Fertilizers, paper, steel… Rising gas prices are forcing sectors to close plants in Europe. Temporary? Or are we on the eve of great deindustrialization?”, he wonders Le Mondequoted by Rador.

Svein Tore Holseter compares his sector to the European textile industry in the 1990s: on the verge of a major shift. Since the end of August, the head of Yara, a large Norwegian multinational fertilizer company, has cut production by two-thirds at many of its European plants, including three in France.

Rising prices for gas, which is a raw material (it is converted with nitrogen from the air to obtain fertilizers and a number of by-products), made them unprofitable.

“If you take urea [unul dintre produsele din fabricile sale]for example, when we decided to close, it cost us $2,000 [2.040 de euro] to produce and sell for 800 dollars per ton. In the USA, the production of the same ton costs $200, and in Russia – $100.

Under these conditions, it is impossible to withstand competition.” And if its plants, which employ 7,000 people in Europe, aren’t closed entirely, it’s mainly to make AdBlue, a key product for diesel trucks that has seen a sharp rise in price and remains profitable.

A month after effectively shutting down operations in Europe, Holsether fears the damage may be irreversible.

“We risk seeing our industry erased from the map of Europe. We are not like restaurants that may be temporarily closed to fight a virus and then bring customers back. The danger is that the closure becomes permanent. He notes that his factories offer “quality jobs”, which is becoming a rarity in Europe.

Across the Old Continent, industry bears the brunt of these historic spikes in gas prices. The price of natural gas, which serves as a source of energy but also often as a raw material, has risen from 30 euros per megawatt-hour a year ago to 200 euros today, reaching a peak of 350 euros in August.

Almost instantly, many energy-intensive and often already unprofitable plants found themselves in deficit. The shock is concentrated in Europe, as gas becomes increasingly difficult to transport and prices vary by region. In the USA or Asia, its value has increased much less.

Trade balance

Robin Brooks, a German who is chief economist at the Institute of International Finance (IIF), an American financial association, sees it as “the biggest shock to European competitiveness since the 1980s.”

Suddenly, the eurozone’s trade balance, which had been structurally positive for a decade, collapsed. From January to July 2021, the balance was €121 billion in the euro area; from January to July this year, it reached -177 billion euros.

“We always think of Europe as a region with an active trade balance. Within two months it was gone. It’s shocking,” Brooks continues.

The experience of Defontain illustrates this. This huge Vendée plant, which makes parts for wind turbines, automotive and aircraft components, is suffering from Asian competition.

“Energy inflation is not like that of our competitors,” notes Eric Jacquemont, its boss, bitterly. “In some regions, Asian manufacturers are increasing their competitive advantage.”

“Besides the uncertainty this creates for his own factory and his workers, the man sees a ‘real risk to the industry.’ “As for wind energy, our investments have stopped. The danger is to see the disappearance of French and even European actors.’

The energy shock is, of course, a consequence of the war in Ukraine, which began on February 24, but actually began in the summer when Russia cut off gas supplies to Europe. Since then, one by one, the most energy-consuming plants in many sectors have been closed: fertilizers, glass, aluminum, cement, ceramics, steel, etc.

In July, industrial production in the eurozone fell by 2.3%

In the Netherlands, Nyrstar, the world leader in zinc and lead, decided in August to temporarily close its smelter in Budel, near the border with Belgium. The OCI company in Fransum, near Groningen, has stopped producing bioethanol. Germany, the engine of European industry, was hit hard. At ArcelorMittal, the furnace in Bremen was closed and production was reduced in Hamburg.

Hakle Group, a well-known manufacturer of toilet paper, went bankrupt in early September amid rising energy and paper pulp prices.

The SKW Piesteritz chemical plant in Saxony-Anhalt, specializing in the production of fertilizers and AdBlue, was forced to stop production in mid-September.

On the other side of the Rhine, steel production has fallen by 5% since the start of the energy crisis, chemicals production by 8% and fertilizer production by up to 70%.

In July, industrial production in the Eurozone fell by 2.3%. With one essential question: is there a risk of a domino effect, where the closing of the plant could lead to the bankruptcy of subcontractors? In Ludwigshafen, Germany, the example of global chemical giant BASF illustrates this.

The chemical complex is one of the largest in the world and supplies the entire European industry with chemical compounds. In recent weeks, it has been producing almost no ammonia, which is already unprofitable.

“In the second quarter of 2022, additional gas costs amount to 800 million euros compared to the second quarter of 2021 and even 1 billion compared to 2020,” reports Daniela Rechenberger, BASF spokesperson.

For now, the group compensates for this by purchasing ammonia on international markets. “We continue to deliver to our customers, but we had to adjust the prices. Such a price increase has a cascading effect.

Products derived from ammonia are ubiquitous in our daily lives: adhesives, glues, resins, raw materials for varnishes, pesticides, fertilizers, dyes, pigments, exhaust gas cleaning agents (AdBlue), explosives, paint chemicals, food additives or even certain fibers. and plastics intended for automobiles.

Competition is already knocking on the door: i

In the United States, some states looking to reindustrialize are trying to attract German companies looking for cheaper carbon-free energy, according to a survey by Handelsblatt daily. The first decisions about moving are beginning to appear.

Carpet manufacturer Balta has closed one of its factories in Flanders and announced a partial relocation of the plant to Turkey: “The cost of electricity plus the cost of wages made the situation unbearable,” says a company spokesman.

Sometimes the move stays within the EU: Beaulieu Group, one of the world’s leaders in the production of floor coverings, has announced the transfer of its Walloon factory from Comyn to Haut-de-France.

Central Europe, which has become the backyard of German industry, has so far been a favored location for factory relocation. But not this time either, because energy prices are also rising there.

Slovakia’s main aluminum plant, Slovalco, owned by Norway’s Norsk Hydro and the country’s largest consumer of electricity, has temporarily closed.

In Romania and Slovenia, aluminum production enterprises have significantly reduced their capacities. And the entire sector is under threat of final closure.

“Europe will have to import aluminum from countries like China or Russia,” said Milan Vesely, director of Slovalco, which is set to lay off 300 people by the end of September.

Waiting for a hypothetical lull in the gas market, what should companies do? In Sweden, leading Swedish sawmill group Vidar monitors electricity prices daily and adjusts its production accordingly. Others knew how to predict.

Finnish-Swedish woodworking giant Stora Enso, for example, is more than 70% self-sufficient in energy through the recycling of production waste: biomass used to generate heat and electricity.

But many companies have neither the time nor the money to reinvent themselves in the midst of a crisis. In view of the emergency situation, the state authorities are expanding assistance plans.

Germany has just announced €200 billion in support (over a year and a half), the details of which remain unclear, but which caps the price of gas within a certain consumption limit.

Britain has also capped energy prices by up to £30bn (€33bn) for businesses alone for six months. In France, the price shield was extended to small businesses.

The European Commission is to present proposals to curb the rise in gas prices at a summit scheduled for October 6 and 7.

Fifteen countries, including France, are calling for caps on wholesale prices, but now face opposition from Germany, the Netherlands and Austria.

However, the positions seem to coincide: at a joint forum, French and German economy ministers Bruno Le Maire and Robert Habeck are pleading for “substantial and effective financial support (…) open to all companies that have been severely affected by the rapid rise in prices.” According to them, it is about “preventing a long-term crisis with closures, bankruptcies and unemployment”.

Aside from this public support that is helping to mitigate the crisis, the worst may be yet to come. “For now, we have temporary shutdowns, but production capacity remains in place,” says IIF’s Brooks. “And the point is not to bury German industry.

Risk sectors account for 82% of industrial energy consumption, but only 23% of jobs,” the Ifo economic institute emphasizes.

“In Germany, the volume of production is mainly falling. On the other hand, gross value added is developing much better,” emphasizes economist Gabriel Felbermayr from the Austrian WIFO Institute.

This means that the country manages to enter industrial segments where the margin is even higher. However, it is easy to imagine dark scenarios where the crisis continues and European industry continues to suffer from expensive energy.

In this case, Brooks concludes, at the European level “structural changes and some deindustrialization are possible.”

Le Monde (Rador takeover)