The LNG lifeline Will cheaper global gas resuscitate European industry?

Recent years have taken a brutal toll on Europe’s industrial producers, as a combination of record energy prices, supply-chain disruptions and robust decarbonisation targets have eroded their global competitiveness. Faced with the spectre of ever-greater deindustrialisation, European governments have responded with policy measures, albeit with mixed success.

Rather than political intervention, however, it is the end of those high energy prices that may ultimately provide the greatest relief for Europe’s industrial sectors. Liquefied natural gas (LNG) suppliers, particularly in the US and Qatar, have responded to high gas prices by investing massively in new supply. Consequently, traded gas prices in Europe are set to tumble in the coming years as a new wave of LNG supply hits the market. With energy costs a key factor in Europe’s economic malaise, its industrial producers could be the greatest beneficiaries of lower gas and electricity prices.

European industrial natural gas and power demand have declined by 21% and 4%, respectively, since 2021, sparked by soaring prices after Russia’s invasion of Ukraine. Though energy prices have come down from their 2022 peak, average European industrial electricity prices remain at a significant premium to those in China and the US, while natural gas prices are several times higher than in the US.

Desperate to reverse the European Union’s (EU) industrial decline, the European Commission published ‘The Future of European Competitiveness’ in September 2024. Led by former European Central Bank chief Mario Draghi, the report gives energy centre stage. Recognising the detrimental impact of high energy prices on the bloc’s industrial competitiveness, it details policy aims of reducing prices through deregulation, infrastructure investment and new energy price formulas.

However, other forces are at play besides the consequences of lower energy prices on Europe’s industrial producers. The Draghi report’s goals of boosting European industrial competitiveness are set against the backdrop of the EU’s unswerving commitment to driving down emissions. This will require a delicate balancing act: if emissions reduction remains the EU’s guiding principle, then reviving industrial growth becomes even more difficult.

In this month’s Horizons, we examine the impact of lower wholesale energy prices and how they will translate into energy-bill reductions for Europe’s industries, assess which industrial sectors will be most impacted, and consider what else Europe will need to do to achieve its objective of restoring global competitiveness. As energy prices fall, the implications for stakeholders across Europe and beyond will be profound.

Closing the competitiveness gap

European industrial competitiveness has been hit hard by the energy crises that followed Russia’s invasion of Ukraine, which sent European gas and electricity prices soaring and widened an already significant price gap with its major competitors, including the US and China.

Europe’s gas prices have been structurally higher than those in the US since shale gas transformed the US energy market well over a decade ago. The increasing availability of low-cost shale gas to the power sector has also kept US electricity prices low. In China, industrial gas prices, which are mainly regulated, with some linkage to oil prices, have historically been similar to those in Europe. However, its electricity prices remain lower because of relatively cheap coal and, more recently, the massive build-out of subsidised renewable energy.

Consequently, the impact of the energy crisis on European gas and electricity prices was far more damaging than that on China and the US. At their peak in 2023, average European industrial gas prices were more than five times those in the US, while electricity prices were almost three times. Although prices have since fallen, the average European industry  still pays more than four times as much than in the US for gas and more than twice as much for electricity.

A reversal of fortune

Europe’s extreme price disadvantage may soon be over, however. The massive build-out of US LNG is expected to boost global supply faster than demand growth, resulting in European traded gas prices almost halving by 2030, when prices will be at their lowest levels, compared with 2025. Benchmark European gas prices are forecast to fall to an average of €24/MWh (US$8/mmbtu) in the 2030-2035 period. Prices could fall further still should a meaningful return of Russian gas to Europe materialise.

At the same time, growth in LNG supply and data centres in the US will boost local gas demand by almost 40% in the next 10 years, lifting domestic Henry Hub prices to an average US$4.9/mmbtu (€15/MWh) in the 2030-2035 period ‒ 50% higher than the average price in 2025.

In effect, the success of US LNG supply growth will come at a cost to US consumers and to the benefit of those in Europe. The reduction in wholesale energy prices won’t fully translate into lower industrial energy prices, however, as infrastructure cost and subsidies for investments in renewables, will offset part of the benefits. Even so, European industrial users will see gas costs reduce sharply, putting them closer to those in China, where prices will remain relatively flat, and narrowing the competitive gap to the US. Similarly, reduction in wholesale power prices, albeit softer than gas price reduction because of increasing carbon prices, is set to halve Europe’s competitive gap to China and the US in the 2030-2035 period from current levels.

Figure 2: In Europe, what goes up must come down

Peak pain for Europe’s energy-intensive industries

The consequences of lower energy costs for industrial competitiveness are not uniform, however, with some sectors more exposed than others. To illustrate this, we have calculated the gas and electricity expenditure of different industrial sectors and assessed the result as a share of production costs.

The continent’s petrochemical producers, for example, saw energy as a share of total costs increase dramatically from a pre-crisis level of 5% to as much as 12% in 2022. As a result, production volumes across Europe's chemical sector decreased by 21% that year, with firms including BASF and INEOS facing increasing competition from producers elsewhere. Companies responded by either closing or mothballing plants, or moving production to lower-energy-cost locations. Wood Mackenzie estimates that European chemical production today is running at only 80% of total capacity. ExxonMobil’s recent announcement to shutter its ethylene plant in Scotland is a stark sign that relief remains elusive.

The non-ferrous metal sector has also been hit hard. While energy accounts for less than 10% of costs across the full value chain, it represents between 20% and 40% of costs in the smelting and refining of base metals such as aluminium, copper and zinc. Companies, including Glencore and Trafigura, have closed or temporarily shuttered plants as energy costs skyrocketed. Other companies and industrial sectors have also suffered, despite energy accounting for less than 8% of their overall costs, with companies including ArcelorMittal and Thyssenkrupp in steel, and Nestlé and Danone in food, also taking a hit.

Figure 3: Europe’s most energy-intensive industries have been hit hard
Cost of energy (gas and electricity) vs total production costs by type of industry

Note: Energy-efficiency ranges have been calculated using the gas and power prices for energy-intensive industries, except for ‘Other industries’, where the average price for industry has been used instead. Energy costs have been considered as a share of intermediate consumption, as expressed by Eurostat (which does not include labour costs or capex).
Source: Wood Mackenzie Lens Gas & LNG and Lens Power & Renewables, Eurostat.

Note: Prices include non-recoverable taxes and levies. Different bands are representative of the amount of energy that each industry consumes. For gas, ‘Band I1’ refers to industries that consume less than 1,000 GJ, while ‘Band I6’ refers to consumption above 4,000,000 GJ. For power, ‘Band IA’ refers to industries that consume less than 20 MWh, while ‘Band IG’ refers to consumption above 150,000 MWh.
Source: Eurostat, Wood Mackenzie.

Note: bubble size represents sector gross value added
Source: Wood Mackenzie Lens Gas & LNG and Lens Power & Renewables, Eurostat.