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European industry is being weakened by the energy crisis

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The industrial firms of Europe are stepping up to the challenge of reducing energy consumption in the face of rising prices and dwindling supply. During the most recent three months, there was a decrease in the demand for both natural gas and electricity. However, it is just too soon to be rejoicing over anything. The decrease is not merely due to the fact that industrial enterprises are lowering the thermostats in their buildings; rather, it is due to the fact that same businesses are also closing down factories that may never be revived. And while reduced energy consumption is helping Europe weather the crisis that was sparked by Russia’s war in Ukraine and Moscow’s supply cuts, executives, economists, and industry groups are warning that if high energy costs continue, Europe’s industrial base could end up being severely weakened as a result.

Industries that require a great deal of energy, such as aluminum, fertilizers, and chemicals, run the risk of having their manufacturing moved permanently to countries or regions that have an abundance of low-cost energy sources, such as the United States. Even though October was exceptionally warm and forecasts are calling for a mild winter, the price of natural gas in the United States is still approximately one fifth of what it is in Europe. This is despite the fact that both of these factors helped drive prices lower. At a conference held in London the previous month, a member of the management board at the utility company E.ON named Patrick Lammers stated, “A lot of companies are just leaving manufacturing.” They really insist that we destroy everything.

This month, manufacturing activity in the Eurozone dropped to its lowest level since May of 2020, which was a warning indication that Europe was headed for a recession. According to figures provided by the International Energy Agency, the demand for industrial gas in Europe dropped by 25 percent in the third quarter compared to the same period in the previous year. According to the opinions of industry analysts, widespread shutdowns had to be the reason of the decline because improvements in operational efficiency alone could not have produced such savings. An official representative for the European Commission stated in an email that the organization is “doing everything we can to prevent a decline in industrial activity.” However, according to a study that was published on Wednesday, businesses in Germany, which is the industrial powerhouse of Europe, have already begun to scale back because of rising energy costs.

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According to the findings of a study of 24,000 businesses conducted by the German chamber of trade and industry (DIHK), more than one in four enterprises in the chemicals sector and 16% of businesses in the car sector said that they were being forced to decrease production. In addition to this, seventeen percent of companies operating in the automotive industry stated that they intended to relocate some production overseas. In reference to essential semi-finished products like chemicals and metals, DIHK Managing Director Martin Wansleben stated that “the impacts are obviously visible: energy-intensive producers of intermediate goods in particular are cutting back on output.”

Analysts believe that the current energy crisis is hastening the migration of production from Europe to other regions of the world where labor is less expensive and other costs are lower. This migration has been going on for decades. According to Daniel Kral, senior economist at Oxford Economics, “factories will shut down and move to the United States where there is an abundance of cheap shale energy” if energy prices remain so high for such a long period of time that a portion of European industry becomes structurally uncompetitive. “If the energy prices stay so elevated that part of European Industry becomes structurally uncompetitive,”

For instance, throughout the course of the previous year, the primary aluminum production in the EU was reduced by a factor of 0.5, or 1 million tonnes. Reuters’ analysis of trade data reveals that all nine zinc smelters in the bloc have either reduced or ceased production. This decrease in domestic production was compensated for by an increase in zinc imports from China, Kazakhstan, Turkey, and Russia. According to Chris Heron, who works for the industry association Eurometaux, reopening an aluminum smelter might cost up to 394 million dollars and is highly unlikely given the uncertain economic situation for Europe. “In the course of history,” he said, “whenever these temporary closures take place, permanent closures follow as a consequence.”

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The rising cost of energy poses a threat not only to Western efforts to ensure a sufficient supply of electricity but also of the essential minerals required to manufacture electric vehicles and build renewable energy infrastructure. Lithium, bauxite, nickel, and rare earth are some of the essential minerals that are required for the transition to a green economy. At the beginning of the following year, it is anticipated that Brussels will propose new legislation in the form of the European Critical Raw Materials Act in order to build up reserves of these minerals. However, Emanuele Manigrassi, the environment and energy senior manager at European Aluminium, warned that businesses are unlikely to invest in Europe if the region does not have access to more renewable electricity and if costs do not decrease.

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