Europe could see forced deindustrialization as a result of the energy crisis

The European Union silently celebrated a substantial drop in gas and electricity consumption this year amid record prices, a cut in much of the Russian gas supply and a liquidity crisis in the energy market.

However, the reason for the celebration is dubious: companies aren’t just limiting their energy consumption and continuing to work as usual. They are closing factories, downsizing or relocating. Europe could be on the path of deindustrialisation.

That the European Union is heading towards a recession is now quite clear to anyone who looks at the indicators. The last one there-manufacturing activity in the euro area—Has fallen to its lowest level since May 2020.

The October reading for S&P Global’s PMI also signaled a looming recession, down in the month and with the fourth monthly reading below 50, an indication of an economic contraction.

With perhaps worse news, however, German conglomerate BASF said last month that it would be permanently on the downside in its home country and expand into China. The announcement served as a blow to a government trying to juggle energy shortages and climate targets without extending the life of nuclear power plants.

“The European chemicals market has grown only weakly for about a decade [and] the significant increase in natural gas and electricity prices over the course of this year is putting pressure on chemical value chains, “said Martin Brudermueller, CEO of BASF, quoted from the FT, at the end of October.

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However, it is worth noting that the energy crisis was not the only reason for BASF’s plans to reduce its presence at home and grow abroad. Even stricter EU regulation was a factor behind this decision, Brudermueller said.

Other sectors also appear to have problems with new EU regulations. The commercial body for the steel and aluminum industries, which have also suffered significantly from energy cost inflation, recently proposed that the EU take a step-by-step approach with its new cross-border adjustment mechanism, known also as an import carbon tax.

CBAM was conceived as a way to level the playing field for European industrial companies subject to strict emissions regulation that makes its production more expensive than the production of countries with more lax emission standards.

However, it would also make important raw materials for Europe’s steel and aluminum industries more expensive, adding to the pain these industries are already experiencing because they are also some of the most energy-hungry.

One tenth of the crude steel production capacity in Europe has already been idle, according to Jefferies’ estimates. All zinc smelters have reduced production and some have closed. Half of primary aluminum production was also stopped. And in fertilizers, 70 percent of factories have been idle due to energy shortages.

Chemical plants are also holding back their activities, ferroalloy kilns are going cold, and plastic and ceramic production is also shrinking.

Some of these companies may choose to eventually move to a location with cheaper and more widely available energy sources, contributing to the process of deindustrialisation in Europe. As for the best candidate for this transfer, according to some observers, it is the United States, with its abundant gas reserves, increasing production and favorable investment climate.

In the meantime, one thing has become crystal clear: the reduction of energy consumption in European industrial sectors is not really a cause for celebration. If anything, it is a cause for concern and urgent action by decision makers.

The gas price cap that the EU recently agreed could help a little, but because it’s linked to lower consumption, it’s not really a solution for companies wishing to stay in business. It is a life support system.

By Irina Slav for Oilparmi

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