- Energy costs well above historical norms threaten to plague the region’s industry for years.
According to Bloomberg article published on February 27, 2023:
Today’s Take: Gas Pains
European natural gas prices are down 85% from the highs of last summer, but that doesn’t mean industries are back on an even keel.
BASF SE is a case in point, announcing Friday that it’s closing several gas-intensive factories in Germany and cutting thousands of jobs. Europe’s biggest chemical producer will instead serve its customers in the region from plants in places like the US and China.
Current gas prices are “at least double what we are used to,” Chief Financial Officer Hans-Ulrich Engel said. “Prices have declined, but we expect them to stay considerably higher in the long run.”
Make no mistake, Europe succeeded in avoiding an energy catastrophe this winter. The continent survived without much piped supply from Russia through a concerted effort to curb consumption and boost deliveries of alternatives such as liquefied natural gas.
But key to that success was the decision by many companies to halt factories or slow production in response to soaring gas costs. European Union industrial gas demand fell 15% last year from the 2019-2021 average, according to think tank Bruegel. BASF slashed gas consumption by around a third in Europe and still incurred €2 billion ($2.1 billion) of additional costs.
Even if prices stabilize around lower levels, it will be challenging to go back to the way things were without cheap Russian fuel. A return to normal factory production would boost gas demand, tightening limited global supplies and risking higher prices once again.
Deindustrialization hasn’t swept across Europe, but it is forcing a reconfiguration. The industries most dependent on gas, like ammonia and fertilizer manufacturers, are looking to move production to places with lower costs and abundant fuel — such as the US — or remove gas from their supply chain altogether.
BASF isn’t an outlier. The energy crisis changed the way certain industries view Europe as a manufacturing hub. More companies are bound to join the exodus.
