Feb 4, 2023
German Energy Reprieve Too Little, Too Late to Save Factory Jobs
With gas prices down from record highs, Germany has seen a surge of optimism that the worst of the energy crisis has passed. But for the country’s biggest industrial producers, the long-term picture remains dismal.
Companies including BASF SE, Dow Inc. and Lanxess AG are poised to cut thousands of jobs and shift investment out of Germany because they don’t expect Berlin to reliably provide the energy they need at prices close to those they once paid for Russian pipeline gas.
“We are no longer competitive in Germany,” Lanxess Chief Executive Officer Matthias Zachert said at a recent conference organized by Die Welt newspaper. The Cologne-based chemical maker plans to maintain its production sites in North Rhine-Westphalia, “but our investments to grow further will go to more competitive locations like the US.”
Germany is in an all-out push to secure enough affordable energy to keep its industrial base from shrinking. Business confidence has risen in recent weeks after a patch of unseasonably warm weather and the early completion of a liquefied natural gas terminal helped push down prices and avoid possible rationing and blackouts.
The reprieve has some manufacturers breathing a sigh of relief: automotive giants Mercedes-Benz AG and Volkswagen AG were primarily concerned that fuel rationing would deal a blow to finely-calibrated supply chains.
But Germany hasn’t received direct Russian gas imports since September — a dramatic shift considering Moscow accounted for more than half of German gas imports before the invasion of Ukraine. With virtually no prospect of those imports resuming, the outlook for German chemical, glass and building-material companies, where gas and electricity can account for a third of costs, remains bleak.
Even after recent declines, German energy prices remain substantially higher than in rival manufacturing zones in the US and Asia.
BASF announced in October it would make €500 million ($541 million) in cost savings as it adjusts to permanently higher energy prices in Germany. Gas prices have dropped 40% since then, but BASF’s board is sticking with the cuts and wants to stop producing the most gas-intensive products at its Ludwigshafen plant, the company said.
Industry group Aluminium Deutschland said a recent survey of metal producers showed that two-thirds confirmed a slight improvement in energy prices in recent months, while 86% of the companies described the prospect of long-term gas and electricity supplies in Germany as “not good.”
“Unfortunately, we can’t yet say that the worst is behind us,” said AD President Rob van Gils.
The German chemical and pharmaceutical industry employs around 466,500 people and has an annual turnover in excess of €200 billion, according to Germany’s economics ministry. It’s an integral part of the automotive and other supply chains.
A survey from Germany’s VCI chemical association in late January revealed that almost half of chemical companies plan to cut investment in Germany this year due to energy costs.
At the same time, industrial firms are seeing a drop in demand amid a global economic slowdown. That makes it increasingly difficult to raise prices in keeping with elevated costs.
Some companies are considering outright closures. Trinseo Plc, one of the world’s biggest manufacturers of polystyrne, a polymer used for insulation in a products ranging from auto parts to medical devices, opened talks with labor union about the closure of its production site in Boehlen, Germany, which employs about 400 people.
“The cost position of the Boehlen facility is challenged due to the current energy cost environment in Europe as well as the facility’s smaller scale,” Chief Executive Officer Frank Bozich said in a statement. “It’s difficult to envision significant earnings improvement at the site in the near to medium term.”
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