June 5, 2023

Forced deindustrialization may occur in Europe as a result of the energy crisis | OilPrice.com

The European Union has quietly celebrated a steady decline in gas and electricity consumption this year amid record prices, the disruption of much of Russia’s gas supply and a liquidity crisis in energy markets.

However, the reason for the celebration is questionable: companies do not just curb their energy use and continue as usual. They are closing factories, downsizing or moving. Europe may well be headed for deindustrialization.

The fact that the European Union is going into recession is now abundantly clear to anyone who follows the indicators. The latest there –manufacturing activities in the euro area– fell to its lowest level since May 2020.

S&P Global’s PMI reading for October also signaled a looming recession, falling for the month and marking the fourth reading below 50 in a month, a sign the economy is contracting.

In perhaps worse news, however, the German conglomerate BASF said last month that it is permanently winding down in its home country and expanding into China. The announcement was a blow to the government, which was trying to tackle the energy shortage with climate goals without extending the life of nuclear power plants.

“The European chemical market has grown only weakly for about a decade [and] the significant rise in natural gas and electricity prices this year will put pressure on chemical value chains,” said BASF CEO Martin Brudermueller. borrowed by FT at the end of October.

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Still, it is worth noting that the energy crisis was not the only reason for BASF’s plans to reduce its presence at home and grow abroad. The EU’s stricter regulation also influenced this decision, Brudermueller said.

Other industries also seem to have problems with the new EU regulations. The trade body for the steel and aluminum industry, which has also been hit hard by energy cost inflation, recently suggested that the EU take a gradual approach with its new cross-border adjustment mechanism, also known as an imported carbon tax.

CBAM was designed as a way to level the playing field for European industrial companies subject to strict emission regulations, which makes its production more expensive compared to production in countries with looser emission standards.

However, it would also make an important raw material for Europe’s steel and aluminum industries more expensive, adding to the pain already experienced by these industries, as they are also the most energy intensive.

One tenth of Europe’s crude steel production capacity has already been at idleAccording to Jefferies estimates. All zinc smelters have curtailed production, and some have ceased operations. Half of the primary aluminum production has also been stopped. And in the field of fertilizers, 70 percent of the factories have been idle due to the lack of energy.

Chemical factories are also curbing their activities, ferroalloy furnaces are cooling down, and the production of plastics and ceramics is also shrinking.

Some of these companies may want to eventually relocate to a location with cheaper and more widely available energy sources, furthering the deindustrialization process in Europe. As for the best candidate According to some observers, this move involves the United States, with its abundant gas reserves, growing production and friendly investment climate.

At the same time, one thing has become crystal clear: the decrease in energy consumption in European industries is certainly no cause for celebration. If anything, it is a matter of concern and urgent action by decision makers.

The gas price ceiling recently agreed by the EU may help a little, but since it is tied to lower consumption, it is not really a solution for companies that want to continue doing business. It is a life support system.

Irina Slav for Oilprice.com

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