German Manufacturing Might Crumble if Energy Crisis Persists
Manufacturers might begin exiting Germany in light of rising energy costs as car parts, chemicals, and steel get too expensive to produce cost-effectively.
Manufacturers might begin exiting Germany in light of rising energy costs as car parts, chemicals, and steel get too expensive to produce cost-effectively
The cost of electricity in Germany has risen by more than twice its price in July, as the year-ahead electricity benchmark in Europe climbed to $573(570 euros) per megawatt hour (MWh). Just two years ago, it was 40 euros. The Chief Executive Officer of BIW Isolierstoffe GmbH, a silicone parts manufacturer for the auto, aerospace and appliance industries lamented to Bloomberg: “Energy inflation is way more dramatic here than elsewhere. I fear a gradual de-industrialization of the German economy.”
German industrialization was built on the back of cheap Russian gas but after Russia slashed flows in response to sanctions, the nation may struggle to keep the lights on and businesses running. Companies have previously shutdown due to high prices in December and March. Currently, the rally in prices have been sustained further tightening the squeeze. European gas for next month settled Thursday at a record high of 241 euros per megawatt-hour, about 11 times higher than usual for this time of the year.
Despite efforts by the government to reduce the burden on households through subsidies, businesses have not been immune to the soaring costs, and many are gearing up to pass the costs to customers or shut down altogether.
“Prices are placing a heavy burden on many energy-intensive companies competing internationally,” said Matthias Ruch, a spokesman for Evonik Industries AG, the world’s second-largest chemical producer with plants in 27 countries.
The company is substituting as much as 40% of its German gas volumes with liquefied petroleum gas and coal and passing some higher costs on to customers. But the notion of relocating is a nonstarter, a spokesman said.
Government data analysed by Oxford Economics revealed that the volume of chemical imports to Germany rose by about 27% from the corresponding period of 2021 implying that the country’s industrial position was slipping. Simultaneously, Germany’s chemical production dropped 8% from December.
Martin Devenish, former Goldman Sachs Group Inc. Managing Director also told Bloomberg: “If the industry has to go to shortened work weeks and reduced pay thanks to the energy crunch, this is where I get nervous.”
He added, “The ingredients for social unrest are there and the risk of that is under-appreciated.” The International Monetary Fund (IMF) had said in August that Germany was on track to be the worst performer in the G7 countries due to its industrial reliance on Russian gas.
