(Bloomberg) – European industry nears breaking point as the region’s energy crisis worsens day by day.
Bloomberg’s Most Read
Electricity and gas prices are hitting new records almost daily, and some energy-hungry companies have temporarily shut down their operations because they are becoming too expensive to operate. As winter approaches and Europeans start turning on their heaters, the pressure will intensify, pushing more leaders to make tough decisions about keeping factories open.
Ammonia producer SKW Stickstoffwerke Piesteritz GmbH is among those forced to take drastic measures. The German company, which consumes 640 gigawatt hours of natural gas each year, or the equivalent of about 50,000 homes, announced Tuesday that it would cut production by 20% to offset rising gas prices.
âIt doesn’t make sense to produce ammonia at these price points,â said managing director Petr Cingr. “A complete production halt is looming if the government does not act.”
On Wednesday, the European Union issued a new warning and said it would present measures, including tax cuts and state aid, that governments can use to help.
“This price shock cannot be underestimated,” said EU energy chief Kadri Simson. “If nothing is done, it risks jeopardizing Europe’s recovery.”
The comments came a day after the UK’s Energy Intensive Users Group called on the government to roll out emergency measures or deal with business closures this winter.
The crisis in the region is the result of a tightening in supply mixed with an explosion in demand after the Covid-19 pandemic. It threatens to dampen the economic recovery by raising business costs and household energy bills, sending inflation to multi-year highs.
Many companies are trying to increase their energy efficiency, but any gains are outweighed by the scale of the soaring costs. The damage will worsen if the crisis evolves from price shock to shortages, and more industries must take the dramatic step of flipping the “off” switch.
There is even a risk that governments will intervene directly, as happened in China. This could involve restrictions on industrial energy use to keep supplies running low and to keep homes warm during the winter, especially at Christmas.
First-month Dutch gas futures jumped 22.4% on Wednesday after closing 20% ââhigher on Tuesday. The UK equivalent benchmark jumped 27.6%.
“It’s really scary,” said Carsten Rolle, head of the energy department at German industry association BDI. âThe price increases make you dizzy.
Last month, CF Industries Holding Inc., a major fertilizer maker, shut down operations at two UK factories, citing high natural gas prices. Austrian Borealis AG and Norwegian chemicals company Yara International ASA have also cut production.
These measures will affect other industries, such as agriculture, adding to the pressure on food prices. More widespread closures would hurt economic growth and put jobs at risk.
The options for mitigating the spikes appear to be limited. On the supply side, little relief is expected from the large natural gas producers, who have slowed down flows for their own domestic needs.
The longer the crisis lasts, the greater the risk of a total shortage of supply.
The German giant BASF SE is already preparing for this and claims to have entered into long-term contracts with a range of gas suppliers to avoid being hit by a crisis at a single supplier. The company’s Ludwigshafen plant, Europe’s largest chemical plant, has been designated “systemically important” by the German grid operator, meaning its electricity supply would not be cut off in order to protect public supply.
The impact of record gas, electricity and carbon prices has been greater on small and medium-sized industrial producers, who have fewer options for financial protection and are more exposed to volatility.
Already hurt by coronavirus lockdowns, many small German companies decided not to secure long-term energy supplies earlier this year and cannot afford to catch up now because gas prices are so high, according to Andreas Loeschel, professor of resource economics at the Ruhr area. University of Bochum.
âIt all depends on the demand side of the equation,â he said, referring to the potential for a colder-than-expected winter. âA number of unlikely events are building up to cause a situation that we have never seen before. “
(Updates with EU comments in fifth paragraph, prices at 11th)
Bloomberg Businessweek Most Read
Â© 2021 Bloomberg LP