GTHT has released a research report stating that the current U.S.-Iran conflict has led to a temporary increase in European natural gas prices, with the TTF natural gas futures price rising 76% compared to pre-conflict levels. This round of tensions is primarily affecting Europe indirectly by disrupting the global LNG trade chain via the Strait of Hormuz, resulting in a longer transmission chain and weaker price elasticity. However, against the backdrop of Europe's firm commitment to carbon neutrality and cleaner energy structures, the low-carbon attributes and operational cost advantages of heat pump heating are becoming increasingly entrenched. Current policy subsidies in key markets such as Germany and the U.K. have significantly surpassed 2022 levels. If this geopolitical conflict triggers another upward breakout in natural gas prices, the heat pump sector is expected to experience a new wave of market activity. GTHT's main viewpoints are as follows:
The Russia-Ukraine conflict in 2022 triggered a shock to Europe's energy supply, initiating a historic rally in the heat pump sector. Following the outbreak of the Russia-Ukraine war in February 2022, EU sanctions on Russia combined with Russia's countermeasures to reduce pipeline gas supplies drove European natural gas prices to climb to $70.04 per MMBtu by August 2022, a 148% increase from the beginning of the year and a 354% year-on-year rise. Capital markets quickly priced in the demand for alternative heating solutions in Europe. The Wind Air Source Heat Pump Index rose 69% from its low on April 26, 2022, to its peak on August 18, 2022. Representative stocks such as Deye Technology, Sunrise East, Vanward Electric, Dayuan Pump Industry, and Devotion Corporation achieved gains of over 100%, with the rally lasting approximately five months.
The sharp rise in European natural gas prices formed the macroeconomic foundation for the rally, which was further amplified by policy catalysts and export data, creating a triple resonance effect. Regarding natural gas prices, European prices hit a historic high of $70.04 per MMBtu in August 2022, up 148% from the start of the year and 354% year-on-year, significantly increasing residential heating costs and validating the substitution logic for heat pumps. On the policy front, the EU issued a preliminary communication on REPowerEU in March 2022, first mentioning quantitative targets for heat pumps. The full plan was officially released on May 18, setting a specific goal of installing 10 million additional hydronic heat pumps from 2023 to 2027. Between April and August, member states increased subsidies, with policy catalysts solidifying market expectations for medium- to long-term heat pump demand. On the export side, China's air-source heat pump export growth accelerated monthly from 32% year-on-year in April-September 2022 to 114%, with high-frequency data continuously confirming the real surge in European orders, providing substantial support for market expectations. The resonance of these three drivers pushed the sector to new highs.
The sector rally ended as energy prices peaked and declined, cooling expectations for substitution demand. After natural gas prices peaked in August 2022, they fell rapidly, dropping approximately 86% from the peak by July 2023. Market expectations for the sustainability of heat pump demand subsequently reversed. Issues such as channel inventory buildup and a shortage of installation workers in Europe further reduced order visibility. The market ultimately characterized this round of demand as a one-time pulse driven by geopolitical conflict rather than a structural shift in heating methods, leading to a rapid mean reversion in sector valuations.
The U.S.-Iran situation has reignited expectations for energy price increases, keeping investment opportunities in the heat pump sector in focus. The current U.S.-Iran conflict has caused a temporary rise in European natural gas prices, with TTF futures up 76% from pre-conflict levels, though this is far less dramatic than the price movements seen during the Russia-Ukraine conflict. The fundamental reason is that Europe's current direct reliance on Middle Eastern natural gas is significantly lower than its previous dependence on Russian pipeline gas. Middle Eastern gas accounts for only about 7.8% of Europe's total imports, meaning the current conflict affects Europe more indirectly by disrupting the global LNG trade chain via the Strait of Hormuz. This results in a longer transmission chain and weaker price elasticity, making the catalytic intensity for the heat pump sector unlikely to match that of the previous energy crisis phase. However, under the overarching theme of Europe's steadfast progress toward carbon neutrality and cleaner energy structures, the low-carbon attributes and operational cost advantages of heat pump heating are becoming increasingly solidified. Current policy subsidies in core markets like Germany and the U.K. have already significantly exceeded 2022 levels. If this geopolitical conflict triggers another sustained upward move in natural gas prices, the heat pump sector could be poised for a new wave of market activity.
Risk warnings include significant fluctuations in global energy prices; heat pump demand falling short of expectations; and risks related to changes in international trade policies and tariffs.