THE CHALLENGE OF DEALING WITH THE VOLATILITY OF ENERGY PRICES Leaving aside the challenge of dealing with the volatility of energy prices, it is forcing much of German industry to think about the long-term term competitive viability of domestic production. The list of companies considering either relocating production to other parts of Europe, or closing production within Europe is growing, with BASF perhaps dropping the largest bombshell when it announced at the end of October that it will have to downsize “permanently” in Europe, as high energy costs are making the region increasingly uncompetitive.
As this graphic via Oxford Economics and the IEA attests, the scale of the potential ‘de-industrialization’ of Germany due to this ‘basis shift’ in energy costs is enormous:
Gas demand and intensity in German manufacturing industries
Gas intensity - mtoe per unit of GVA
Total Gas Demand - mtoe
Mtoe: million tonnes of oil equivalent; GVA: gross value added Source: Oxford Economics/International Energy Agency
The implications for Germany’s ‘Mittelstand’ (SMEs), which form the backbone of the large manufacturing conglomerates’ supply chains are all too obvious and make the risk of a ‘Japanification’ of its industrial heartland all too real.
It is little surprise that the current coalition government has thrown typical German fiscal prudence to the wind, by announcing EUR 200 Bln in support measures to mitigate the fall-out from the energy crisis. But this is not a long-term solution and has very unsurprisingly rankled most other EU countries, above all given the many decades of Germany browbeating them about fiscal prudence. It also makes the challenge of planning for future EU energy demand all the more difficult, if such a hollowing out of German industry were to get traction.
Marc Ostwald E:
marc.ostwald@admisi.com T: +44(0) 20 7716 8534
27 | ADMISI - The Ghost In The Machine | Q3 Edition 2022
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