The energy crisis is diminishing in European business | Whuff News


LONDON, Nov 2 (Reuters) – Europe needs its industrial companies to maintain energy amid rising costs and reduced supplies, and they are delivering – demand for natural gas and electricity both fell last quarter.

It’s too early to get excited, though. The slowdown isn’t just about industrial companies turning off thermostats, they’re also shutting down plants that may never reopen.

And while lower energy consumption is helping Europe cope with the crisis caused by Russia’s war in Ukraine and Moscow’s supply cuts, executives, economists and business groups warn its industrial base could end up too weak if high energy costs continue.

Industries that use a lot of energy, such as aluminum, fertilizers, and chemicals are at risk of companies permanently shifting production to places where energy is low, such as the United States.

Even as an unusually warm October and a forecast mild winter helped lower prices, natural gas in the United States still costs about a fifth of what companies pay in Europe.

“Many companies are stopping production,” Patrick Lammers, a member of the supervisory board at utility E.ON ( EONGn.DE ) told a conference in London last month. “They really want to destroy.”

That could lead to Europe being deindustrialized quickly, he added.

The Euro-zone this month reached its weakest level since May 2020, indicating that Europe is facing a recession.

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The International Energy Agency estimates that European industrial gas demand fell by 25% in the third quarter from a year earlier. Analysts say widespread closures should have followed the downturn because success alone would not have generated such savings.

“We are doing everything we can to prevent the reduction of industrial jobs,” a European Commission spokesperson said in an email.

But when the weather gets colder and homes warmer, the industrial sector will be the first to face cuts in the event of shortages, economists warn.

EXODUS IS AWESOME

European industry has shifted production to low-labor areas and lowered other costs for decades, but the energy crisis is accelerating the exodus, analysts say.

“If electricity prices remain so high that the European industrial sector cannot compete, factories will close and move to the US where there is an abundance of cheap shale energy,” said Daniel Kral, an economist at Oxford Economics.

For example, the EU’s primary aluminum production was cut in half, by 1 million tonnes, last year.

Trade figures compiled by Reuters show all nine zinc smelters in the bloc have cut or stopped production, which has been replaced by output from China, Kazakhstan, Turkey, and Russia.

Reopening the aluminum smelter would cost up to 400 million euros ($394 million) and is unlikely given Europe’s uncertain economic outlook, said Chris Heron at trade association Eurometaux.

“Historically, when there are temporary closures, permanent closures come as a result,” he added.

Western efforts to secure resources not only for electricity but also for key minerals used in electric vehicles and renewable infrastructure are also at risk from higher energy prices.

Brussels is expected to propose a new law at the beginning of next year – the European Critical Raw Materials Act – to build reserves of minerals necessary for the transition to a green economy, such as lithium, bauxite, nickel, and rare earths.

But without renewable energy and low costs, companies are unlikely to invest in Europe, Emanuele Manigrassi, senior manager of climate and energy at Aluminum Europe, warned.

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PACKING

The dreaded industrial erosion is already underway. Europe became the largest importer of chemicals for the first time this year, according to Cefic, the European Chemical Industry Council.

More than half of Europe’s production of ammonia, a key ingredient in fertilizers, has been shut down and 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 current plans to bring it back.

“We are monitoring the situation in the gas market closely and are making emergency plans,” CEO Svein Tore Holsether told Reuters by email.

Last week, global chemicals group BASF ( BASFn.DE ) questioned whether there was a new plant business in Europe.

The company has also warned that it will have to shut down production at its key Ludwigshafen site – Germany’s single largest energy consumer – if gas supplies fall below half of its needs.

Other firms, 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 cut production twice at its factory in Bavaria.

“From Jan. 1, we will be able to switch to oil,” said company CEO Wolfgang Ott, as the company seeks government aid to keep energy costs down. It is considering a 2 megawatt solar project.

German factories are demanding speedy approval to switch from gas to polluting fuels, warning they will otherwise be forced to cut production to meet savings targets in Berlin.

In Greece, Selected Textiles, a small cotton producer, cut results as orders from northern Europe fell.

At its plant in Farsala, central Greece, CEO Apostolos Dontas predicted production would fall by 30% this year.

“We see our customers (…) are very concerned about whether there will be equal consumption of finished products in Europe and whether the 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 managing director Martin Ashcroft said.

“If this is a structural change and gas prices remain high for three or four years, the real risk is that business investment will be directed elsewhere to areas with lower energy prices,” added Ashcroft.

($1 = 1.0164 euro)

Additional reporting by Kate Abnett in Brussels, Christoph Steitz in Frankfurt, Josephine Mason, Richa Naidu and Pratima Desai in London, Michael Shields in Zurich and Angeliki Koutantou in Athens; Paintings by Vincent Flasseur Editing by Josephine Mason and Tomasz Janowski

Our standards: The Thomson Reuters Trust Principles.



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