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Germany risks factory exodus as soaring energy prices bite hard

LONDON (BLOOMBERG) – Europe’s industrial heartland faces a potential exodus as manufacturers of German car parts, chemicals and steel struggle to absorb power prices that rocket to new highs almost every day.

Power and gas prices in Germany more than doubled in just two months, with year-ahead electricity – a benchmark for the continent – soaring past €540 (S$755) per megawatt hour. Two years ago, it was €40.

“Energy inflation is way more dramatic here than elsewhere,” said Mr Ralf Stoffels, chief executive officer of BIW Isolierstoffe, a maker of silicone parts for the auto, aerospace and appliance industries. “I fear a gradual deindustrialisation of the German economy.”

The nation relied on gas from Russia to fuel its power plants and factories, but now it is preparing for an unprecedented challenge to keep lights on and businesses running after Russia slashed those flows. Temporary shutdowns due to high prices have been seen before, with fertiliser and steel production curbed in December and March.

Now, prices are seeing an even more sustained rally that is tightening the squeeze. European gas for next month settled on Thursday (Aug 18) at a record high of €241 per megawatt hour, about 11 times higher than usual this time of year.

While the government is limiting the increases faced by households to some extent, businesses are not immune to those soaring costs, and many are set to pass on increases to customers or even shut altogether.

“Prices are placing a heavy burden on many energy-intensive companies competing internationally,” said Mr Matthias Ruch, a spokesman for Evonik Industries, the world’s second-largest chemical producer with plants in 27 countries.

The company is substituting as much as 40 per cent of its German natural gas volumes with liquefied petroleum gas and coal, and passing on some higher costs to customers. But the notion of relocating is a non-starter.

Still, there is evidence that Germany’s industrial position is slipping. In the first six months of this year, the volume of chemical imports rose by about 27 per cent from the same period last year, according to government data analysed by consultancy Oxford Economics. Simultaneously, chemical production fell, with output in June down almost 8 per cent from December.

The International Monetary Fund said last month that Germany is set to be the worst performer in the Group of Seven nations this year due to its industry’s reliance on Russian natural gas.

Europe’s largest copper producer, Hamburg-based Aurubis, aims to minimise gas use and pass on power costs to customers. Sugar giant Suedzucker devised emergency energy plans in the event that Russia completely cuts off gas supply to Germany.

BMW is stepping up its preparations for a potential shortage. The automaker runs 37 gas-powered facilities that generate heat and electricity at plants in Germany and Austria, and it is considering using local utilities instead.

Packaging firm Delkeskamp Verpackungswerke plans to close a paper mill in the northern city of Nortrup because of high energy costs, with 70 workers losing their jobs.

A prolonged ascent for energy prices may wind up transforming the continent’s economic landscape, said Dr Simone Tagliapietra, senior fellow at Brussels-based think-tank Bruegel.

“Some industries will go under serious stress and will have to rethink their production in Europe,” he said.