Soaring energy prices imperil the industrial giants of Europe
• The continent is paying seven times as much for natural gas as the US
Europe’s industrial giants feared for months that gas shortages this winter would cripple production. Now, with fuel available, they find they cannot afford it.
“It’s not about shutdowns. It’s pricing, it’s cost,” said Christian Levin, CEO of Traton, the truckmaking unit of Volkswagen.
Europe pays seven times as much for gas as the US, underscoring a dramatic erosion of the continent’s industrial competitiveness that threatens to cause lasting damage to its economy.
With Russian President Vladimir Putin stepping up his war effort in Ukraine, there’s little sign that gas flows, and substantially lower prices, will be restored to Europe in the near term. Signs of an economic transformation are already afoot. Germany, Europe’s biggest economy, has seen its usual trade surplus dwindle as the surge in imported energy costs offsets its high-value exports of cars and machinery, and chemical companies began shifting production outside the country. Last month, German producer prices jumped a record 46%.
Plastics maker Covestro won’t make growth investments in Europe if the crisis persists, and will instead look to Asia, where CEO Markus Steilemann said the company can secure energy at prices 20 times cheaper than in the German and European spot market.
Volkswagen, Europe’s biggest carmaker, warned last week that it could reallocate production out of Germany and Eastern Europe if energy prices don’t come down.
Chancellor Olaf Scholz travelled with a group of business leaders to the Middle East at the weekend as he tries to nail down deals for liquefied natural gas with Saudi Arabia and Qatar to make up for Russia’s cuts.
But negotiations have been difficult, with gas suppliers including Qatar playing hardball over the price and duration of potential agreements, German officials have said.
Talks with suppliers in Europe and North America have proved to be similarly complex, underlining the uphill struggle Scholz faces in locking down supplies at prices that will keep Germany’s economic base competitive. Covestro expects its fuel bill to top €2.2bn in 2022, almost four times its cost in 2020, the year before Russia started choking off gas supplies to Europe.
“At the current price level, energy-intensive German industry is no longer globally competitive,” said a Covestro spokesperson. “For a number of chemicals, imports from the US or China are already cheaper than producing them locally.”
LASTING DAMAGE
Where possible, manufacturers including Volkswagen and BMW are moving from gas to oil or coal to keep facilities running. But some energy-intensive manufacturing — such as metals, paper and ceramics — has become unfeasible, prompting a rise in the number of companies shutting down, shift production abroad or, like chemical giant BASF, to import key materials such as ammonia from competitors. Mercedes-Benz has ramped up production of key car parts to stockpile in case it has to close German factories.
“These burdens are causing lasting damage to the industrial core of our economy,” said Christian Seyfert, MD of VIK, a group that represents energyintensive companies.
“We advise politicians to take decisive action urgently so that Germany and Europe as a business location are not completely left behind internationally.”
Governments across Europe, where industrial production accounts for about a quarter of the economy, are taking emergency actions to shore up utilities and cushion the effect of the crisis. The UK announced a plan estimated at £40bn to cap wholesale energy prices that feed into gas and power contracts for businesses for six months.
Germany, with its heavy reliance on Russian gas, has been hit harder by the energy shortage than many of its neighbours. But the rest of the continent is under similar duress.
In France, glassmaker Duralex near Orleans said it was putting its oven on standby for five months even though the order book is full and sales are rising. “Continuing to produce at current prices would be a financial aberration,” said JoseLuis Llacuna, president of Duralex, which exports to 110 countries and has had its Picardie model featured in the James Bond film Skyfall.
THESE BURDENS ARE CAUSING LASTING DAMAGE TO THE INDUSTRIAL CORE OF OUR ECONOMY
HIGH STAKES
French President Emmanuel Macron urged small and medium-sized businesses on Thursday to hold off on signing new energy contracts at “crazy prices”, saying governments were renegotiating gas and electricity tariffs.
The stakes are perhaps highest in Germany, where industrial production makes up about 30% of the economy and employs about 1.15-million people. Energy-intensive factories countrywide supply everything from gearbox components for cars to chemicals for medicines and everyday plastics.
Covestro, which makes materials for the building and car industries, said demand was starting to break down.
“We’re slowly losing our customers,” Steilemann said.
“We have an increased number of insolvencies, an increased number of closures and very restrained purchasing.” Germany is to nationalise Uniper, its largest gas importer, with an €8bn capital injection, and the country is poised to impose a gas levy on October 1 that spreads the pain of soaring wholesale energy prices to households and businesses.
Businesses have decried that plan. “Our companies can no longer cope with any further burdens,” said Wolfgang Grosse Entrup, president of the chemical association VCI, an organisation that represents the likes of BASF and Evonik Industries, key suppliers to Germany’s car making sector. “The situation is becoming more and more drastic.”