An energy price shock is rocking European industry, with export-oriented Germany hitting even harder than elsewhere. Hydraulic fracturing keeps natural gas prices low in the US, but Germany does not allow the process. Liquefied natural gas (LNG) is very expensive and provides ideal price margin speculation. For the foreseeable future, natural gas in Europe (and much of Asia) will remain much more expensive than in the US. While producers of non-tradable goods and services mainly pass on additional costs to their customers, companies in energy-intensive industries are fighting for this, despite increased international competition, and are reducing production. Press releases and media reports indicate that companies in energy-intensive sectors are moving their production abroad. Why produce ammonia at your own base, if you can import it cheaper from the USA? In October, production in the German chemicals sector fell 23% below the 2021 average. We would not be surprised if a total of 2%-3% of Germany’s current industrial capacity (and 1%-2% of the Eurozone, respectively) immigrate to the US or perhaps , to Arab countries in some cases within three years. Is the core of Europe moving towards deindustrialization? Not really, in our opinion. Reacting to excessively high prices, German industry has been using about 25% less natural gas than usual over the past four months.

The chemical sector, which previously accounted for 7.4% of Germany’s total industrial production but 37% of industrial gas use, plays a key role in these savings measures. However, this is only part of the picture. In general, German industrial production (with the exception of energy and construction) has fared much better so far. For example, significant de-bottlenecking of the supply chain has allowed the automotive sector to ramp up production again. With the ongoing winter recession, falling demand is likely to force most companies across all sectors to cut production. But for the sudden recovery in economic activity that we predict will come as Europe weathers the winter with little (or no) Russian gas, the current production shift pattern gives a glimpse into the future of both German and European industry as a whole.

* Messrs. Holger Schmieding, Callum Pickering and Salomon Fiedler are economists at Berenberg Bank.