In Germany, benchmark quarterly electricity prices are approaching EUR 60 per megawatt hour, which are levels last seen before the crisis and hint at an end to Europe’s energy crisis. Meanwhile, there is growing opposition by environmentalists against investments into natural gas infrastructure. With the shift in market conditions, the pendulum seems to be swinging back from energy security to the environment. However, in most cases, this is not a question of ‘either or’.

Very often, this debate and natural gas’ role in an electricity market that transitions to low emissions and clean energy seems to miss two key aspects:

• Gas infrastructure is key for energy security. Europe has the most advanced electricity market design and a well-proven mechanism that fosters investments into this type of energy security, the so-called capacity markets. A capacity market pays for the infrastructure but not its usage, and infrastructure costs are lower compared to fuel and emissions costs.
• Gas infrastructure does not lock in emissions. The incremental shift to clean energy pressures gas use for power generation. Gas use at power plants dropped significantly in Europe last year, resulting in energy-related CO2 emissions declining.

Moreover, the broader debate seems to overlook the established biogas market. Over the past months, gas power plants in Northwest Europe consumed roughly 100 million cubic meters of fuel per day, half as much as the industry overall. Europe’s biogas production sums up to more than 50 million cubic meters per day. More importantly, transporting and storing methane, the molecule that turns natural gas and biogas into fuels, is far less costly and complex compared to hydrogen, an aspect that has been neglected so far.

Looking ahead, there is still great potential to increase biogas output and we see gas power plants as part of the energy transition, offering energy security at low costs and low emissions.

China’s property crisis: Beyond a cyclical slowdown

The real estate sector has been a major growth engine for China’s economy and is now at the centre of the current slowdown. Nevertheless, residential investment as a percentage of GDP is still higher than in many advanced economies. Over investments and excessive leverage are meeting a structural decline of demand as demographic factors become less favourable.

Urbanisation, which has driven most of the demand for urban housing in the past decade, is slowing significantly. Moreover, China’s population has peaked. The latest official population figures show that China’s total population continued to decline for a second year in 2023, shrinking by more than two million. The structurally shrinking demand for urban housing forces the property sector to adjust to a smaller and more sustainable size over the medium term. 

The property sector is a large and important component of the Chinese economy and is closely linked to the rest of the economy. The medium-term outlook for the Chinese economy will depend on what policy measures are taken to mitigate the economic costs and whether resources can be successfully reallocated away from the property and infrastructure sectors to more efficient areas.

Geopolitics: Impacts on shipping in the Red Sea

Another area of infrastructure in jeopardy are the clashes in the Red Sea. While some observers are warning about the potential economic impacts, namely a sizeable and lasting inflation push, from our point of view the overall economic impact should remain negligible.

The Suez Canal and the Bab el-Mandeb Strait, are indeed chokepoints of global trade between Europe, the Middle East, and Asia, however, there are various reasons why the impact for Europe’s economy will likely remain limited:

• The Europe–Asia trade reroutes via the Cape of Good Hope. While this journey is longer and absorbs more ships at sea, it keeps the goods flowing into Europe. 
• In consequences of the pandemic distortions and some of the energy trade sanctions, the fleet of container, bulk, and tanker vessels has expanded.
• Europe’s crude oil supplies either sail around the Cape of Good Hope, as the very large crude carriers cannot pass the Suez Canal, or skip the Bab el-Mandeb Strait by being loaded at Saudi Arabia’s Red Sea coast. Europe’s natural gas imports also largely come from North America.

The attacks by the Houthi rebels on ships in the Red Sea add to the perception of the Middle East’s instability and fuel concerns about the geopolitical risks overall. While this topic continues to dominate the news headlines, the market remains calm.

What does this mean for investors?

In our view, there is no quick solution to the challenges China is facing, which means that positive surprises are rather unlikely. This is also not good news for Europe, which, due to its exports, is highly dependent on the health of the Chinese economy. Even though the European economy is struggling, the European Central Bank is not yet ready to declare victory over inflation and cut interest rates.

In terms of inflation, we believe that the impact of the attacks on ships in the Red Sea should not be overemphasised. Shortages are also unlikely, as we are only witnessing a one-off lengthening of supply chains rather than a disruption.