Panic mood in the economy
Germany is threatened with de-industrialization
10/07/2022 5:37 PM
Germany owes its prosperity to industry. But rapidly rising gas and electricity prices could be the beginning of the end of the successful model. Production facilities are closed and increasingly moved abroad. Can Germany continue to assert itself as an industrial nation?
Panic is hitting parts of the German economy due to the rapid rise in gas and electricity prices. Given the further price increases expected early next year, both companies and their trade associations fear that production in Germany could become permanently unprofitable. The Munich Ifo Institute expects that the development of energy prices will lead to more investment abroad.
“At first glance, the cost of energy is not that high,” says Ifo economist Oliver Falck. The share of energy costs in the gross production value is 0.5 percent in the automotive industry, 0.8 percent in mechanical engineering and 3.1 percent in the chemical industry. “Nevertheless, a sharp increase in energy prices could affect the competitiveness of especially those sectors that face strong international competition and already have relatively low sales margins due to competition.” Falck expects “temporary production stops and relocation of particularly energy-intensive production steps abroad.”
According to Falck, energy-intensive production is also very capital-intensive, ie expensive. Relocations are not easy. “But we will probably see new investment abroad.” A spokesperson for the mechanical engineering association VDMA says: “Companies will not make such an important decision just because of energy prices, but sharply rising energy prices can of course be the deciding factor in individual cases.”
Inner German supply chains have long been disrupted
The data from the Federal Bureau of Statistics shows how immense the energy needs of the most energy-intensive companies are. With only 171,000 inhabitants, the city of Ludwigshafen has the highest gas consumption in all of Germany. Because the BASF mother plant is located in the city on the Rhine.
BASF does not only provide figures for Ludwigshafen, but according to the chemical company, the energy costs of the European sites together were 800 million euros higher in the second quarter than a year earlier. Compared to the second quarter of 2020, the additional costs of the energy supply amounted to one billion euros.
Consequential damage of high energy prices: Inner German supply chains have long been disrupted, supply problems are no longer just with Chinese imports. “We have received a lot of feedback from member associations reporting production cuts by member companies as a result of the massive increase in energy prices,” said Bertram Brossardt, general manager of the Bavarian Business Association (vbw).
BASF has greatly reduced its ammonia production and the production of acetylene, a raw material for many plastics, textiles and solvents, is also not running at full speed. According to a BASF spokesperson, demand has fallen because some acetylene derivatives cannot currently be manufactured competitively.
Production costs for basic chemicals explode
“The costs for electricity, oil and gas make up about 12 percent of production costs in the chemical industry,” says Wolfgang Große Entrup, general manager of the trade association VCI. “With basic chemicals, the share is even higher, around 16 percent. With individual chemicals, such as ammonia or chlorine, the share is even more than 70 percent.”
Chemical products are needed for the manufacture of almost all industrial products. “In the third quarter, chemical energy costs were almost 150 percent higher than in the previous year,” says Große Entrup. Within two years, the industry’s energy costs had more than quadrupled. The prices of many precursors have also risen in the triple-digit range since 2020.
Troubled entrepreneurs see the situation much more dramatically than economists. The biggest cost problem for many medium-sized industrial companies is not natural gas, but electricity. For years, some companies bought electricity on the spot market because prices there were cheaper than long-term supply contracts.
Spot prices have risen, but many companies with long-term supply contracts are now facing huge price increases for electricity. In many places the contracts expire at the end of the year. Many companies used to pay less than ten cents per kilowatt hour, but the prices are now around 40 cents, reports Andrea Thoma-Böck, director of the family business Thoma Metallveredelung in Heimertingen.
Industry migrates abroad
“Very few companies will be in the fortunate position of being covered by 2023,” the entrepreneur says. “The rest are waking up to this new pricing world that no company can handle.” Some companies cannot find anyone willing to sell them electricity: “To make matters worse, many companies are refused an electricity contract,” says Thoma-Böck.
The automotive industry association VDA surveyed 103 suppliers and manufacturers of buses, trailers and bodies in September, and ten percent reported production restrictions. As soon as the high electricity prices get out of hand, VBW CEO Brossardt expects that production in many companies will become unprofitable. “The companies cannot keep up for long. It affects not only energy-intensive companies, but the broad spectrum of the economy.” Companies are also plagued by uncertainty about how the gas price ceiling should be shaped.
Even before the Corona crisis, there was a more or less gradual migration of German industry. According to the Federal Statistical Office, the share of “goods of foreign origin” in German exports has steadily increased, from just under 10 percent in 1990 to 24.5 percent last year. This indirectly shows how massively German industry invested in foreign production.