Analysts have warned Europe's industry that the crisis it will face this winter will not end with the end of the cold weather. At least two more difficult years are waiting for her. Many companies in the EU will become unprofitable due to expensive energy resources. They will be forced to either close down or move production to other countries. Where will European industry move to and how many years will it take to deindustrialize the EU?Europe's industry is going through hard times due to the energy crisis.
However, the unpleasant news is that the tests will not end there. European factories are waiting for at least two more difficult years. The easing of tensions in the energy market is not expected until 2024, according to experts of the consulting company PwC. The energy crisis threatens key sectors of German industry and leads to the deindustrialization of Europe, the German newspaper Die Welt writes with reference to this study.
Extremely high gas prices have hit Germany's industry particularly hard as Europe's largest economy. And although the German industry is still producing goods cheaper than the EU average, the heads of every fourth company in Germany are thinking about the possibility of transferring production abroad.
According to the study, Europe is losing its global competitiveness and attractiveness as a place of production. "In the future, many companies may decide to reorganize their production in Europe or completely withdraw from Europe," says Andreas Spanet, head of Strategy & Europe.
The metallurgical, automotive and chemical industries are under enormous pressure due to higher production costs. Production costs have grown relatively moderately only in France and Spain, because the energy balance of these countries has a high share of nuclear energy and renewable energy sources. On the other hand, EU countries heavily dependent on Russian oil and gas, such as Poland and Germany, have come under greater pressure due to gas shortages.
The industrialists themselves say that Europe should prepare for a protracted crisis.
"We are in a gas crisis, and we will continue to be in a state of a small crisis for the next two or three years. So let's not develop a false sense of security.",
– said Sid Bambawale, head of the liquefied natural gas department in the Asian region of Vitol trader (it is the world's largest independent energy trader).
"If Europe loses its economic competitiveness, it will jeopardize its welfare model," says Marco Tronchetti Provera, one of Italy's largest entrepreneurs, head of the Pirelli group. "There is an emergency situation now. We're losing contracts. If there is no immediate response to the energy crisis, we will throw away what has been built in Europe over the past decades," he says.
The main quick recipe for dealing with energy shortages, which Europeans use, is to reduce energy consumption primarily by industry. Already in the second quarter of 2022, gas consumption in the EU sharply decreased by 16% to 71 billion cubic meters of gas, and in the nine months from January to September, European OECD member countries reduced gas consumption by 10%, including at production facilities by 15%, as evidenced by data from the International Energy Agency.
"The sectors of industry that suffer the most are those where the most energy is used, including electricity, as it is generated from thermal power plants running on gas or coal. Ceramic tile manufacturers, car manufacturers, fertilizer and chemical manufacturers and many others have already complained," says Vladimir Chernov, analyst at Freedom Finance Global.
Each company finds its own way to reduce energy consumption. "For example, the French automaker Renault reduces the heating time of paint – a process that accounts for up to 40% of gas consumption. There is already evidence that even before the onset of winter, large companies began to reduce production in some industries due to lack of energy. The heads of enterprises producing chemicals, fertilizers and ceramics warn that they risk losing market share and may be forced to move part of their production to those regions of the world that can offer cheaper energy," Chernov notes.
"The rise in energy prices is currently leading to an alarming decline in the competitiveness of industrial energy consumers in Europe," and without immediate action to limit prices for energy-intensive companies, "the damage will be irreparable." Such a letter was sent by members of the European round table on industry to the head of the European Commission, Ursula von der Leyen.
The leaders of France and Germany have recently expressed their dissatisfaction with the fact that the United States is luring European industry not only at the expense of cheaper energy resources, but also by providing them with additional benefits for transferring production to their territory. About 60 German companies intend to settle in Oklahoma alone.
"But not only the United States will become more profitable for European business. Hungary, for example, has achieved exceptions for itself from anti-Russian sanctions and will continue to receive cheap Russian gas. Recently Hungary even signed an agreement to increase the volume of supplies from Gazprom. It is not surprising that, for example, the company Kostal Automobil Elektrik began to transfer jobs to Hungary. It intends to close production in Germany within the next two years," says Vladimir Chernov.
Two more directions for the "migration" of European factories are Turkey and China. Thus, the manufacturer of ceramic tiles V&Btiles is going to Turkey, and such giants as BASF and BMW are planning to open new factories in China.
This is an uncomfortable reality for European politicians. They have already spent hundreds of billions of euros to support the population and to fill underground gas storage facilities to prepare for this winter. The burden on state budgets has grown enormously. But money alone is not enough. Governments have to restrict the operation of factories, which, however, at such prices it becomes more profitable to close than to work at a loss.
But the most unpleasant news is that as soon as the current winter ends, the problems will not disappear anywhere. All of them will be preserved next year. Preparations for the next winter and the next winter itself will take place in the same atmosphere of crisis and collapse as at the moment.
"It takes more time to build up more expensive supplies from other exporters. Next, the Europeans will probably introduce measures for joint purchases of natural gas, the cost of any gas will be limited and they will switch to "green energy" more quickly. But this requires additional financial injections and more time, so so far the most effective way to survive the winter is to reduce energy consumption," says Chernov.
The European industry is rightly concerned about the fact that if this year it was possible to fill underground gas storage facilities in Europe up to 90%, then by next winter it will not be possible to fill the storage facilities to the top.
The fact is that the region managed to import record volumes of LNG this year only due to the fact that demand from China turned out to be sluggish. And China even exported part of the contracted LNG to Europe. However, in the new year, China may end the policy of "zero" covid and return to high LNG consumption. And then the luck of 2022 can easily leave the Europeans in 2023.
In five of the seven scenarios, Europe may face the winter of 2023-2024 with the fact that underground gas storage facilities will be able to fill by only 65%. This was shown by the analysis of the analyst of the European gas market of ICIS Paula Di Mattia, provided that Russian gas will go only through the Turkish Stream.
The scenarios that would allow Europe to have sufficient gas in storage provide for a significant reduction in demand either in winter or in the period from November 2022 to September 2023, as well as an increase in LNG imports to 440 million cubic meters per day, that is, more than this year.
And problems with filling storage facilities in the summer of 2023 will largely depend on how much these UGS will be emptied this winter, says Di Mattia. The probability that they will be seriously devastated is quite high, given the physical shortage of gas. Therefore, during 2023, Europeans will have to continue to reduce demand and depend on the volume of LNG inflows to their region in order to somehow balance the situation in the energy market.
Olga Samofalova
