via notayesmanseconomics:
A rise in energy costs is an especially big issue if you are an exporting manufacturer. The issue is in play for my subject of yesterday Japan, but when one thinks about it the classic case is Germany. We have been observing this for a couple of years now but it has taken a while for it to become accepted elsewhere. Even the Financial Times is on the case these days.
German industry is unlikely to recover to pre-Ukraine war levels as elevated prices from imported liquefied natural gas have put Europe’s largest economy at a “disadvantage”, the chief of one of Germany’s leading energy companies has warned.
“Gas prices in continental Europe, especially in Germany, are structurally higher now, because we, in the end, depend on LNG imports,” said Markus Krebber, chief executive of RWE. “The German industry has a disadvantage.”
The Financial Times then has a go at some interesting framing.
His comments come as European gas prices have plummeted 90 per cent from the record levels seen in 2022 and dipped briefly to levels last seen before the energy crisis, spurring questions about the extent to which industrial demand will recover.
Although it soon crumbles.
However, despite the sharp declines in the gas market, the European benchmark sits above pre-crisis averages, almost two-thirds higher than at the same time in 2019, according to commodities pricing agency Argus.
This is something that features in the Transitory inflation debate as there was an issue pre the Ukraine war. It suits the establishment to claim there was not as it provides an excuse for their failures. Let me illustrate this from the Federal Statistics Office report for January 2022 which was before the war.
Especially the rise in energy product prices (+20.5%) was markedly higher than overall inflation (December 2021: +18.3%). Motor fuel prices increased 24.8% and household energy prices 18.3%, year on year. Among household energy products, price rises were recorded especially for heating oil (+51.9%), natural gas (+32.2%) and electricity (+11.1%).
So it was already a problem and there are a couple of sacred cows here too. For example you do not have to be a fan of Donald Trump to see that he was right about this.
Germany had to wean itself off natural gas supplies from Russia after Moscow’s full-scale invasion of Ukraine as it became apparent that the Kremlin was using energy exports as a geopolitical weapon.
Plus under the editorial regime of Lionel Barber the Financial Times made Angela Merkel its person of the year in 2015.
Echoing criticism in Germany over the country’s energy policy, Krebber said then-chancellor Angela Merkel’s decision in 2011 to shut down its nuclear fleet without replacing the fuel with another energy source aside from Russian pipeline imports was a “mistake”.
Even if we step forwards to now we see that the German government seems determined to sell its industry down the river.
Berlin maintains that it is pouring money into transitioning the economy, positioning it for major future competitive advantages in a carbon-neutral world.
What competitive advantages are they? After all industry is already leaving.
Samantha Dart, head of natural gas research at Goldman Sachs, sees permanent closures of industrial capacity in Europe that will not come back.
It seems clear where at least some are going.
German companies announced a record $15.7bn in capital commitments to US projects last year, up sharply from $8.2bn a year earlier, dwarfing any other foreign destination, according to data from fDi Markets, a Financial Times subsidiary.
Number Crunching The Impact
One way of looking at it is below.
Gas demand from Europe’s industrial sector was down 24 per cent last year from 2019 levels, according to S&P Global Commodity Insights. The firm expects 6 to 10 per cent of the continent’s gas consumption to have disappeared forever due to demand destruction.
Plus if this survey is any guide more will be on its way.
A survey by the German Chamber of Commerce and Industry last September found that 43 per cent of large industrial companies were planning to relocate their operations outside of Germany, with the US being the top destination.
Such has been the interest that the Federal Statistics Office compiled a special report.
If you look at the different industrial sectors, you can see that the production of chemical products requires the most energy. Metal production and processing also requires large amounts of energy.
Putting it another way there is this.
The five industrial sectors with the highest energy consumption together required 77% of total industrial energy consumption in 2021, while their share of gross industrial value added at factor costs was only 17%.
That makes them very vulnerable to price rises, because of the scale of the issue. Also as an aside there is another problem and a reason for the rise in food prices we have seen worldwide.
Natural gas is not only used for energy purposes, but more than a third of it is used as a raw material for the production of chemical products such as fertilizers.
It seems that The Rolling Stones were onto something.
It’s a gas, gas, gas
The impact at the time was put like this.
Since the beginning of 2022, production in energy-intensive industries has fallen almost continuously in 2022 and has therefore developed significantly weaker than the industry as a whole. From February 2022 to July 2023, production in energy-intensive industries fell by 16.7%.
Although apparently that is okay or something like that.
During the same period, total industrial production only fell by 2.8%. The energy-intensive industries, with their significant declines, do not appear to have a significant impact on the development of overall industrial production.
The Future is Bright
If we look wider then a rescue is at hand.
In the long-run, the Commission says the Green Deal will nonetheless have a positive effect, boosting EU competitiveness by creating jobs in eco-friendly sectors. ( EuroNews)
I am being the online equivalent of tongue-in-cheek as we know that politicians are only interested in the short-term. So any reference to the long-run evokes images of the phrase “Jam Tomorrow”. Such thoughts immediately hit trouble with those who would make the jam.
As the EU changes the way goods are produced and consumed, there will undoubtedly be job losses, and recent protests by farmers across Europe are a stark example of the real fear surrounding the green transition. ( EuroNews)
The whole piece has a German link in that it is a piece on President Von der Leyen’s attempt to serve a second term. Indeed she could have written it as somehow it omits that there is a common theme in all the failure on her watch which is her.
But for our purposes today we again have a German politician pursuing the same failed energy strategy.
Comment
This issue comes at us in a variety of ways. Here is the Financial Times from another article.
Big investors are selling US Treasuries and buying European government bonds, betting that cooler inflation in Europe will allow its central bank to start cutting interest rates sooner than the Federal Reserve.
As the main European bond market is Germany that is good in isolation. But the bigger picture is bad because you are betting the the European economies will continue to under perform.
The shift comes as the US and European economies have begun to diverge, with softer inflation and a weaker economy in Europe fuelling bets that the ECB will deliver more cuts than the Fed this year.
Of course that whole issue is rather toxic for past views at the FT.
Finally let me add something from my own thinking which is that there is a problem with the analysis of the Federal Statistics Office above. They are following the conventional view of smooth demand and supply curves and saying not much has happened. But in the real world these things take time along the lines of how people respond to change “Anger then Denial” and so on.
Thus some businesses will be hanging on and it is how long prices remain high that will also feed in? Over time more will fold. As to the latest news it raises the stakes.
European natural gas is expected to be more expensive through next winter amid persistent uncertainty about supply risks, including remaining flows from Russia ( @business)