Energy crisis: Europe’s industry shutting down
- Sep 20, 2022 12:31 pm GMT
With energy prices at decade long highs, Europe’s most energy intensive companies have begun to shut down. Dozens of plants in a diverse range of industries such as steel, aluminium, fertilisers and the power industry itself, have been forced to close shop as sky-high gas and power prices make their businesses loss-making.
The shortage of gas has already prompted talk of energy rationing crippling industry, but for the most energy intensive sectors things have already gone beyond that; costs have risen so high they are no longer profitable and have to close down.
That gutting of Europe’s heavy industry is already weighing on the economies of the region and economists are predicting that the EU is about to go into a deep recession.
“Sky-high gas prices and aggressive monetary policy tightening have pushed the global economy to the brink of a late 2022/early 2023 recession – defined as two quarters of falling per capita GDP. We expect a global recession to be avoided, but a sustained and substantial improvement in growth also seems unlikely,” Oxford Economics said in a note.
The closures could do long-term damage to Europe’s industrial base. In
Over half of Europe’s aluminium smelters have already been affected by the power crises.
As bne IntelliNews reported, after over seven months of war commodity prices across the board have begun to fall in the last few weeks, but even as they come off their panic peaks the prices of things like gas and power remain double or treble their normal levels.
Producers of the metal from
At the start of September India’s ArcelorMittal, one of the largest steelmakers in the world, said it plans to close two of its plants in
Construction steel is typically made in power-intensive electric furnaces that have been hit hard by the record power prices in
Many mills using electric-arc furnaces are now loss-making. Plants using coal-fired blast furnaces will be less badly affected, say experts, as power makes up a lower proportion of their costs.
Other big steel mills in the firing line are
Already at the beginning of August, the Belgian Aperam mill in Genk was closed and production at the Châtelet mill has been reduced.
The Spanish and Belgian EAF mills alone have a combined production capacity of more than 3mn tonnes of stainless steel per year, which will definitely have an impact on the availability of stainless steel in
They include a number of producers in eastern EU members such as Romania’s Alro, Slovakia’s Slovalco and Talum in
Slovakia’s Slovalco cut production by 40%, after previously announcing a capacity cut to 80% in 2019, the latter connected to the country’s EU Emissions Trading System (ETS). The new cut corresponds to an annual reduction of 35,000 tonnes of aluminium.
“If conditions are not improved, the smelter, which is one of the newest and most efficient in
Meanwhile, Talum lowered production from its Slovenian smelter from
Among the West European companies to take similar steps are Aluminium Dunkerque Industries France, Trimet Aluminium in
The hike in power costs has also affected European producers outside the EU.
Montenegro’s Uniprom completed the shutdown of the country’s sole aluminium smelter, KAP, on
That left Monetengro’s power company EPCG with excess electricity worth more than €100mn to export after its biggest client halted operations.
Eurometaux said there have been a number of shutdowns and reductions in production at zinc producers, as all nine electrolytic zinc smelters in the EU have been “heavily affected” by the power crisis. Among them is the KCM zinc smelter in
Fertiliser producers are also shutting down as they are on the frontline of the economic war, heavily dependent on gas as a feedstock. That could cause some serious problems.
The world will face a food shortage if the fertiliser markets are not normalised, the head of the
The German chemicals powerhouse
Rival ammonia makers
The EU’s fifth sanction package limited imports of Russian fertilisers, throwing
“Due to record prices for natural gas, the main production feedstock used by
“Although there are no problems with the availability of gas, the current situation in the gas market, which determines the profitability of production activities, is extraordinary and completely beyond the control of [the group], and could not have been predicted,” the two companies said in similarly-worded statements.
Another Polish fertiliser maker, Anwil – which is owned by energy giant
The company resumed production of fertilisers and other industrial products in April with state support, but two months later discontinued the production of ammonia, saying at the time that it would only keep producing fertilisers until it uses all its inventory of ammonia. That point arrived in September, when
The wild swings in gas prices have fed through to the normally placid power market, which has wreaked havoc. The power sector relies on exactly matching demand and supply and traders are the backbone of this mechanism. If supply and demand can’t be balanced then power stations simply go offline.
While the power system is efficiently coordinated
More pressure is planed on small traders as contracts are usually signed well in advance to ensure the broker has power to sell when it is needed. Normal these contracts come with an upfront payment, but the central counterparties (CCPs) that facilitate these trades are now demanding up to 80% of the contract price ahead of time, creating a liquidity problem that small traders can’t cover and banks are increasingly unwilling to credit. The prospects of a default are growing and if a big trading house goes down that would lead to system-wide liquidity crisis, says the Bruegel think-tank.
Several large utility players have already got into trouble. The German government is preparing to bail out its major utility company, Uniper, with a rescue package worth €15bn; the Élysée has announced a €10bn package to finalise the nationalisation of Electricité de
European governments have been forced to step into the breach with massive bailout packages and nationalisations. Since
Economic impact on
The economic war with
“The ZEW index for the eurozone fell again in September, as the assessment of the current situation and the outlook for the next six months deteriorated further which reaffirms our call for an incoming recession this winter. The picture is even worse in
Runaway inflation is dragging growth down as central banks across the region aggressively hike rates in an effort to regain control of prices. August inflation remained high in
“Among the categories that drove the increase are housing (up 24.8% y/y), boosted by surging electricity prices, and food prices whose rate was 13.8%, the highest since the beginning of the series in January 1994,” Oxford Economic said.
Fiscal support to protect households and businesses from ballooning energy prices generally amounts to around 2-3% of GDP across Central and
Governments have been rolling out a raft of measures to counter the crisis.
The Czech government has been slower to respond but is now acting on a noticeable scale. Last month it approved an energy subsidy for households and businesses and said that it has set aside a total of €7bn (2.5% of GDP) to deal with soaring prices.
“These fiscal interventions will provide support to economic activity, but they won’t completely mitigate the effect of extremely elevated prices. Based on calculations we published earlier this week, which assume a full pass-through of wholesale energy prices to consumer prices, household spending on energy would rise by more than 3% of GDP across most of the region between 2021 and 2023. That rise is more than the total offsetting fiscal support governments have announced for both households and businesses,”
More and more government are looking at capping energy prices. An attempt to impose a
“Even so, if energy prices surge further or stay high for a prolonged period, some governments may still find it difficult to maintain or increase support,” says Farr.
A deep recession seems inevitable now.
“Further contractions in industrial output are to be expected as wholesale gas and electricity prices remain higher for longer, leading to demand destruction. Less government support for industry compared to households over winter will also weigh on output. We expect eurozone industry and GDP to enter a recession from Q3 and ending in Q1 next year,” Oxford Economics said in a note. “The GDP recession should be shallow, with activity gradually picking up over 2023 as inflation starts to ease and the
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