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European Electrical Equipment: Heat Pump Market Outlook Summary

Core Content

This document provides an analysis of the European heat pump market, focusing on current trends, future outlook, and industry dynamics. It includes insights from an expert call with Peter Cerny, CEO of ESBE, a key supplier of valves in the European heat pump industry.

Key Takeaways

1. Market Performance in 2025

• Q1 2025 saw very strong growth in Sweden, the Netherlands, and Germany:
  • Sweden: +38% YoY in heat pump shipments
  • Germany: +35% YoY in heat pump sales
  • Netherlands: +67% YoY in heat pump sales
• The growth in Q1 was inflated due to a very weak Q1 2024 marked by destocking.
• Q2 2025 is expected to show a strong increase in Germany due to continued demand.
• Overall, 2025 market growth is unlikely to reach 40-50%, as the growth rate will likely drop in the coming quarters.
• OEM shipments are now more reflective of true demand, indicating that the market is bottoming out.

2. Regional Dynamics

• France and Poland remain weak spots in the market.
  • France: Recovery is expected to start from mid-2026.
  • Poland: The new subsidy scheme is challenging to access, leading to a drop in applications compared to previous years.
• Despite current challenges, Poland is a long-term growth market due to the replacement of old coal boilers.

3. Long-Term Outlook

• Hydronic heat pump sales in 2024 were approximately 1.1 million units.
• Industry capacity for hydronic units is estimated at ~4 million units.
• A 2030E target of ~2 million hydronic systems is considered reasonable, implying ~3.5 million units including air-to-air.
• Air-to-water heat pumps are expected to grow the fastest in terms of technology.
• Capacity expansion by OEMs may be overestimated due to flexibility in production planning (e.g., shifts, speed of expansion).

4. Market Drivers and Risks

• Interest rates and electricity-to-gas price ratio are key factors influencing demand, especially in the newbuild segment.
• Carbon pricing for gas starting in 2027 could boost demand.
• Investor concerns around pricing risks to OEM margins may be overdone, as OEMs are focusing on R&D to develop cheaper products that will reduce final prices in 2-3 years.
• Pricing strategies remain sticky, with wholesalers running discounts but OEM list prices not significantly changing.

5. Competition

• Asian competition is a concern, but local production and long track records of new entrants are more accepted by European installers.
• Price competition is not a major issue at the moment, as OEMs are not adjusting pricing significantly.

Investment Ratings and Disclosures

Investment Rating System

• Buy: ETR of 15% or more (or 25% or more for High Risk stocks)
• Neutral: No clear ETR or ETR within a neutral range
• Sell: Negative ETR

Catalyst Watch/Short Term Views (STV)

• Indicates near-term price movements based on specific catalysts.
• Catalyst Watch is used for high confidence in price impact, while STV is for moderate confidence.
• These do not affect the fundamental equity rating.

Analyst Affiliations

• The authors of the report are employed by:
  • Citigroup Global Markets Limited Dubai (Klas Bergelind)
  • Citigroup Global Markets India Private Limited (Avinash Mundhra)
  • Citigroup Global Markets Limited (Martin Wilkie, Siron Ng, Vivek Midha, CFA)

Important Disclosures

• Conflict of interest: Citi Research may have business relationships with companies covered in the report.
• Liquidity and market making: Citi may be a liquidity provider or market maker for certain financial instruments.
• Recommendations: Not guaranteed, and past performance is not indicative of future results.
• Regulatory compliance: The report is intended for institutional investors, and not all content is available to retail clients.
• Investor advisory: Not intended for retail clients in Israel, Turkey, and other jurisdictions.
• Investment risks: Include price volatility, regulatory issues, and currency fluctuations.

Conclusion

The European heat pump market is showing signs of stabilization, with OEM shipments now better reflecting actual demand. While Q1 2025 growth was exceptionally strong, it is expected to slow in subsequent quarters. Long-term growth is anticipated, particularly in hydronic and air-to-water units, with Poland being a key growth market. Investor concerns around pricing and competition are overblown, as OEMs are focusing on cost reduction through R&D rather than price cuts. The report also emphasizes the importance of regulatory and market dynamics in shaping future demand.