In Q1, we noticed that core inflation remains persistent, suggesting that central banks are more likely to maintain current high interest rates for a longer period. Additionally, gas and oil prices have risen recently due to renewed concerns over potential escalation of geopolitical tensions and OPEC production cuts, further contributing to price pressures.

The increase in oil prices can be attributed to rising risk premia due to fears of escalating geopolitical tensions, as well as OPEC+’s ongoing tight control over supply through cuts in Saudi oil production. The International Energy Agency (IEA) reported a shortage of 1.2 million barrels per day (MMbpd) in global oil markets during the second half of 2023. We anticipate that this situation could persist into 2024 affecting the overall economic growth. Although these external events have some implications for the infrastructure sector, they are not as significant as what is discussed below.

Also, the geopolitical tensions, combined with disruptions to US LNG supply and a Norwegian outage, are likely to push up gas prices in Europe. We noticed that the main gas price for the upcoming month increased by 6.68% to 33.45 euros per megawatt hour (MWh) at the Dutch TTF hub, and the price for the next day also rose by 9.0% to 33.88 euros/MWh, as reported by LSEG. These larger than usual increases and Europe’s increased reliance on LNG following reduced gas imports from Russia could have an impact on the economy. In 2023, natural gas accounted for 17% of EU electricity, generating 452 TWh annually. However, despite the rising gas prices, we expect to observe stable energy prices due to significant ongoing contributions from wind and solar power (27% of EU electricity and increasing). Therefore, we are not adjusting our revenue projections higher for our Power Generation X-Renewables (IC10) and Renewable Power (IC70) sectors, as the impact on these sectors is limited.

The ongoing shipping disruptions in the Red Sea are expected to continue to cause slight increases in producer and import prices. This is a consequence of ships needing to be rerouted, resulting in longer transit times and higher freight costs. Consequently, the throughput of ships and overall tonnage may decrease. However, we have not noticed a significant impact on the revenue of our Port constituents (IC6030), mainly located in Europe. This minimal effect on revenue can be attributed to localized factors and the diverse range of cargo handled by these ports.

However, we observe some leading indicators that lead us to anticipate that economies may experience weaker GDP growth, which implies limited revenue growth for infrastructure projects driven by economic factors in the near term. This observation particularly applies to merchant (BR2) constituents, which face higher exposure to market risk compared to contracted (BR1) constituents with fixed-term and mostly CPI-indexed contracts. Consequently, we are exercising caution with our merchant assets and have maintained our previous revenue forecasts.

References:

• IEA (2023). Global energy crisis. What is OPEC+ and how is it different from OPEC? – U.S. Energy Information Administration (EIA)
• LSEG (2024). EUROPE GAS-Prices rise further amid Middle East, supply concerns – Reuters