By Anna Cooban, CNN Business
Germany is bracing itself for a rough winter as soaring energy prices threaten to leave permanent scars on its manufacturing sector, a key engine of its economy.
Industrial production fell by 0.8% in August from the month before, according preliminary data released by the country’s statistics office on Friday. Supply chain bottlenecks caused by the coronavirus crisis and the war in Ukraine continue to weigh on producers, the office said.
But energy-intensive sectors, which include chemicals, glass and metals producers, fared even worse, slumping by more than 2% from July.
Carsten Brzeski, chief economist at ING Germany, said in a Friday note that an economic contraction was “inevitable” while energy prices remain eye-wateringly high.
“We don’t need a crystal ball to see a further weakening of German industry in the coming months. The full impact of higher energy prices will only be felt in the last months of the year,” he said.
Energy prices started rising last fall, and then shot even higher when Russia invaded Ukraine in late February, sparking an energy standoff between Europe and Moscow.
Germany’s manufacturing industry — which accounts for more than one fifth of the country’s economic output — is worried some of its companies won’t see the crisis through. Many are slashing production, while some are laying off staff and relocating parts of their operations abroad to cope.
Frederick Persson, chief executive for central and eastern European at Prysmian Group, an Italian-owned cables manufacturer, told CNN Business that energy costs were “on a scale that [he had] never seen before.”
“[Energy] has gone from being… a cost among others in the business to be something which has the capacity of basically closing the business down,” he said.
Energy costs at Prysmian’s six German factories are expected to soar to €20 million ($20 million) this year from just €5 million ($5 million) in 2021. Next year, costs are predicted to hit €35 million ($34 million) — a 600% rise from 2020.
The company relies on natural gas to power its machines, but wholesale prices in Germany shot up nearly 400% in the year to early September, though have since fallen back, data from the Independent Commodity Intelligence Services shows.
Despite a successful race to fill gas storage facilities ahead of winter — Germany’s stores are currently 93% full, according to Gas Infrastructure Europe — energy costs continue to fuel consumer price inflation, which jumped to 10% in September.
Without its usual supply of Russian gas, the country is likely to severely deplete its stores over the winter — and continue paying whopping prices next year — even assuming households and businesses manage to slash their consumption, Stefan Schneider, chief German economist at Deutsche Bank Research, said in a report last week.
Marc Schattenberg, a senior economist at the bank, told CNN Business that he expects to see as many as 2 million workers on furlough next spring as their employers battle high prices and shortages of gas. That’s roughly one third of the numbers furloughed at the height of the pandemic in April 2020.
Prysmian has already made permanent cuts to its workforce. Persson said he had laid off about 10% of staff in his region, which covers Germany, Romania, Hungary and the Czech Republic, over the past three months.
Like other major economies, the prospect of a deep recession in Germany is becoming increasingly likely. That could herald a broader decline in the country’s industrial sector, which employs 7.5 million people.
Manufacturing output is predicted to drop by 2.5% this year, and by about 5% in 2023, according to Deutsche Bank.
“We might consider this time as the starting point for an accelerated deindustrialization in Germany,” Eric Heymann, a senior economist at the bank, wrote in the report.
Surviving the winter
Companies that require vast amounts of energy are scrambling to find ways to stay afloat. Not all are succeeding.
According to a survey last month by the Confederation of European Paper Industries (CEPI), two-thirds of paper producers on the continent have cut their production, while just over half have temporarily closed.
Paper-making needs a lot of energy 24/7 to evaporate large quantities of water. Hakle, a toilet paper manufacturer in Germany, blamed soaring energy and material costs for its insolvency last month.
“Surviving this winter is going to be a challenge,” Malgosia Rybak, CEPI’s climate and energy director told CNN Business.
Many German manufacturers are small and medium-sized businesses — part of the country’s “Mittelstand” — and are often family-owned and deeply integrated into their communities. They are less able to absorb energy price shocks than industry behemoths.
But big companies such as Prysmian, one of the world’s largest cable producers, are also struggling. Persson said he has cut production in his region by 5% over the past six months.
There is help at hand. The German government has so far promised to spend nearly €300 billion ($294 billion) to help millions of households and businesses cope as prices soar. As much as €200 billion ($196 billion) of that support could be funded by government borrowing.
Such whopping sums have sparked criticism. Claude Turmes, Luxembourg’s energy minister, last week said the giveaways represented an “insane race” by governments to outspend one another.
“There’s a risk that essentially Germany subsidizing its glass industry will kill the Czech glass industry,” Georg Zachmann, a senior fellow at Bruegel, told CNN Business.
“If one country can essentially afford to outbid everybody else on the energy market, yes, it’s a problem,” he said.
Generous handouts may be causing problems with its EU partners, but Germany believes the heart of its giant economy is at stake. Some manufacturers are already moving parts of their operations abroad.
Companies have relied on the steady flow of cheap gas from Russia since the 1990s to fuel their factories. That energy source is now “vanishing,” Zachmann said, pushing businesses to find alternate sources, or move energy-intensive activities to other countries.
Prysmian has done just that. At the start of last year, Persson moved the gas-guzzling production of cable conductors from German factories to Hungary and the Czech Republic to save money. He has started to buy parts from Turkey, rather than make them in-house, to cut energy consumption.
“[We are] trying to move away from Germany [for energy-intensive products] for the simple reason that it is very hard for us to sustain the production,” he said.
Similar pressures can be seen elsewhere in Europe. Germany’s BASF and Norway’s Yara International, two chemicals giants, have slashed their production of ammonia — a key ingredient in fertilizer — on the continent due to high gas prices. Yara International’s European ammonia production is running at just 35% of its capacity, company CEO Svein Tore Holseter, told CNN Business.
In Germany’s auto industry, there are early indications of a more permanent shift.
According to a September survey by VDA, Germany’s automotive industry association, 85% of car makers view the country as an uncompetitive location because of high energy prices and insecure supply. Just 3% of companies said they plan to invest in the country, whereas 22% want to shift their investments abroad.
But some analysts are skeptical about how much damage the current crisis will inflict in the long term.
“Energy-intensive branches [of industry] will relocate as energy prices will structurally stay on higher levels. But, in total, we do not expect a full-blown deindustrialization of the economy,” Stefan Kooths, research director at the Kiehl Institute for the World Economy, told CNN Business.
Deutsche Bank’s Schattenberg is hopeful, and sees the next two years as a period of adjustment.
“German industry, the so-called ‘Mittlestand’, the small and medium [sized] companies, are quite resilient and adaptable,” he said.
™ & © 2022 Cable News Network, Inc., a Warner Bros. Discovery Company. All rights reserved.