International stock markets continued to be affected by the financial crisis and the resultant global recession in the first quarter of 2009. Germany’s lead index, the DAX 30, which had closed 2008 at 4,810 points, had lost over 1,100 points by the beginning of March, but recovered somewhat thereafter. It had reached 4,085 points at the end of March. This represents a 15 % decrease compared with the year-end level in 2008 and matches the decline of the Dow Jones Euro STOXX 50, the most important lead index in the Eurozone. In April, the DAX 30 nearly fully recovered from the points drop observed since the beginning of the year, despite the persistently gloomy economic outlooks. It closed the month at 4,769 points.
RWE shareholders were also affected by further decreases in share price in the first quarter. The company’s common stock traded at EUR52.81 at the end of March, falling 17 % short of last year’s closing quotation. The company’s preferred shares declined 13 % in price to EUR46.86. RWE shares thus marginally outperformed the European sector index Dow Jones STOXX Utilities (-18 %). Besides the crisis in the financial markets, price trends on commodity markets were among the main drivers of the performance of utility stocks. Raw materials initially became cheaper, leading to reductions in electricity forward prices. This triggered negative reactions by share prices. The fact that RWE is solidly financed and has low net financial debt compared to other companies in its sector had a stabilising effect. At the end of April, RWE common shares traded at EUR54.59, slightly surpassing their closing quotation in March despite the discount caused by the high dividend payment.
The situation on the bond markets also remained tense. Even old economy industries are finding it difficult to refinance their operations, owing to the high economic risks. Despite the challenging environment, several European utilities, including RWE, made use of the last quarter to issue new bonds. Utility euro bonds alone totalled EUR35 billion by the end of March. Credit spreads charged on top of the interbank interest rate rose, but this increase was partially offset by the decline in interbank interest rates. The price for hedging RWE credit risk via fi ve-year credit default swaps (CDSs) continued to climb initially. It briefl y exceeded 100 basis
Economic environment
Economic downturn persists
The global economy continued to shrink in the first quarter of 2009. Economic output in most industrial nations decreased. Gross domestic product (GDP) in the Eurozone was 3.8 % down on the figure for last year’s first quarter, according to available estimates. Germany appears to have suffered an even steeper decline of 5.1 %, going hand-in-hand with a significant drop in industrial capacity utilisation. Waning foreign demand is one of the main factors hampering Germany’s economy. Discretionary income displayed weak development in the UK, owing to the economic and real estate crises. Therefore, consumer spending is no longer capable of supporting the UK economy. Receding investment and exports caused GDP to fall an estimated 4.0 %. Countries hit the hardest by the crisis in Central Eastern Europe were those depending strongly on exports (Czech Republic) and those with high levels of foreign-currency consumer loans (Hungary). Capital outfl ows put their currencies under pressure. In contrast, the Polish economy proved to be relatively crisis-proof, given the low importance of exports. Slovakia benefi ted from its inclusion in the Eurozone which protected the country from turbulent currency swings.
Weather much cooler year on year
Whereas the economic trend is primarily refl ected in the level of demand for energy from industrial enterprises, household energy consumption strongly depends on weather conditions. Temperatures in the company’s core markets, i. e. Germany, the UK and Central Eastern Europe, were much lower in the first quarter than in the same period in 2008. They also fell below the long-term average. In addition to energy consumption, weather conditions also infl uence the generation of electricity, above all from wind turbines. Given the cold weather, there was much less wind in the first quarter in Germany than in the same period last year and the long-term seasonal average.
Economic crisis reduces energy consumption in RWE’s core markets
The cool weather and the markedly deteriorating industrial cycle were the two opposing factors influencing demand for energy in the core markets in the first quarter. Electricity use was significantly affected by the decline in industrial production. The negative economic impact was mitigated by stable demand from homes and the service sector. Based on initial estimates, German electricity consumption was 5 % down on the corresponding period in 2008. Estimates for the company’s foreign electricity markets, namely the UK (-4 %), Poland (-4 %), Hungary (-5 %) and Slovakia (-6 %), were of a similar order. The gas consumption trend, which was also significantly influenced by the cool weather, was less uniform. Estimates in Germany for the first quarter still differ widely. Based on the company’s assessments, consumption either stagnated or recorded a marginal decline. Preliminary data analyses in the Czech Republic indicate that demand rose by 7 %, while drops of 3 % and 2 % were estimated for the UK and Hungary.
Oil market: Brent prices significantly below year-earlier level
The recession clearly left its mark on international commodity markets. Following a dramatic freefall in the second half of 2008, prices stabilised at a low level in the first quarter of 2009. Crude oil in particular became much cheaper. In the first three months of 2009, a barrel of Brent crude sold for an average of $44. It traded at $97 in the first quarter of 2008 and temporarily above $140 in July 2008. However, production cut-backs decided by OPEC countries and the emerging hope for economic recovery contributed to the fact that prices have not slipped considerably since the beginning of the year and have recently stayed above the 50-dollar mark for a substantial period.
Gas prices still affected by 2008 crude oil boom
European gas quotations mirror price developments on the oil market, albeit typically with a lag of several months. Therefore, imports of gas into Germany became more expensive than in the first quarter of 2008, although oil prices have recently decreased significantly. They were still influenced by the record prices on the oil market in the middle of last year. This development was reflected in end customer prices as well. Gas bills rose by about 20 % for homes and 30 % for industrial enterprises. Price increases outside Germany were of a similar order. The aforementioned customer groups had to pay 25 % and 30 % more in the Czech Republic, 35 % and 29 % more in the UK, and 24 % and 22 % more in Hungary.
Hard coal prices halved
The price curve on international hard coal markets was similar to that of crude oil. In the first quarter of 2009, a metric ton in Rotterdam spot trading sold for an average of $71 (including freight and insurance). This is about half the comparable figure for 2008 ($138). The global economy continues to dampen demand for hard coal. Demand for transportation has also declined due to the recession. This is reflected in the substantial decrease in sea freight rates. Prices for the standard route from South Africa to Rotterdam were an average of $8 per metric ton. This is merely a quarter of what was charged in the first three months of 2008 ($32). German hard coal prices are determined by the German Federal Office of Economics and Export Control (BAFA). They track the price of imported hard coal with a lag. No BAFA figures were available for the first quarter of 2009 when this report went to print.
