The de-industrialisation of Europe looks imminent as the energy crisis has reached the tipping point. With natural gas prices over $100 per megawatt hour higher than they were a year ago, there seems to be some truth to these fears. Germany and Italy, two of the biggest economies from Europe, will soon be in a recession.
The economic implications of Russia’s war in Ukraine on the global economy, and especially on Europe, have been mind-boggling. The significant impact on global supply chains has been particularly devastating. Barclays has cut global growth forecasts and warns the world to brace up for the weakest growth in four decades.
Beginning of the end?
Part of the problem emerges from the unfinished project of recovery from the pandemic. The other part is the impact of sanctions imposed on Russia that is creating myriad problems for Europe and cascading effects are being felt worldwide.
In Europe, as the industrial running and output is severely impacted, various firms have been shutting down or cutting down production as the only means to survive. Those most adversely hit are energy-intensive sectors, like fertiliser producers, chemicals, steel and aluminum to name a few. Not just these, but the production of glass, paper, ceramics, and cement is also having to be curtailed due to skyrocketing energy prices and increasingly limited energy availability.
Chemical industry: Europe’s chemical industry is a crucial element of almost all value chains and a vital part of its economy, which explains why the general slowdown is being seen. Not only in Europe, but globally, chemical production growth will slow down by 2.7 per cent in 2022, following a 7 per cent increase in 2021.
To put things into perspective, up to 40 per cent of Europe’s chemical industry (petrochemicals and basic inorganics) is at risk of permanent cutbacks unless a sufficient economic assistance package is introduced or natural gas prices fall.
Germany’s BASF, the world’s largest chemicals company by revenue, was hit both by surging gas prices and the limited availability of other key products. Due to paltry business and difficult conditions in Europe, BASF’s management recently launched a cost-cutting programme to be implemented between 2023 and 2024. The cuts are expected to reduce annual costs outside production by 500 million euros. On the other hand, BASF expects further growth in China and plans to multiply investments there. Its chief was a part of the business delegation that accompanied Chancellor Olaf Scholz in his recent visit to China.
Fertiliser industry: Since natural gas is required in large quantities to make fertilisers, many manufacturers in Europe have been forced to either reduce or suspend production in its plants. The Brussels-based association Fertilizers Europe has been calling for urgent government assistance as high natural gas prices have caused the suspension of 70 per cent of ammonia production in Europe, a key ingredient for making fertilisers.
While fertilizers are excluded in the scope of sanctions against Russia, the supply itself from Russia was interrupted due to sanctions imposed on the country in other areas, including banking, transportation and insurance. Ultimately it indicates a worsening agricultural production and a looming food shortage.
Energy Market Intelligence (ICIS) data has revealed the negative effects of rising gas prices on fertiliser production across Europe. Norwegian chemical company, Yara, operating in Italy, France, Norway, and Germany and German ammonia producer SKW Piesteritz have reduced production to survive. In the UK, CF Fertilizers has already scaled down production and begun plans to cease production. The story is the same for Spain, Poland, Slovakia, Bulgaria, Croatia, and Lithuania. Fertiliser companies are cutting down production if not forced to shut down already.
Steel industry: Steel demand recovery in developed economies suffered a major setback in 2022 as a result of persistent inflation and lasting supply-side bottlenecks. The war has made matters worse. Demand in the EU is expected to contract by 3.5 per cent in 2022. Italy’s strong reliance on Russia and Ukraine for certain iron and steel imports alongside natural gas has made it extremely vulnerable.
Europe is losing half of its metal smelting capacity
While the aluminum and zinc industries do not use natural gas directly, the vast amounts of power that smelters consume has left them exposed to Europe’s crisis. Each ton of aluminum takes about 14 megawatt hours of power to produce, which is enough to run an average UK home for more than three years. Production of zinc – which requires about four megawatt hours of power per ton – is also under severe strain.
ArcelorMittal announced it will switch off one of two furnaces at its steelworks in Germany’s Bremen until further notice from September-end, citing the tenfold increase in gas and electricity prices.
In yet another development, Norsk Hydro has already shut its aluminum smelter in Slovakia. Such closures add to growing signs of stress in Europe’s industrial economy. The decision is quite painful for Slovakia – the plant is one of the biggest employers in the Banská Bystrica region and the closure will result in job cuts.
Europe’s energy crisis has been contributing to volatile trading on the London Metal Exchange. The economic mayhem prevails.
Europe’s fight for survival
Germany, the powerhouse, is witnessing unprecedented overhaul of its economy with energy diversification efforts. It is now gaining control over a huge chunk of its industrial base in an effort to prevent shortages and blackouts this winter.
In September 2022, Germany seized the local unit of Russian oil major Rosneft. It also impacts holdings in France, Italy, and Austria, highlighting how interconnected and hence vulnerable Europe’s energy system is.
Alongside the Rosneft decision unit and amid his controversial visit to China for bettering trade relations, Scholz’s administration is in advanced talks to take over Uniper SE and two other major gas importers. The need for preserving critical infrastructure is urgent with Uniper losing 100 million euros a day as it tries to replace Russian gas to maintain deliveries to local utilities and manufacturers.
Future trajectory of Europe’s sanctions on Russia
What should be expected from the next tranche of sanctions if at all? The new round, whenever it comes, won’t be particularly hard-hitting.
With soaring energy prices, it also seems inconceivable that any more measures will be taken regarding energy. Ninety per cent of Russian crude oil imports will be banned across the EU on 5 December after a long deliberation throughout the summer. However, the remaining 10 per cent of the crude will continue being supplied via the Druzhba pipeline and is not likely to be banned. But what Europe really needs to look out for is another spike in oil prices as a result of the ban.
Will Europe’s economic woes falter its support for Ukraine? Brussels had promised a macro-financial assistance package of nine billion euros to Ukraine in May 2022. Of that, only three billion euros have reached Kyiv so far. There is disagreement on when the next two tranches of three billion euros will be disbursed. The current economic challenges indicate that it could well be shifted to 2023 or even later.
Economic concerns are to take precedence before the EU can form consensus on further assistance to Ukraine. Trade analysts have one word to caution Europe against – complacency. For Europe then, survival will be the order of the day.
The writer is an Associate Fellow, Europe and Eurasia Center, at the Manohar Parrikar Institute for Defence Studies and Analyses. She tweets @swasrao. Views are personal.
(Edited by Tarannum Khan)