1 2023 term price, taking into consideration the supply and demand balance, production cost and recent spot market trend. The bearish economic outlook weighs on methanol buying appetite, which is expected to be the main driver for the price agreement. Increased market volatility, in addition to high production costs, will also influence the discussions for the new contract price.

5. Market costs for green hydrogen ironmaking remains high on EU renewable power prices

What's happening? European reference iron and steel costs made from green hydrogen electrolysis, supplied by renewable power, with direct-reduction iron ore pellets remain high after falling from a peak in August. Costs for producing DRI via green hydrogen and DR-grade pellets have been far higher than for natural gas-based DRI and pig iron over 2022, according to estimates by S&P Global Commodity Insights using monthly average data. This is due to the volume of hydrogen needed for ironmaking as well as underlying renewable power prices, electrolyzer efficiencies and capex, using Platts PEM hydrogen assessment prices in the Netherlands. New green DRI projects may rely on lower hydrogen prices through captive renewable power supplies and increased generation capacity, while current cost indications were supported by energy market shortages and demand.

What's next? New projects for producing lower emissions steel have been announced in European countries including Sweden, Germany, Spain, France and the Netherlands with plans around DRI and scrap, using green hydrogen. Some DRI plants may rely initially on natural gas, until sufficient commercial hydrogen availability comes into the market. This approach may provide opportunities for reviewing steel raw materials and costs as demand increases for DR pellets and lower emissions metallic iron products. Pig iron and hot-briquetted iron may need to be combined with ferrous recycled scrap to meet steel quality standards, with a greater focus in the industry on carbon emissions benchmarking and reporting with supplier sourcing.

Reporting and analyses by Andre Lambine, Henry Edwardes-Evans, Stuart Elliot, Stergios Zacharakis and Hector Forster