Germany is preparing for a harsh winter as rising energy prices they threaten to leave permanent scars on its manufacturing sector, a key driver of its economy.
Industrial production fell 0.8% in August from a month earlier, according to preliminary data released Friday by the country’s statistics office. Bottlenecks in the supply chain caused by the coronavirus crisis and the war in ukraine they continue to weigh on growers, the office said.
But energy-intensive sectors, which include chemical, glass and metal producers, fared even worse, falling more than 2% since July.
Carsten Brzeski, chief economist at ING Germany, said in a note on Friday that an economic contraction was “inevitable” while energy prices remain unbelievably high.
“We don’t need a crystal ball to see a further weakening of German industry in the coming months. The full impact of higher energy prices will only be felt in the final months of the year,” he said.
Energy prices started rising last fall and then soared even higher when Russia invaded Ukraine in late February, sparking a energetic showdown between Europe and Moscow.
from Germany manufacturing industry — which accounts for more than a fifth of the country’s economic output — is concerned that some of its companies will not make it through the crisis. Many are cutting production, while others are laying off staff and relocating parts of their operations abroad to cope with the situation.
Frederick Persson, chief executive officer for Central and Eastern Europe at Prysmian Group, an Italian-owned cable manufacturer, told CNN Business that energy costs were “on a scale that [he had] never seen before.”
“[Energy] it has gone from being… one cost among others in the business to being something that has the ability to basically close the business,” he said.
Energy costs at Prysmian’s six German factories are expected to soar to 20 million euros ($20 million) this year. of just €5 million ($5 million) in 2021. Next year, costs are forecast to reach €35 million ($34 million), a 600% increase from 2020.
The company relies on natural gas to power its machines, but wholesale prices in Germany soared nearly 400% in the year to early September, though they have since receded, data from Independent Commodity Intelligence Services shows.
Despite a successful race to fill gas storage facilities before winter (German stores are currently 93% full, according to Gas Infrastructure Europe), energy costs continue to drive consumer price inflation , which increased to 10% in September.
Without its usual supply of Russian gas, the country is likely to severely deplete its reserves over the winter and continue to pay sky-high prices next year, even assuming households and businesses manage to reduce their consumption, Stefan Schneider, chief German economist at Deutsche Bank Research said in a report last week.
Marc Schattenberg, a senior economist at the bank, told CNN Business that he expects to see as many as 2 million workers furloughed next spring as their employers battle high prices and gasoline shortages. That’s about a third of the people furloughed at the height of the pandemic in April 2020.
Prysmian has already made permanent cuts to its workforce. Persson said he had laid off around 10% of staff in his region, which covers Germany, Romania, Hungary and the Czech Republic, in the last three months.
Like other large economies, the prospect of a deep recession in Germany it is increasingly likely. That could herald a broader decline in the country’s industrial sector, which employs 7.5 million people.
Manufacturing output is forecast to fall 2.5% this year and about 5% in 2023, according to Deutsche Bank.
“We could consider this moment as the starting point for an accelerated deindustrialization in Germany,” Eric Heymann, a senior economist at the bank, wrote in the report.
Companies that require large amounts of energy are struggling to find ways to stay afloat. Not everyone is succeeding.
According to a survey carried out last month by the Confederation of European Paper Industries (CEPI), two-thirds of the continent’s paper producers have cut production, while just over half have closed temporarily.
Papermaking needs a lot of energy 24/7 evaporate large amounts of water. Hakle, a toilet paper maker in Germany, blamed rising energy and material costs for its insolvency last month.
“Surviving this winter is going to be a challenge,” Malgosia Rybak, director of climate and energy at CEPI, told CNN Business.
Many German manufacturers are small and medium-sized companies, part of the country’s “Mittelstand”, and are often family-owned and deeply integrated into their communities. They are less able to absorb the shocks of energy prices than the industry giants.
But big companies like Prysmian, one of the world’s largest cable producers, are also struggling. Persson said he has reduced production in his region by 5% over the last six months.
There is help at hand. The German government has so far promised to spend almost €300 billion ($294 billion) to help millions of households and businesses cope with rising prices. As much as €200 billion ($196 billion) of that support could be financed by government loans.
Those huge sums have drawn criticism. Claude Turmes, Luxembourg’s energy minister, said last week that the gifts represented a “crazy race” by governments to outspend everyone else.
“There is a risk that essentially Germany, by subsidizing its glass industry, will kill the Czech glass industry.” Georg Zachmann, Bruegel’s lead researcher, told CNN Business.
“If one country can afford to outperform all the others in the energy market, yes, it is a problem.” he said.
Generous donations may be causing problems with its EU partners, but Germany believes the heart of its gigantic economy is at stake. Some manufacturers are already moving part of their operations abroad.
Companies have relied on the constant cheap gas flow from Russia since the 1990s to feed its factories. That energy source is now “disappearing,” Zachmann said, pushing companies to find alternative sources or move energy-intensive activities to other countries.
Prysmian has done just that. Early last year, Persson moved gas-guzzling cable conductor production from German factories to Hungary and the Czech Republic to save money. He has started buying parts from Turkey, instead of manufacturing them in-house, to reduce energy consumption.
“[We are] trying to get away from germany [for energy-intensive products] for the simple reason that it is very difficult for us to sustain production”, he said.
Similar pressures can be seen in other parts of Europe. BASF of Germany
(BASFY) and Yara International of Norway
(YARIY), two chemical giants, have cut their production of ammonia, a key ingredient in fertilizers, on the mainland due to high gas prices. Yara International
(YARIY)European ammonia production is running at just 35% capacity, the company’s chief executive, Svein Tore Holseter, told CNN Business.
In german automotive industrythere are early signs of a more permanent change.
According to a September survey by VDA, Germany’s auto industry association, 85% of carmakers see the country as uncompetitive due to high energy prices and insecure supply. Only 3% of companies said they plan to invest in the country, while 22% want to move their investments abroad.
But some analysts are skeptical about how much long-term damage the current crisis will inflict.
“Energy-intensive lines [of industry] it will pass through as energy prices remain structurally higher. But in total, we don’t expect a complete deindustrialization of the economy,” Stefan Kooths, director of research at the Kiehl Institute for the World Economy, told CNN Business.
Deutsche Bank’s Schattenberg is hopeful and sees the next two years as a period of adjustment.
“German industry, the so-called ‘Mittlestand’, the small and medium [sized] companies, they are quite resilient and adaptable,” he said.