European natural gas prices surge, with earnings pressure on chemical companies potentially concentrated in 1H27

Overview

The report analyzes the impact of the sharp rise in European natural gas prices on the earnings of industrial chemicals and fertilizer companies. Morgan Stanley believes that natural gas and electricity serve both as sources of production heat and as feedstocks for products such as ammonia, so higher prices will raise costs. However, existing hedging arrangements make 2026 risks relatively low, with pressure more likely to be deferred until 1H27.

Core views

The European natural gas market is first facing combined pressure from prices, supply, and inventories. Dutch TTF has risen by approximately 55% since June 17, 2026, to €65/MWh. The report attributes the increase to uncertainty over natural gas supply caused by renewed escalation of the conflict, competition between Europe and Asia for Middle Eastern LNG cargoes, and rising risk premiums ahead of winter. Approximately 20% of global LNG supply is typically transported through the Strait of Hormuz, of which approximately 70% is shipped to Asia and approximately 10% to Europe. Consequently, shipping or supply disruptions would simultaneously intensify competition for cargoes in both Asia and Europe. Inventories have further weakened Europe's buffer against winter demand. European natural gas storage has fallen to approximately 52%, more than 20% below the historical seasonal average; the chart indicates that inventories are at their lowest level in more than 15 years. The report believes low inventories make it more difficult for Europe to withstand a normal-to-cold winter. Morgan Stanley's commodities team forecasts Dutch TTF at €65/MWh in 4Q26 and €68/MWh in 1H27. It should be noted that another part of the report summary lists the 1H27 assumption as €38/MWh, whereas the subsequent text and the commodities team's forecast both state €68/MWh. Natural gas and electricity play a dual role for industrial chemicals and fertilizer companies: they are used to generate steam and process heat, while also serving as feedstocks that can be converted into products such as ammonia. Based on 2026 consensus EBITDA, every €10/MWh change in gas prices has an average unhedged impact of approximately 5% on the EBITDA of covered companies. Differences among companies are significant: Yara's sensitivity is approximately 12%, K+S's approximately 8%, Solvay's approximately 6%, and BASF's approximately 4%. Therefore, based solely on unhedged exposure, Yara is the most vulnerable to higher energy prices. Unhedged estimates are not equivalent to actual earnings impacts because most companies have locked in part of their energy purchase prices. Approximately 80% of Solvay's 2026 energy requirements are covered, while approximately 70% of K+S's 2026 requirements and approximately 50% of its 2027 requirements are covered. BASF has also implemented hedging arrangements but has not disclosed the specific percentage. This means that actual cost risks in 2026 are significantly lower than indicated by static sensitivity estimates. K+S could still face a low-single-digit percentage earnings risk in 2H26, but the report generally views 2026 earnings damage as relatively limited. Yara is the exception: the company does not hedge energy prices and therefore has the highest direct cost sensitivity. However, the report also notes that Europe is currently the marginal supplier or buyer in the urea market, and rising European costs could drive a corresponding or partial increase in urea prices, offsetting some energy cost pressure. Therefore, Yara's high unhedged sensitivity may not fully translate into an EBITDA decline of the same magnitude. The timing of risks depends on when existing hedges expire and whether high gas prices persist. Morgan Stanley believes that some companies could begin to bear higher energy costs in 4Q26, but more material pressure may emerge in 1H27. If the commodities team's forecast of Dutch TTF rising to €68/MWh materializes, with all else being equal, earnings risks would be more pronounced for BASF and Solvay, followed by K+S. This does not reflect the highest unhedged sensitivity, but rather the stronger pass-through of high gas prices to actual procurement costs as hedge coverage declines over time.

Analysis framework

The report first explains the rise in European natural gas prices through conflict, competition for LNG cargoes, and low inventories. It then uses 2026 consensus EBITDA as the basis for estimating each company's unhedged earnings sensitivity to every €10/MWh change in gas prices. It subsequently incorporates companies' actual hedge ratios, hedge durations, and the potential offset from higher urea prices to assess where the cost impact is likely to materialize in 4Q26 and 1H27.

Methodology notes

• Industry/Sector Analysis FrameworkSupply-demand framework

  European Natural Gas Supply, Demand, and Inventory Analysis

  The report combines supply uncertainty caused by conflict, competition between Europe and Asia for LNG cargoes, the share transported through the Strait of Hormuz, and European inventory levels to explain the rise in Dutch TTF prices and winter risks.

• Corporate Fundamentals and Financial Framework

  Unhedged EBITDA Sensitivity Analysis

  Using 2026 consensus EBITDA as the basis, the report estimates the impact of every €10/MWh change in natural gas prices on each company's EBITDA, then uses hedge coverage ratios to adjust its assessment of actual earnings risks.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Yara International ASA（YAR.OL）

  For every €10/MWh change in natural gas prices, the unhedged impact on 2026 EBITDA is approximately 12%, the highest among the four companies.

  Strengths

  Rising European costs could drive higher urea prices, partially offsetting energy cost pressure.

  Weaknesses

  The company does not hedge energy prices and has the greatest direct cost exposure.

  Comparison

  Its unhedged sensitivity is higher than those of K+S, Solvay, and BASF.

  Risks

  If urea prices fail to rise in line with European marginal costs, higher natural gas prices could more directly depress earnings.

• K+S AG（SDFGn.DE）

  For every €10/MWh change in natural gas prices, the unhedged impact on 2026 EBITDA is approximately 8%.

  Strengths

  Approximately 70% of 2026 energy requirements and 50% of 2027 requirements are already covered, cushioning part of the cost increase.

  Weaknesses

  Hedge coverage in 2027 is lower than in 2026, weakening subsequent cost protection.

  Comparison

  Its unhedged sensitivity is lower than Yara's but higher than those of Solvay and BASF.

  Risks

  There could be a low-single-digit percentage earnings risk in 2H26, with risks potentially rising further in 1H27.

• Solvay（SOLB.BR）

  For every €10/MWh change in natural gas prices, the unhedged impact on 2026 EBITDA is approximately 6%.

  Strengths

  Approximately 80% of 2026 energy requirements are covered, a relatively high level among the companies disclosed in the report.

  Weaknesses

  The high hedge ratio mainly reduces near-term risks and cannot eliminate cost pressure after the hedges expire.

  Comparison

  Its unhedged sensitivity is lower than those of Yara and K+S but higher than BASF's.

  Risks

  If high gas prices persist, the report believes more material earnings risks could emerge in 1H27.

• BASF（BASFn.DE）

  For every €10/MWh change in natural gas prices, the unhedged impact on 2026 EBITDA is approximately 4%.

  Strengths

  The company has implemented an energy price hedging strategy, which can reduce the actual cost impact in 2026.

  Weaknesses

  The specific hedge ratio has not been disclosed, making the degree of protection difficult to quantify from the report's data.

  Comparison

  It has the lowest unhedged EBITDA sensitivity among the four companies.

  Risks

  Despite its relatively low static sensitivity, the report still identifies BASF as one of the companies facing more pronounced earnings risks in 1H27.

Key data

• Recent Dutch TTF increaseApproximately +55% to €65/MWhSince June 17, 2026
• European natural gas storageApproximately 52%More than 20% below the historical seasonal average; the chart indicates the lowest level in more than 15 years
• Global LNG transported through the Strait of HormuzApproximately 20%Of which approximately 70% is typically shipped to Asia and approximately 10% to Europe
• Dutch TTF forecast€65/MWh in 4Q26; €68/MWh in 1H27Morgan Stanley commodities team forecast; another part of the summary lists €38/MWh for 1H27
• Average unhedged sensitivity of covered companiesApproximately 5% of EBITDAFor every €10/MWh change in gas prices, based on 2026 consensus EBITDA
• Yara unhedged sensitivityApproximately 12% of 2026 EBITDAFor every €10/MWh change in gas prices; the company does not hedge
• K+S unhedged sensitivityApproximately 8% of 2026 EBITDAFor every €10/MWh change in gas prices
• Solvay unhedged sensitivityApproximately 6% of 2026 EBITDAFor every €10/MWh change in gas prices
• BASF unhedged sensitivityApproximately 4% of 2026 EBITDAFor every €10/MWh change in gas prices
• 2026 hedge coverageSolvay approximately 80%; K+S approximately 70%; BASF percentage undisclosedPart of energy consumption prices have been locked in, so actual risks are lower than unhedged estimates
• K+S 2027 hedge coverageApproximately 50%Declining coverage increases the risk of cost pass-through in 1H27
• Potential K+S earnings risk in 2H26Low-single-digit percentageThe relatively limited near-term risk stated in the report

Impact & implications

The report believes that rising European gas prices will not immediately affect 2026 earnings to the full extent indicated by unhedged sensitivities because most companies already have substantial energy cost coverage. As hedges gradually expire, if high gas prices persist into 1H27, actual earnings pressure on BASF and Solvay could increase significantly, while K+S faces relatively lower risk. Although Yara is unhedged and has the highest static sensitivity, rising urea prices could provide a partial offset.

Risks

• Continued increases in European natural gas and electricity prices could raise energy and feedstock costs for chemicals and fertilizer companies.
• A renewed escalation of the conflict could intensify uncertainty over natural gas supply and affect LNG transported through the Strait of Hormuz.
• Competition between Europe and Asia for Middle Eastern LNG cargoes could further raise procurement costs.
• Inventories of only approximately 52%, significantly below the seasonal average, leave Europe with an insufficient buffer against a normal-to-cold winter.
• After corporate hedges gradually expire, high gas prices could pass through more fully to earnings in 1H27.
• If Yara cannot offset costs through higher urea prices, its unhedged exposure could result in more direct earnings pressure.

What to watch

• Monitor whether Dutch TTF reaches Morgan Stanley's forecasts of €65/MWh in 4Q26 and €68/MWh in 1H27.
• Monitor the pace of European natural gas inventory replenishment, winter temperatures, and the gap between inventories and the historical seasonal average.
• Monitor supply risks related to the Strait of Hormuz and competition for LNG cargoes between Europe and Asia.
• Monitor the actual energy procurement costs of Solvay, K+S, and BASF after their existing hedges expire.
• Monitor whether urea prices rise with European marginal production costs, thereby cushioning Yara's natural gas cost pressure.