Europe’s industrial giants have fretted for months that gas shortages this winter will cripple production. But even with fuel available, companies are discovering they can’t 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 is paying 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 redoubling his war efforts 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 by 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. Discussions with suppliers in Europe and North America have proven similarly complex, underlining the uphill struggle Scholz faces in locking down supplies at prices that will keep Germany’s economic base competitive.
On Sunday Reuters reported that German utility RWE has struck a deal with Abu Dhabi National Oil Company to deliver liquefied natural by the end of December.
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,” a Covestro spokesperson said. “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 growing number of companies to shut 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 energy-intensive companies. “We urgently advise politicians to take decisive action 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 impact of the crisis. The UK announced an estimated £40bn plan that would cap wholesale energy prices that feed into gas and power contracts for businesses for six months.
Germany, because of 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, located near Orleans, said it’s putting its oven on standby for five months even though the order book is full and sales are growing. “Continuing to produce at current prices would be a financial aberration,” said Jose-Luis Llacuna, president of Duralex, which exports to 110 countries and had its Picardie model featured in the James Bond movie Skyfall.
High stakes
French President Emmanuel Macron on Thursday urged small and medium-sized businesses to hold off on signing new energy contracts at “crazy prices”, saying governments are 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 the chemicals for medicines and everyday plastics.
Covestro, which makes materials for the building and car industries, said demand is 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, the country’s 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.”
Bloomberg News. More stories like this are available on bloomberg.com
