Hives of activity don’t get bigger — and busier — than BASF’s headquarters in Ludwigshafen. The size of a small town, it’s the largest integrated chemical complex in the world, with one of Europe’s biggest wastewater treatment plants, its own hospital and fire brigade.
The lifeblood of Ludwigshafen is natural gas. It is the substance that courses through its dense network of pipes, the fuel for its power plants, the feedstock for its chemical processes. And Russia’s war in Ukraine has knocked out its main supplier.
BASF first responded to the soaring price of gas by shutting down its ammonia plant and reducing the run rate of its acetylene facility, hobbling production of two chemical building blocks used to make a host of different products that are vital to modern industrial value chains.
“High natural gas prices have created a situation where importing ammonia from overseas was cheaper than manufacturing it ourselves,” says Uwe Liebelt, head of BASF’s European sites.
By October, the company had gone much further, concluding that higher energy costs had so badly undermined Europe’s competitiveness that it would have to transform its entire business.
Chief executive Martin Brudermüller announced that BASF would downsize in Europe “as quickly as possible, and also permanently”. Most of the cuts are expected to be made at the Ludwigshafen site.
BASF is not alone. Since the summer, companies across Germany have been scrambling to adjust to the near disappearance of Russian gas. They have dimmed the lights, switched to oil — and, as a last resort cut production. Some are even thinking about moving operations to countries where energy is cheaper.
That is triggering deep concern about the future of German industry and the sustainability of the country’s business model, which has long been predicated on the cheap energy guaranteed by a plentiful supply of Russian gas.
Constanze Stelzenmüller, director of the Center on the US and Europe at the Brookings Institution, has said Germany is a case study of a western state that made a “strategic bet” on globalisation and interdependence — and was now suffering the consequences.
“It outsourced its security to the US, its export-led growth to China, and its energy needs to Russia,” she wrote in June. “It is now finding itself excruciatingly vulnerable in an early 21st century characterised by great power competition and an increasing weaponisation of interdependence by allies and adversaries alike.”
In many ways, BASF epitomises Stelzenmüller’s point. Over the years, it became highly dependent on piped Russian gas: Brudermüller said in April it formed the “basis for our industry’s competitiveness”.
And it has become increasingly intertwined with China, which now accounts for €12bn of its annual revenues. BASF is currently building a €10bn chemical complex in Guangdong, south-eastern China, which is the largest foreign investment in its history.
Some in Berlin eye the new China plant with suspicion. “They’re basically building another version of Ludwigshafen there,” says one German official. “The fear is they might one day shut down the German site altogether and transact all their business in the Chinese factory instead. Their shareholders couldn’t care less, as long as the money keeps flowing.”
BASF has largely dismissed concerns that it’s repeating the same mistakes German business made in Russia — becoming too dependent on an authoritarian state with potentially aggressive intentions towards its neighbours. Brudermüller, who spent ten years living in Hong Kong, says BASF can’t afford not to be in China, which accounts for 50 per cent of the global chemicals market and is growing much more strongly than Europe.
There were risks, Brudermüller told reporters in October, but “we’ve come to the conclusion that China is an opportunity . . . and it makes sense to expand our position [there].” Germans should “stop this China-bashing and look at ourselves a bit more self-critically”.
Some Germans are doing just that — and calling for a major rethink of the country’s economic paradigm, on everything from deregulation to immigration. “The German business model has to change,” Christian Lindner, the country’s finance minister, tells the Financial Times. “It was based on low energy prices . . . on an abundance of skilled workers, and open markets for Germany’s high-tech products.” But “this model doesn’t really work any more because many of the core elements have changed.”
‘We’re living hand to mouth’
Companies across Germany are finding themselves burdened by exorbitant short-term energy costs. KPM, one of Europe’s oldest porcelain producers, founded by King Frederick the Great of Prussia in 1763, fires its vases, cups and plates in kilns that are heated to 1,600C and has no alternative to gas.
“It’s the company’s biggest crisis since the second world war,” says chief executive Jörg Woltmann. “We’re living hand to mouth.”
KPM has been able to cut its energy use by 10-15 per cent, he says, by switching off the lights and heating at weekends and packing its kilns more tightly “so we can do with one less fire”. The company has not reduced production: but its costs have soared, not just for energy but for all its raw materials and inputs like packaging. Woltmann says KPM will have to start raising prices for its products by the middle of next year.
Government statistics released last month said production in energy intensive industries, which account for 23 per cent of all industrial jobs in Germany, had declined by 10 per cent since the start of the year. Sectors like metals, glass, ceramics, paper and textiles have taken the biggest hit. “That means there are 1.5mn workers in Germany whose industries are currently under pressure,” says Clemens Fuest, head of the Ifo Institute.
Heinz-Glas, a 400-year-old glass manufacturer based in the southern state of Bavaria which makes bottles and jars for the perfume and cosmetics industry, is also suffering.
“In 2019 we paid about €11mn for energy — this year it will be €32mn,” says Carletta Heinz, the company’s chief executive.
Unlike KPM, Heinz-Glas has struggled to curb its gas consumption. “There’s little scope for energy efficiency measures,” says Heinz. “We’ve always been very careful about our energy use and so we can’t do much more to reduce it.”
Her hope is that the government will intervene to help. There are precedents: Heinz-Glas suffered a crisis in the 19th century when the price of wood, its main energy source, went through the roof. “The government financed the construction of a railway so coal could be delivered straight to our factory, and we were able to switch,” she says.
Some help is already on its way. In September, chancellor Olaf Scholz announced the creation of a €200bn “protective shield” to cushion the impact of higher energy costs on companies and households, including a “brake” on the price of gas. Heinz hopes this is just the start. “The government will do what’s needed to keep industry in Germany alive,” she says. “Because without industry our country is worth nothing.”
Germany’s glass and ceramics manufacturers may be struggling — but they are relatively small. Not so the chemical industry, which employs more than 450,000 people in Germany. “If it were to halve in size that would have a direct impact on the country’s prosperity,” says Henrik Ahlers, country manager for EY Germany.
Germany has Europe’s largest chemicals industry by far — yet it is almost entirely reliant on imported energy and raw materials. For decades, BASF, Europe’s largest industrial consumer of gas, derived most of those imports from Russia.
Now the cost of that dependence is becoming clear. The company says it had to pay €2.2bn more for gas between January and September than it did in the same period of 2021 and ended up making a €130mn loss in its German business in the third quarter. It now plans to shave €1bn in costs over the next two years, partly in response to the surge in energy prices.
BASF’s Liebelt sees little relief ahead. “The gas price has come down but it’s not even close to what it was before,” he says. “[And] it will stay significantly above what we have in the US, for example.”
The spectre of deindustrialisation
The concern now is that industrial production could shift away from Germany altogether in the long term. A poll over the summer by the BDI, Germany’s main business lobby, found that nearly one in four Mittelstand companies — the small and medium-sized enterprises that form the backbone of the German economy — were considering moving production abroad. It was principally energy costs that were triggering the shift.
But they’re not the only factor. The business environment in Germany — and Europe more broadly — has “deteriorated”, BASF’s Brudermüller said in October. Growth in the European market has been sluggish for a decade. EU regulation is creating “great uncertainty”, he said.
Industry leaders cite measures such as the EU’s industrial emissions directive and its chemicals strategy for…
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2022-12-06 05:00:32
