June 20, 2012 / 2:28 PM / 6 years ago

Analysis: Power price declines bode ill for German economy

LONDON (Reuters) - A steep decline in German electricity prices suggests firms are preparing for harder economic times ahead, reinforcing the grim outlook seen in leading indicators of economic sentiment published this week.

Germany has so far weathered the sovereign debt crisis that has gripped much of Europe during the past year, but German wholesale electricity forward prices have dropped more than 20 percent since April, Reuters data shows.

Prices for delivery in 2013 are now back at levels from 2009, the height of the financial crisis, reflecting lower expectations by the German manufacturing sector. The prices depend strongly on demand from the German manufacturing sector.

“Forward power prices on the European Energy Exchange (EEX) are largely determined by internal sales forecasts of big power suppliers, and this tells you something about the economic outlook,” said Maik Neubauer, a partner at financial and energy consultancy Baringa and former chief financial officer at EEX.

London-based brokers in the electricity market say industrial buying interest has dropped off, indicating expectations of lower industrial activity for the coming year.

“The power market has come under intense pressure as industrials are scaling back their orders in expectation of weaker demand for the next 12 months,” one electricity trader with a major German utility said, under condition of anonymity while discussing customer behavior.

The gloomy outlook is supported by other leading indicators. The ZEW index published on Tuesday showed analyst and investor sentiment fell in June at its fastest rate since October 1998, far below the performance expected.

The Ifo business climate index, which will be published on Friday, is also expected to show declines, according to a Reuters poll of economists.

Cement sales, an important measure of the construction sector, are also down.

According to the German cement industry association, cement sales dropped by 10.4 percent year-on-year in May. So far this year, they are down 8 percent compared with the first five months of 2011.

Germany’s energy sector is undergoing profound changes, with the government subsidizing a large-scale renewable power capacity expansion and ordering nuclear plants shut following last year’s accident at Japan’s Fukushima reactors.

Electricity prices can be less volatile than economic growth. The drop in Germany’s 2008 GDP, for instance, was much steeper than the fall in power prices. Likewise, some changes in the energy sector are not linked to economic output.

“The fact that the German government decided to retire 8.4 gigawatts of nuclear units drove prices up during Q2 2011. But this price action had to do with reduced supply versus the same demand and not with an increase in GDP,” Paolo Coghe, Senior Analyst at French Bank Societe Generale said.

Falling electricity prices could now be partly due to an increase in renewable energy supply expected to come to the grid next year.

“It could also be that industrials have only scaled back orders until there is more clarity over the direction of other energy prices, such as oil, and how the regulatory framework in power markets develops. And should there be a recovery, power prices may jump back as well,” Baringa’s Neubauer said.

Additional reporting by Vera Eckert and Maria Sheahan in Frankfurt, and Oleg Vukmanovic in London; Editing by Peter Graff and Jane Baird

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