European Industry Buckles Under Weight of Soaring Energy Prices

(Bloomberg) — 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.

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“It’s not about shutdowns. It’s pricing, it’s cost,” said Christian Levin, chief executive officer of Traton SE, the truckmaking unit of Volkswagen AG.

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 — would 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 AG won’t make growth investments in Europe if the crisis persists and instead look to Asia, where Chief Executive Officer 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 Thursday that it could reallocate production out of Germany and eastern Europe if energy prices don’t come down.

Chancellor Olaf Scholz will travel with a group of business leaders to the Middle East this 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.

Covestro expects its fuel bill to top 2.2 billion euros ($2.2 billion) in 2022, almost four times its costs 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 spokeswoman said. “For a number of chemicals, imports from the US or China are already cheaper than producing them locally.”

Where possible, manufacturers including Volkswagen and BMW AG 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 SE, to import key materials like ammonia from competitors. Mercedes-Benz AG has actually ramped up production of key auto 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, managing director 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 roughly a quarter of the economy, are taking emergency actions to shore up utilities and cushion the impact of the crisis. The UK this week announced an estimated £40 billion ($44.8 billion) 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 neighbors. 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 5 months even though the company’s 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.”

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 in the process of renegotiating gas and electricity costs.

The stakes are perhaps highest in Germany, where industrial production makes up roughly 30% of the economy and employs around 1.15 million people. Energy-intensive factories across the country supply everything from gearbox components for cars to the chemicals for medicines and everyday plastics. Covestro, which makes materials for the building and automotive 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 said this week it will nationalize Uniper SE, the country’s largest gas importer, with an 8 billion euro capital injection, and the country is poised to impose a gas levy on Oct. 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 organization that represents the likes of BASF and Evonik Industries AG, key suppliers to Germany’s carmaking sector. “The situation is becoming more and more drastic.”