German industry sounds alarm over energy rationing plan
For 400 years, Carletta Heinz’s family has been producing bespoke glass bottles for the world‘s leading perfumeries in a factory on the edge of Germany’s Franconian Forest.
But Russia’s invasion of Ukraine could force the 38-year-old chief executive to close the company before it enters its fifth century.
In the event of a prolonged gas shortage, if Moscow decides to cut off supplies to European countries that imposed sanctions on Russia during the war, “we will not be able to survive as a company”, she said. . “We should close the [glass-melting furnaces] completely, we would lose the workforce. . . and it would be very difficult to restart production after a year or two.
Heinz-Glas is not the only German company to sound the alarm. More than half of the natural gas consumed in the country each year comes from Russia – the highest share of any major EU economy – and gas-dependent industries are warning that by winter their operations could to be at the mercy of Moscow.
Their fears intensified on Wednesday when the German government, fearing Russia could cut gas supplies after EU states rejected Moscow’s demand to be paid in roubles, activated the first of three steps warning of its emergency supply plan.
Under a law put in place during the 1970s oil embargo on Arab exporters, German industry would be forced to reduce its gas consumption in the event of a shortage, with supplies reserved for critical infrastructure and households.
Such a move would cost Europe’s largest economy tens of billions of euros, according to estimates, and could plunge it into recession. Union leaders have warned that hundreds of thousands of jobs will be at risk.
The German economy could even enter its “worst crisis since the end of World War II“, Martin Brudermüller, managing director of BASF, the world’s largest chemical company by sales, told the Frankfurter Allgemeine Sonntagszeitung newspaper on Thursday. .
Christian Seyfert, the boss of VIK, which represents energy-intensive German groups such as steelmakers or chemists, said the crisis “could certainly be worse than the [Covid-19] pandemic”.
The coronavirus “hit our members very hard, but thanks in part to demand from China, there was a rapid economic recovery,” he said. “It’s an even more worrying situation.”
While many German companies have adjusted their profit forecasts to take account of rising energy costs in the wake of the war, some of the country’s major industries say they will not be able to operate without an adequate supply of gas.
Heinz-Glas’s furnaces – most of which are gas-fired to 1,600°C – operate around the clock, with around six glowing bottles rolling off the production line every second of the day. They are delivered to leading customers around the world, including Yves Saint Laurent, Tiffany and Estée Lauder.
If it cooled, the molten glass in the furnaces would solidify and the equipment would have to be replaced, at a cost of several million euros.
The much larger chemical and steel industries face a similar situation. About 15% of Germany’s gas supply is consumed by the chemical sector, according to VCI, its representative body. BASF’s Ludwigshafen plant in southwestern Germany, the largest integrated chemical complex in the world, uses almost 4% of the country’s gas.
While the gas used for electricity generation can be replaced by coal-fired power plants, its role as a feedstock or fuel for blast furnaces and other industrial processes is not easily replaced.
BASF told the FT that steam crackers – units that convert hydrocarbons into basic chemical compounds – at its Ludwighsafen site would shut down completely if gas deliveries fell below 50% of their normal level, endangering the supply of substances used for medicine, hygiene and food products.
Henrik Follmann, director of family-owned chemicals maker Follman Chemie, based in North Rhine-Westphalia, western Germany, said gas supply was crucial for the manufacture of naphtha. “We need this raw material,” he said. “If we don’t get it, the refineries will shut down, then the chemical industry will shut down and all German industry will shut down.”
He added: “I supply chemicals to the wood and furniture industries – if they don’t get them from me, what are they going to do? It’s the same for the chip manufacturing industry, which relies on chemicals, or the automotive industry.
Steelmakers are also alarmed by the government’s proposals. In the western city of Duisburg, the blast furnaces of Europe’s largest steelworks depend on gas as a back-up if their coal reserves run out.
A person close to Thyssenkrupp, which owns the plant, said: “Going under a critical amount of gas [supply] would be dangerous. This would cause serious damage to our assets.
Any cut in Germany’s gas supply is unlikely to exceed 50%, analysts say. According to them, the so-called “demand destruction” caused by soaring prices would reduce gas consumption. Meanwhile, about a third of Russian imports could be replaced by deliveries from other countries, according to BDEW, which represents German utilities.
Efforts to reduce household gas use could further reduce pain. In the event of a supply disruption, according to Allianz economists, “for each [percentage point] reduction in household gas consumption . . . up to 25,000 jobs will be protected in the manufacturing sector”.
It is unclear whether energy suppliers would be held liable if they failed to deliver the gas to customers. If the government forced suppliers to cut deliveries, utility groups would be shielded from compensation claims, according to Christian Hampel, a partner at BDO Legal who advises companies on the potential fallout from gas shortages.
But “as long as a replacement supply is possible, the gas supplier must deliver”, he added. The economic existence of suppliers “could be threatened” if they are forced to pay exorbitant prices for replacement gas or compensate customers, he said.
While German industry has faced energy crises in the past, the government appeared unprepared this time around, executives said.
Carletta Heinz’s father, Carl-August, ran the family glass business during the oil embargo of the 1970s. But the 71-year-old pensioner said that crisis was “clearly the most dangerous”.
Moving production out of Germany “would be the very last resort,” said Carletta Heinz. She was unimpressed with the political decisions that had led her business to face an existential threat.
“Our country has truly failed to secure a second source[for gas],” she said. “No company would do it that way.”