German industry says energy rationing will devastate businesses

For 400 years, Carletta Heinz’s family has been producing special glass bottles for the main perfumeries in the world, in a factory near the Franconian forest, in Germany.

But Russia’s invasion of Ukraine could force its 38-year-old chief executive to close the company before it enters its fifth century.

In the event of prolonged gas shortages, if Moscow decides to cut supplies to European countries that have imposed sanctions on Russia over the war, “we will not be able to survive as a company,” Heinz said. “We would have to completely shut down [os fornos de fundição de vidro]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 raising the alarm. More than half of the natural gas consumed in the country each year comes from Russia – the highest proportion among the EU’s major economies – and gas-dependent industries are warning that in winter their operations could be at the mercy of Moscow’s goodwill. .

Their fears rose on Wednesday when the German government, worried that Russia could cut off gas supplies after EU countries rejected Moscow’s demand to be paid in rubles, activated the first of three alert stages in your emergency supply plan.

Under a law implemented during the oil embargo on Arab exporters in the 1970s, German industry would be forced to reduce gas consumption in the event of a shortage, with supplies reserved for critical infrastructure and homes.

Such a move would cost Europe’s biggest economy tens of billions of euros, as estimates suggest, and could plunge it into recession. Union leaders warned that hundreds of thousands of jobs would be at risk.

The German economy could even enter its “worst crisis since the end of the Second World War”, Martin Brudermuller, chief executive of BASF, the world’s biggest chemical company by sales, told the Frankfurter Allgemeine Sonntagszeitung newspaper on Thursday.

Christian Seyfert, director of VIK, which represents energy-intensive German groups such as steel or chemical manufacturers, said the crisis “could definitely be worse than the pandemic.” [Covid-19]”.

The coronavirus “has hit our members hard, but thanks in part to demand from China, there was soon an economic recovery,” he said. “This is an even more worrying situation.”

While many German companies have adjusted their earnings forecasts to account for rising energy costs as a result of the war, some of the country’s major industries say they will not be able to operate without sufficient gas supplies.

Heinz-Glas’ ovens – most of which are gas heated to 1,600°C – run 24 hours a day, with about six glowing flasks exiting the production line every second. They are delivered to important customers around the world such as Yves Saint Laurent, Tiffany and Estée Lauder.

If it cools, the molten glass in the furnaces will solidify and the equipment will have to be replaced, at a cost of millions of 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 plant in Ludwigshafen, southwest Germany – the world’s largest integrated chemical complex – 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 the “steam crackers” – units that break hydrocarbons down into basic chemical components – at its Ludwighsafen site would come to a complete halt if gas deliveries fell below 50% of the normal level, jeopardizing supplies of used substances. in medical, hygiene and food products.

Henrik Follmann, head of the family-owned chemical company Follmann Chemie, based in North Rhine-Westphalia in western Germany, said that gas supply is crucial for naphtha production. “We need that raw material,” he said. “If we don’t, the refineries will stop, the chemical industry will stop and the entire German industry will stop.”

He added: “I supply chemicals to the woodworking and furniture industries – if they don’t get it from me, what are they going to do? automobile”.

Steelmakers are equally alarmed by the government’s proposals. In the western city of Duisburg, the blast furnaces of Europe’s biggest steelmakers rely on gas as a backup if coal supplies are insufficient.

A person close to Thyssenkrupp, which owns the plant, said: “Getting under a critical amount of gas would be dangerous. It would cause serious damage to our assets.”

A cut in gas supplies to Germany is unlikely to exceed 50%, analysts say. The so-called “demand destruction” caused by rising prices would reduce gas consumption, they argue. Meanwhile, about a third of Russian imports could be replaced by deliveries from other countries, according to BDEW, which represents German energy companies.

Efforts to curb domestic gas use could further reduce the problem. In the event of a supply crisis, according to economists at Allianz, “for every [ponto percentual] reduction in household gas consumption… up to 25,000 jobs will be protected in manufacturing”.

It is unclear whether utilities would be held liable if they did not deliver gas to customers. If the government forces suppliers to cut deliveries, utility groups will be protected from claims, according to Christian Hampel, a partner at BDO Legal, which advises companies on the possible consequences of the gas shortage.

But “as long as it is possible to acquire a substitute, the gas supplier must deliver”, he added. The suppliers’ economic existence “may be at risk” if they are forced to pay exorbitant prices for replacement gas or indemnify customers, he said.

While German industry has faced energy crises in the past, this time the government seemed unprepared, according to executives.

Carletta Heinz’s father, Carl-August, ran the family’s glass company during the 1970s oil embargo. But the 71-year-old retiree said this crisis is “clearly the most dangerous.”

Pulling production out of Germany “would be a last resort,” said Carletta Heinz. She was unimpressed by the political decisions that led her company to face an existential threat.

“Our country really failed to secure a second source [de gás]”, she said. “No company would act that way.”

Translated by Luiz Roberto M. Gonçalves