Energy crisis poses existential threat to Europe’s industry

European industries are struggling to stay competitive amid soaring energy costs. European industries are slammed by soaring energy costs so much that they are curtailing or shutting down production, losing global market shares, and risking permanent damage to Europe’s competitiveness, Oil Prices writes.

Surging natural gas and electricity costs have resulted in a jump in operational costs for all industries, from steelmaking and car manufacturing to textiles and clothing. As manufacturers are curtailing, shutting down, or relocating production, they risk never reopening in Europe again, eroding the EU’s competitiveness, including in the industries crucial for the energy transition, such as the metals sector.  

Europe’s industry associations cautiously welcome the various EU proposals to alleviate the burden of high energy prices on businesses, but they say much more is needed to preserve the EU’s competitiveness and spare the industries from closures and massive job losses.  

Existential threat

 

Soaring energy prices have prompted a wave of aluminum capacity cuts across Europe as smelters reel from sky-high gas and power prices while demand remains soft due to concerns about global economic growth.

Due to the high energy costs, the European metals industry in September called on the EU for emergency action to prevent a collapse of the sector which faces an existential threat from surging power and gas prices. The fertilizer industry is also suffering from natural gas prices 15 times the pre-crisis level, 10 times more than U.S. prices, and well above the prices in Asia, the Fertilizers Europe group says.  

Soaring natural gas prices are pushing electricity prices higher, and they are also hurting producers of ammonia, a key ingredient in fertilizers because natural gas is the primary feedstock for ammonia production. Globally, 98% of ammonia plants around the world use fossil fuels as a feedstock, primarily natural gas, 72%, and coal, 22%, according to the EIA. Due to soaring natural gas prices, Norway-based Yara, for example, has been curtailing ammonia production this year, with curtailments taking its total European ammonia capacity utilization down to around 35% as of August.  

“With 70% of ammonia production in Europe halted since August, industry seeks immediate relief measures necessary to restore production,” Fertilizers Europe said in September.  “The gas market solutions will take time, which our industry doesn’t have. The solidarity fund is a positive development, but its effectiveness depends on quick implementation at EU Member States level to ensure streamlining of available funds to most affected sectors, such as the fertilizer industry,” said Jacob Hansen, Director General at Fertilizers Europe.

Associations of energy-intensive industries, including the fertilizer industry, steel-making, chemicals, ceramics, mining, glass, and paper, underline “the need for more immediate and efficient measures to be put in place, as we observe the crisis circumstances worsening day by day in our industries.”

“We reiterate our call on the European leaders to urgently introduce EU-wide measures aimed at addressing the impact of natural gas prices on industrial competitiveness and measures designed to disconnect electricity prices from gas prices,” the industry associations said at end-September.

Since then, the European Commission has proposed new emergency rules to tackle this energy crisis, including joint gas purchasing, price limiting mechanisms, and solidarity between EU countries in case of shortages.

The aluminum industrial association said in response, “We support the energy crisis proposals, they complement the adopted Council regulations, but we need stronger measures to immediately alleviate the impact of gas prices on energy-intensive industries to maintain a thriving & sustainable EU industrial base.”

Losing competitiveness

European Aluminium, together with the ceramics, fertilizer, and steel associations, said that “The current manufacturing crisis and closures in Europe are quickly resulting in another crisis: the surge of lower cost imports into Europe capturing market share and prolonging temporary closures.”  

 In Germany, Europe’s biggest economy, the automotive industry thinks that the massive increase in energy costs is currently the greatest challenge, a survey by the German Association of the Automotive Industry showed last month. As a result of the extremely high energy costs, there are already production restrictions in 10% of the companies, the survey showed, while another third of companies discuss production restrictions. “It is therefore not surprising that 85% of companies consider Germany as an internationally uncompetitive location in terms of energy prices and security of energy supply,” the association said.

Europe’s energy crisis and soaring energy costs for the industry could result in Europe-based auto manufacturers losing up to 1 million units of production per quarter between this quarter and the end of 2023, S&P Global Mobility said in a report last week.

In Italy, surging energy costs are pushing local textiles and clothing firms to the brink and risk pushing the industry to move production to Asia again, Sergio Tamborini, president of industry association Sistema Moda Italia, told local outlet Nordest Economia in an interview.

The European Round Table for Industry (ERT) warned in a report this month that “The high energy prices and strained supply chains of raw materials are rapidly removing the basis for Europe’s industry’s global competitiveness and its ability to achieve bold decarbonisation targets.” “Energy-intensive industry in the EU is facing an existential crisis. If European political leaders and policy-makers do not take drastic actions in the coming weeks and months to reduce the cost of energy for energy-intensive companies, the damage will be irreparable and will result in a significant loss of jobs in Europe,” ERT added.

According to an analysis by the Economist Intelligence Unit from last week, “Demand reduction is forcing industry across Europe to idle, and will raise input costs to levels that make European industry uncompetitive. This may persist for several years, causing global supply chains to move away from Europe.”