LONDON, Nov 2 (Reuters) – Europe needs its industrial firms to save energy amid soaring costs and shrinking supply, and they are delivering – demand for natural gas and electricity both fell in the latest quarter.
However, it is far too early to rejoice. The decline is not only due to industrial companies turning off thermostats, they are also shutting down facilities that may never reopen.
And while lower energy use is helping Europe weather the crisis triggered by Russia’s war in Ukraine and Moscow’s supply cuts, executives, economists and industry groups warn that its industrial base could end up severely weakened if high energy costs persist.
Energy-intensive industries, such as aluminum, fertilizers and chemicals, risk companies permanently moving production to places where cheap energy is abundant, such as the United States.
Even as an unusually warm October and forecasts of a mild winter helped drive prices lower, natural gas in the U.S. still costs about a fifth of what utilities pay in Europe.
“A lot of companies simply stop production,” Patrick Lammers, a board member at E.ON ( EONGn.DE ), said at a conference in London last month. “They actually demand destruction.”
Manufacturing activity in the euro area this month hit its weakest level since May 2020, signaling that Europe is headed for recession.
The International Energy Agency estimates European demand for industrial gas fell 25% in the third quarter from a year earlier. Analysts say widespread layoffs must be behind the decline because efficiency gains alone would not produce such savings.
“We are doing everything we can to prevent a reduction in industrial activity,” a spokesperson for the European Commission said in an email.
But a survey released on Wednesday showed that companies in Europe’s industrial powerhouse Germany were already scaling back due to energy costs.
More than one in four companies in the chemicals sector and 16% in the automotive sector said they were forced to cut production, a survey of 24,000 companies by the German Chambers of Commerce (DIHK) showed. Additionally, 17% of companies in the automotive sector said they plan to move some production overseas.
“The effects are clearly visible: energy-intensive producers of input goods in particular are cutting back on production,” says DIHK CEO Martin Wansleben, referring to critical semi-finished products such as chemicals and metals.
TOOLS OF EXODUS
European industry has moved production to places with cheaper labor and lower other costs for decades, but the energy crisis is accelerating the exodus, analysts said.
“If energy prices remain so high that some European industry becomes structurally uncompetitive, factories will close and move to the US where there is an abundance of cheap shale energy,” said Daniel Kral, senior economist at Oxford Economics.
For example, the EU’s production of primary aluminum was halved, falling by 1 million tonnes, in the past year.
Trade figures compiled by Reuters show that all nine zinc smelters in the bloc have either cut or stopped production, which was replaced by imports from China, Kazakhstan, Turkey and Russia.
Reinventing an aluminum smelter would cost up to 400 million euros ($394 million) and is unlikely given Europe’s uncertain economic outlook, said Chris Heron of trade association Eurometaux.
“Historically, when these temporary closures occur, permanent closures come as a consequence,” he added.
Western efforts to secure supplies not only of energy but also of key minerals used in electric vehicles and renewable infrastructure are also at risk due to high energy prices.
Brussels is expected to propose new legislation early next year – the European Critical Raw Materials Act – to build up reserves of minerals indispensable in the transition to a green economy, such as lithium, bauxite, nickel and rare earths.
But without more renewable power and lower costs, companies are unlikely to invest in Europe, warned Emanuele Manigrassi, senior director of climate and energy at European Aluminum.
UNPACK
Examples of industrial erosion are piling up. Europe became a net importer of chemicals for the first time ever this year, according to Cefic, the European Chemical Industry Council.
More than half of European production of ammonia, a key ingredient in fertilizers, has shut down and been replaced by imports, according to the International Fertilizer Association.
Norwegian fertilizer maker Yara ( YAR.OL ) has cut two-thirds of its European ammonia production and has no immediate plans to increase it again.
“We are monitoring the situation on the gas market closely and making contingency plans,” CEO Svein Tore Holsether told Reuters by email.
Last week, the world’s largest chemical group BASF ( BASFn.DE ) questioned whether there was a business case for new factories in Europe.
The company has also warned that it would have to shut down production at its main facility in Ludwigshafen – Germany’s single largest industrial energy consumer – if gas supplies fall below half of its needs.
Some companies, including German viscose fiber maker Kelheim Fibers which supplies Procter & Gamble ( PG.N ), are looking to other energy sources. This year, the German company has reduced production twice at its factory in Bavaria.
“From January 1, we will be able to switch to oil,” said company chief Wolfgang Ott, as the company seeks government help to curb energy costs. It is even considering a 2 megawatt solar project.
In Greece, Selected Textiles, a small producer of cotton yarn, has reduced production as orders, mainly from northern Europe, have declined.
At its factory in Farsala, central Greece, CEO Apostolos Dontas estimated production would fall by 30% this year.
“We see that our customers (…) are seriously concerned about whether there will be a corresponding consumption of finished products in Europe and whether northern European producers themselves will have access to natural gas,” he told Reuters.
Tata Chemicals ( TTCH.NS ), which usually works on a five-year plan, is now working on a quarterly basis, its European chief Martin Ashcroft said.
“If this is a structural change and gas prices remain high for three or four years, the real risk is that industry investment will be directed elsewhere to places with lower energy prices,” Ashcroft added.
($1 = 1.0164 euros)
Additional reporting by Kate Abnett in Brussels, Christoph Steitz in Frankfurt, Josephine Mason, Mark John, Richa Naidu and Pratima Desai in London, Michael Shields in Zurich and Angeliki Koutantou in Athens; Graphics by Vincent Flasseur Editing by Josephine Mason and Tomasz Janowski
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