Panic is spreading in parts of the German economy due to the rapid increase in gas and electricity prices. In view of the further round of price increases expected by the beginning of next year, both companies and their industry associations fear that production in Germany could become permanently unprofitable. The Munich Ifo Institute expects that the development of energy prices will lead to increased investments abroad.

“At first glance, the cost of energy is not that high,” says Ifo economist Oliver Falck. The share of energy costs in the gross production value is 0.5 percent in the automotive industry, 0.8 percent in mechanical engineering and 3.1 percent in chemicals.

“Nevertheless, a sharp increase in energy prices can impair the competitiveness of those sectors in particular that face tough international competition and already have relatively low sales margins due to competition.” Falck expects “temporary production stops and the relocation of particularly energy-intensive production steps abroad.”

Energy-intensive production is expensive

According to Falck, energy-intensive production is also very capital-intensive – that is, expensive. Relocations are not easily possible. “But we will probably see new investments being made abroad.” A spokesman for the mechanical engineering association VDMA says: “Companies will not make such an important decision just because of the energy prices, but sharply rising energy prices can of course tip the scales in individual cases.”

The data from the Federal Statistical Office shows how immense the energy requirements of the most energy-intensive companies are. With just 171,000 inhabitants, the city of Ludwigshafen has the highest gas consumption in all of Germany. Because the city on the Rhine is home to the BASF parent plant.

BASF does not give figures just for Ludwigshafen, but according to the chemical company, the energy costs of the European sites together were 800 million euros higher in the second quarter than a year earlier. Compared to the second quarter of 2020, the additional costs of energy supply amounted to one billion euros.

A consequential damage of the high energy prices: The inner-German supply chains have long been disrupted, supply problems are no longer only with Chinese imports. “We have received a lot of feedback from member associations that report production cutbacks by member companies due to the massive increase in energy prices,” says Bertram Brossardt, Managing Director of the Bavarian Business Association (vbw).

BASF spokesman: Acetylene demand has declined

BASF has greatly reduced its ammonia production, and the production of acetylene, a raw material for many plastics, textiles and solvents, is also not running at full capacity. According to a BASF spokesman, demand has fallen because some acetylene derivatives cannot currently be manufactured competitively.

“The costs for electricity, oil and gas make up around 12 percent of the production costs in the chemical industry,” says Wolfgang Große Entrup, general manager of the industry association VCI. “In basic chemicals, the share is even higher at around 16 percent. With individual chemicals, such as ammonia or chlorine, the share is even more than 70 percent.”

Chemical products are required for the manufacture of almost all industrial products. “In the third quarter, chemical energy costs were almost 150 percent higher than in the previous year,” says Große Entrup. Within two years, the industry’s energy costs had more than quadrupled. The prices of many preliminary products have also risen in the three-digit range since 2020.

Electricity costs are the biggest problem

Troubled entrepreneurs see the situation much more dramatically than economists. The biggest cost problem for many medium-sized industrial companies is not natural gas, but electricity. Some companies bought electricity on the spot market for years because the prices there were cheaper than long-term supply contracts.

Spot prices have multiplied, but many companies with long-term supply contracts are now facing huge electricity price increases. The contracts will expire in many places at the end of the year. Many companies have previously paid less than ten cents per kilowatt hour, but prices are now around 40 cents, reports Andrea Thoma-Böck, managing director of the family company Thoma Metallveredelung in Heimertingen.

“Only very few companies will be in the fortunate position of still being covered in 2023,” says the entrepreneur. “The rest are waking up to this new price world that no company can handle.” Some companies can’t find anyone who wants to sell them electricity: “To make matters worse, many companies are refused an electricity contract,” says Thoma-Böck.

Production could become unprofitable in many places

The automotive industry association VDA surveyed 103 suppliers as well as bus, trailer and body manufacturers in September, and ten percent reported production restrictions. Once the high electricity prices hit the mark, vbw CEO Brossardt expects production to become unprofitable in many companies. “The companies can’t keep up with that for long. It doesn’t just affect energy-intensive companies, but the broad spectrum of the economy.” Companies are also plagued by the uncertainty of how the gas price cap should be designed.

There was a more or less gradual migration of German industry even before the Corona crisis. According to the Federal Statistical Office, the proportion of “goods of foreign origin” in German exports has risen steadily, from just under 10 percent in 1990 to 24.5 percent last year. This shows indirectly how massively German industry invested in foreign production.