Soaring energy costs are hitting German industry hard

CNN Business

Germany is bracing for a tough winter as soaring energy prices threaten to permanently scar the economy’s key engine manufacturing.

Industrial production fell 0.8% in August from the previous month, according to preliminary data released by the country’s statistics office on Friday. Supply chain bottlenecks caused by the coronavirus crisis and the war in Ukraine continued to weigh on producers, the office said.

But energy-intensive sectors, including chemical, glass and metal producers, fared worse, down more than 2 percent from July.

Carsten Brzeski, chief economist at ING Germany, said in a report on Friday that economic contraction was “inevitable” while energy prices remained eye-popping.

“We don’t need a crystal ball to see further weakness in German industry in the coming months. The full impact of higher energy prices will only be felt in the final months of the year,” he said.

Energy prices have been rising since last fall, and then Russia invaded Ukraine in late February, sparking an energy standoff between Europe and Moscow.

Germany’s manufacturing sector – which accounts for more than a fifth of the country’s economic output – fears that some of its companies will not survive the crisis. Many are cutting production, while some are laying off staff and moving some operations abroad to cope.

Frederic Persson, chief executive of Italian-owned cable maker Prysmian Group Central and Eastern Europe, told CNN Business that the cost of energy “scales” [he had] Never seen. ”

“[Energy] It’s gone from…other costs in the business to something that can basically shut down the business,” he said.

Energy costs at Prysmian’s six German plants expected to soar to 20 million euros ($20 million) this year The cost in 2021 will be just €5 million ($5 million). Next year, the cost is expected to reach 35 million euros ($34 million), a 600 percent increase from 2020.

In April 2010, the cable reels at the Prysmian cable factory in Schwerin, Germany, opened the conductors and routing machines.

The company relies on natural gas to power its machines, but wholesale prices in Germany soared nearly 400 percent in the year to early September, although they have since retreated, according to the independent Commodity Intelligence Service.

Despite successfully filling gas storage facilities ahead of winter – Germany’s stores are now 93% full, according to European Gas Infrastructure – energy costs continued to fuel consumer prices, rising to 10% in September.

Without the usual supply of Russian gas, the country could severely deplete its stores in winter — and continue to pay high prices next year — according to Stefan Schneider, chief German economist at Deutsche Bank Research. — even if households and businesses manage to cut consumption. , said in a report last week.

Mark Schattenberg, the bank’s senior economist, told CNN Business that he expects as many as 2 million workers to be furloughed next spring as their employers battle high prices and gas shortages. That’s about a third of the number of people furloughed at the height of the pandemic in April 2020.

Prysmian has made permanent layoffs. Persson said he has laid off about 10 percent of his workforce in the past three months in his region, which includes Germany, Romania, Hungary and the Czech Republic.

Like other major economies, a deep recession is increasingly likely in Germany. That could herald a broader downturn in the country’s industrial sector, which employs 7.5 million people.

Manufacturing output is expected to fall by 2.5% this year and by about 5% in 2023, according to Deutsche Bank.

“We might see this time as the starting point for accelerated deindustrialization in Germany,” Eric Heyman, a senior economist at the bank, wrote in a note.

Companies that need a fixed amount of energy are struggling to find ways to stay afloat. Not all are successful.

Two-thirds of paper producers in continental Europe have cut production, while just over half are temporarily closed, according to a survey by the Confederation of European Paper Industries (CEPI) last month.

Papermaking requires a lot of energy 24/7 Evaporate a lot of water.German toilet paper maker Hakle blames soaring energy and material costs Bankrupt last month.

Toilet paper manufacturer Hakle has its headquarters in Düsseldorf, Germany. The company has filed for bankruptcy.

“Getting through this winter will be a challenge,” Malgosia Rybak, CEPI’s climate and energy director, told CNN Business.

Many German manufacturers are small and medium-sized businesses – part of the country’s “Mittelstand” – often family-owned and deeply integrated into their communities. They are less able to absorb energy price shocks than the industry giants.

But big companies like Prysmian, one of the world’s largest cable makers, are also struggling. Persson said he has cut production in his region by 5% over the past six months.

Help at hand. The German government has so far committed to spending nearly 300 billion euros ($294 billion) to help millions of households and businesses cope with soaring prices. As much as 200 billion euros ($196 billion) of that support could be financed through government borrowing.

Such a large amount has sparked criticism. Luxembourg’s energy minister, Claude Turmes, said last week that the giveaways represented a “crazy race” between governments for spending.

“The risk that Germany subsidizes its glass industry will kill the Czech glass industry,” Georg Zachmann, a senior fellow at Bruegel, told CNN Business.

“If a country is basically able to outbid everyone else in the energy market, yes, that’s a problem,” He says.

Generous handouts could cause problems for its EU partners, but Germany believes the heart of its sprawling economy is in jeopardy. Some manufacturers have moved some of their operations abroad.

Since the 1990s, the company has relied on a steady stream of cheap natural gas from Russia to fuel its plants. That energy is now “disappearing,” Zuckerman said, prompting companies to look for alternative sources of energy or to move energy-intensive activities to other countries.

Prysmian does just that. Early last year, Persson moved the production of oil-guzzling cable conductors from the German plant to Hungary and the Czech Republic to save money. He has started buying parts from Turkey instead of making them himself to reduce energy consumption.

“[We are] trying to leave Germany [for energy-intensive products] The reason is simple, it is difficult for us to maintain production,” He says.

Similar pressures can be seen elsewhere in Europe. Two chemical giants, Germany’s BASFY (BASFY) and Norway’s Yara International (YARIY), have cut their production of ammonia, a key ingredient in fertilizers, on the European continent due to high gas prices. YARIY’s European ammonia production is running at only 35% of its capacity, company CEO Svein Tore Holseter told CNN Business.

Chemical company BASF's plant in Ludwigshafen, Germany.

In Germany’s auto industry, there are signs of a more permanent shift.

According to a September survey by the German automobile industry association VDA, 85 percent of automakers believe the country is an uncompetitive place because of high energy prices and insecure supplies. Only 3% of companies said they plan to invest in the country, while 22% want to relocate their investments abroad.

But some analysts are skeptical about the extent of the long-term damage from the current crisis.

“Energy-intensive industries [of industry] Will relocate as energy prices will remain structurally high. In general, however, we do not expect a full-scale deindustrialization of the economy,” Stefan Kooths, research director at the Kiehl Institute for the World Economy, told CNN Business.

Deutsche Bank’s Schattenberg is hopeful and sees the next two years as a period of adjustment.

“German industry, the so-called ‘Mittlestand’, SMEs [sized] Company, very resilient and adaptable,” he said.

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