The costs of rocketing energy are brutal for German industry.

London
CNN Business
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Germany is bracing for a harsh winter as rising energy prices could leave lasting scars on the economy’s main engine, its manufacturing sector.

Industrial production fell by 0.8% in August from the previous month, according to preliminary data released by the National Bureau of Statistics on Friday. Supply chain disruptions caused by the coronavirus crisis and the war in Ukraine continue to weigh on manufacturers, the office said.

But energy-intensive sectors, which include chemical, glass and metal producers, fell more than 2 percent from July.

Carsten Brzeski, chief economist at ING Germany, said in a note on Friday that an economic downturn is “inevitable” and energy prices are eye-wateringly high.

“We don’t need a crystal ball to see German industry weaken further in the coming months. “The full impact of high energy prices will be felt only in the last months of the year.”

Energy prices started to rise last fall, and then shot higher In late February, Russia invaded Ukraine, sparking a violent conflict between Europe and Moscow.

Germany’s manufacturing industry – which accounts for more than a fifth of the country’s economic output – is worried that some of its companies will not see the crisis through. Many are reducing production and some are cutting staff and moving some jobs overseas.

Frederic Persson, chief executive of Central and Eastern Europe at Italian-owned Prysmian Group, told CNN Business that energy costs are “in balance.” [he had] Unprecedented.”

“[Energy] “The price in the business has become something that has the potential to close the business along with others,” he said.

Energy costs at Prysmian’s six German plants are expected to rise to 20 million euros ($20 million) this year. From 5 million euros ($5 million) in 2021. Spending next year is forecast to reach 35 million euros ($34 million) — a 600% increase from 2020.

Although the company relies on natural gas to power the machines, wholesale prices in Germany rose nearly 400% in the year to early September, although they have since fallen, according to data from the Independent Commodity Information Service.

Despite a successful race to fill gas storage areas before winter – German stores are currently 93% full, according to Gas Infrastructure Europe – energy costs, which rose to 10% in September, continue to fuel consumer inflation.

Without the usual supply of Russian gas, the country will run out of gas stores significantly this winter – and continue to pay higher prices next year – even as households and businesses are expected to reduce their consumption, according to a report last week by Stefan Schneider, chief German economist for Deutsche Bank Research.

Mark Shattenberg, the bank’s chief economist, told CNN Business that he expects to lay off up to 2 million workers next spring as employers struggle with high prices and gas shortages. That’s about a third of the numbers at the time of the outbreak in April 2020.

Prysmian has already made permanent cuts to its workforce. Persson said he has laid off about 10% of workers in the region, which covers Germany, Romania, Hungary and the Czech Republic, in the past three months.

As in other major economies, the possibility of a deep recession in Germany is becoming more and more likely. This could herald a wider decline in the country’s industrial sector, which employs 7.5 million people.

Manufacturing output is forecast to decline by 2.5% this year, and by 5% in 2023, according to Deutsche Bank.

“We can see this period as the starting point for accelerated deindustrialization in Germany,” the bank’s senior economist Eric Heymann said in a report.

Labor-intensive companies are scrambling to find ways to stay afloat. Not all are succeeding.

A survey by the Confederation of European Paper Industries (CEPI) last month found that two-thirds of paper producers on the continent had halted production, with more than half temporarily closed.

Paperwork 24/7 requires a lot of energy To evaporate a large amount of water. Hackle, a German toilet paper manufacturer, blamed the high energy and material costs Last month for a loss.

“Surviving this winter is a challenge,” CEPI Climate and Energy Director Malgosia Rybak 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 industrial behemoths.

But big companies like Prysmian, one of the world’s biggest cable manufacturers, are also struggling. Persson says production in his region has dropped 5 percent in the past six months.

Help is at hand. The German government has so far pledged about 300 billion euros ($294 billion) to help millions of households and businesses cope with inflation. Up to 200 billion euros ($196 billion) of the bailout could be financed by government loans.

Such huge sums have provoked criticism. Luxembourg’s energy minister, Claude Thurmes, said last week that the awards represented a “foolish seed” for governments to bend to each other.

“Essentially, there is a fear that Germany supporting its glass industry could kill the Czech glass industry.” Georg Zackmann, a senior fellow at Bruegel, told CNN Business.

“If a country can afford to sell everyone on the energy market, yes, it’s a problem.” he said.

Generous handouts may cause problems with its EU partners, but Germany believes the heart of its giant economy is at stake. Some manufacturers have already moved parts of their operations abroad.

Companies in the year Since the 1990s, they have relied on cheap gas flows from Russia to heat their factories. That source of energy is now “disappearing,” Zackman said, prompting businesses to look for alternative sources or move labor-intensive activities to other countries.

Prysmian did the same. At the beginning of last year, Persson moved to save money on the production of cable transmissions that transport gas from German plants to Hungary and the Czech Republic. To cut energy consumption, instead of making it at home, he started buying parts from Turkey.

“[We are] He is trying to get out of Germany [for energy-intensive products] It is because it is very difficult for us to maintain the product for the simple reason. he said.

Similar pressures can be seen elsewhere in Europe. Germany’s BASF and Norway’s Yara International (YARIY), chemical giants, have cut production of ammonia – a key fertilizer ingredient – due to high gas prices on the continent. Yara International’s (YARIY) European ammonia production is only operating at 35% of capacity, company CEO Sven Tore Holsetter told CNN Business.

There are early signs of more lasting change in the German automobile industry.

According to a September survey by the German automotive industry association VDA, 85 percent of automakers see the country as uncompetitive because of high energy prices and unreliable supplies. About 3 percent of companies said they plan to invest domestically, while 22 percent want to move their investment abroad.

But some analysts are skeptical about how damaging the current crisis will be in the long run.

“Energy-oriented branches [of industry] Energy prices remain at structurally high levels, so they will shift elsewhere. But, overall, we don’t expect the economy to fully deindustrialize,” Stefan Coutts, director of research at the Kiehl Institute for the World Economy, told CNN Business.

Deutsche Bank’s Schottenberg is optimistic, and sees the next two years as a period of adjustment.

“German industry, the so-called ‘mittelstands,’ the small and the medium. [sized] Companies are very dynamic and dynamic, he said.