Business International Analysis: Many European factories closed due to lack of Russian gas

European industry is in the midst of reducing output, even closing factories because of soaring energy prices due to a lack of gas from Russia.

Russian gas was uninterrupted during the Cold War as well as other times of tension between Moscow and the West. But since the Ukraine crisis broke out, output has shrunk sharply. This month, the Nord Stream 1 main pipeline was also temporarily locked.

In the city of Žiar nad Hronom (Slovakia), where the 70-year-old Slovalco aluminum plant supplies auto parts manufacturers across the continent, anxiety is overwhelming. "This is probably the end of metal production in Europe," commented Milan Veselý, Plant Manager.

Slovalco is one of the companies affected by fluctuations in electricity prices across Europe, due to low gas supplies from Russia. For many years, the plant was the largest electricity customer in Slovakia, consuming 9% of the country's electricity.

A worker works at the Slovalco factory in Slovakia. Photo: WSJ

Before energy prices began to rise last year, Slovalco paid about 45 euros (about 45 USD) per MWh. This year, they pay 75 euros in a deal closed from 2021. At the end of August, electricity prices hit 1000 euros/MWh across Europe.

Slovalco did not renew the electricity contract for 2023, which costs up to 2.5 billion euros. They are cutting primary metal production, leaving a small recycling operation. The factory laid off 300 out of 450 workers. "The volatility of electricity prices these days is crazy. This is how we kill the industry," Veselý said.

In the Netherlands, Michael Schlaug, General Manager of Yara Sluiskil shut down two of the three ammonia plants at the end of August. The company's engineers are adjusting the machinery to store ammonia imported from the US, Trinidad and the US. and elsewhere, to replace products they previously produced themselves.

Similarly, fertilizer company OCI NV is importing more ammonia through the port of Rotterdam. It plans to triple capacity at the port next year and is expanding a facility in Beaumont (Texas, USA) to produce ammonia that can be shipped to Europe and Asia. "It's more profitable to scale production in the US," Chief Executive Officer Ahmed El-Hoshy said of energy costs.

The reduction in Europe's industrial capacity will further increase reliance on materials and parts made abroad at a time when governments are working to bring supply chains closer.

In Germany, ArcelorMittal - one of the world's largest steel producers - will close a blast furnace in Bremen and a plant in Hamburg. ArcelorMittal has reduced gas demand by about 40% compared to its expected consumption at the beginning of the year. "We've never seen such fluctuations in energy prices," said Reiner Blaschek, the company's German sales manager.

According to metals lobby group Eurométaux, zinc stocks in the EU are almost depleted, forcing customers to import from China. Primary aluminum production is also dwindling, leaving the EU to maintain recycling operations to produce metals for industries such as packaging, but unable to use them to manufacture wheel hubs, brakes or parts of the EU. plane.

Aluminum smelters cannot renew power contracts. According to the German metal association WV Metalle, companies need 15 MWh of electricity to produce one ton of primary aluminum. Recently, the price of electricity was 9,000 euros per MWh while a ton of finished products cost less than 2,500 euros. "We need urgent aid immediately," said Franziska Erdle, general manager of WV Metalle.

Alcoa's San Ciprián aluminum plant in Spain, Glencore's Portovesme zinc plant in Italy and the Trafigura Group zinc plants in the Netherlands, France and Belgium have limited production or closed. Eurométaux said half of EU aluminum and zinc production capacity has been halted. Silicon and iron alloy capacity also decreased.

"This is a serious event and the European industrial base is already heavily dependent on Russia for cheap energy inputs," said Tom Price, commodity strategist at Liberum.

In the food industry, sugar mills are racing to find alternative energy sources to maintain production. Manufacturer Südzucker (Germany) said this is not easy. Even toilet paper manufacturers like Hakle GmbH (Germany) are struggling. They declared default this month.

This move to cut and close plants has partly helped save fuel in an effort to reduce European demand. Along with hunting for supplies outside of Russia, the block has filled over 80% of its storage. This level is expected to be enough to get through the winter without the need for governments to split gas, even if Russia completely cuts off supply, according to analysts.

A Yara Sluiskil ammonia production facility in the Netherlands. Photo: WSJ

Most governments prefer to reduce production or close factories rather than cut power to hospitals and schools during the winter. Europe consumed 10% less gas than the average for the year in August, according to commodity data firm ICIS. The EU is aiming to cut demand by 15%.

But closing the factory comes with a terrible price. Companies in energy-intensive industries say they will face bankruptcy this winter if the government doesn't help. Complex supply chains in sectors such as the auto and food industries were further disrupted, adding to inflationary pressures.

Volkswagen said it had stockpiled glass products because of concerns that a gas shortage could affect suppliers. Safran, a French manufacturer of aircraft engines and defense-related equipment, said a fragile supply chain limited the company's ability to raise output.

According to the Wall Street Journal , this development pushes Europe to the brink of recession and risks lasting damage to the bloc's manufacturing businesses. Unlike the US, Europe has relied on manufacturing and heavy industry to keep its economy steady in recent decades.

In general, European businesses from steel, aluminum, automobiles, glass and ceramics to sugar and toilet paper manufacturers have all been affected by the energy crisis. Some metallurgical units, which use a lot of energy, are closing factories. Analysts and business executives say some may never reopen, meaning workers will lose their jobs.

Cheap and stable gas from Russia used to be the input that helped the bloc compete with the US, which was rich in resources. It is an advantage that offsets the high labor costs, rigid recruitment rules and strict environmental regulations of the bloc.

The question is whether the current difficulty is temporary, or marks the beginning of a new era of de-industrialisation in Europe. The EU has scoured the world for alternative gas supplies. They reached deals to buy gas from the US, Qatar and elsewhere. And there is a probability that the continent may never again gain access to cheap Russian gas.

For its part, Slovalco aluminum smelter in Slovakia, sold the electricity it subscribed to for the rest of the year, earning 160 million euros. This money is used to pay taxes and for future factory restarts.

Branislav Strýček, CEO of Slovenské Elektrárne - the supplier of electricity to Slovalco - is concerned that many of the country's companies will close, as it is estimated that more than half have not signed up to buy electricity for 2023.

"The price of electricity is a concern," he said. Although he runs an electricity company, Branislav Strýček wants the government and the EU to take measures to limit electricity price increases. "Customers will cease to exist so there will be no one to sell electricity to," he explains.