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European Industry Is Buckling Under a Worsening Energy Squeeze By Bloomberg


© Reuters. The European Industry is Under Pressure from Worsening Energy Supply

(Bloomberg) — European industry is being pushed closer to breaking point as the region’s energy crisis worsens by the day.

Power and gas prices are are hitting fresh records almost daily, and some energy-intensive companies have temporarily shut operations because they’re becoming too expensive to run. The squeeze is expected to intensify as winter nears and Europeans turn on their heaters. This will force more executives to make tough decisions regarding keeping the plants open.

SKW Stickstoffwerke Piesteritz GmbH (ammonia producer) is among the ones forced into making drastic decisions. German firm SKW Stickstoffwerke Piesteritz GmbH, which consumes 640 gigawatts per year (roughly 50,000 homes), announced Tuesday that it would reduce production by 20% in order to compensate for rising gasoline prices.

“It doesn’t make sense to make ammonia at these price levels,” said Chief Executive Officer Petr Cingr. “A complete production stop looms if the government doesn’t act.”

The warning of his father was echoed in England the next day, when the Energy Intensive Users Group urged the government to immediately implement emergency measures. Otherwise, businesses could be shut down during winter.

A supply crunch caused by a spike in demand and an entanglement with the Covid-19 pandemic is what has created the crisis. The crisis threatens to halt the recovery of the region’s economy by driving up household energy costs and raising business costs. Inflation will also rise to unprecedented levels. 

Many companies have been trying to boost their energy efficiency but the price rise is destroying any potential gains. The damage will worsen if the crisis evolves from a price shock to shortages, and more industrials have to take the dramatic step of flicking the “off” switch.

There’s even a risk that governments intervene directly, as has happened in China. This could include limiting industrial energy consumption in order to preserve dwindling resources and heat homes over winter, particularly at Christmas.

“It’s really scary,” said Carsten Rolle, head of the energy department at Germany’s BDI industry association. “The price rises make you dizzy.”

CF Industries (NYSE 🙂 Holding Inc., a large fertilizer manufacturer, stopped operations last month at two U.K. facilities due to high natural gas prices. Austria’s Borealis AG and Norwegian chemical firm Yara International (OTC:) ASA have also reduced output.

Other industries such as agriculture will also be affected by these measures, which could increase food price pressure. A greater number of shutdowns could impact economic growth, and potentially put job security at risk.

There are few options to mitigate the surges. Major natural gas producers have not provided much relief on the demand side. They are holding back flow for domestic consumption. 

If the crisis drags out, more supply shortages are possible.

German giant BASF SE (OTC:) is already preparing for that, and says it’s secured long-term contracts with a range of gas providers to avoid getting hit by a crunch at any one supplier. The company’s Ludwigshafen facility, Europe’s largest chemical plant, has been designated “systemically relevant” by Germany’s grid operator, meaning its electricity supply wouldn’t be cut off in order to protect public supplies.

Small and medium industrial producers have been more affected by record prices for electricity and gas. They also have less financial protection and are therefore more susceptible to volatile market conditions. 

Already damaged by coronavirus lockdowns, many of Germany’s smaller firms decided against securing long-term energy supplies earlier this year and can’t afford to catch up now as gas prices are so high, according to Andreas Loeschel, professor of resource economics at Ruhr-University Bochum. 

“So much depends on the the demand side of the equation,” he said, referring to the potential for a colder-than-expected winter. “A number of unlikely events are building up to cause a situation we’ve never seen before.”

©2021 Bloomberg L.P.