Panic is spreading in parts of the German economy due to the rapid rise in gas and electricity prices. With another round of price increases expected by the beginning of next year, both companies and their industry associations fear that production in Germany could become permanently unprofitable. The Munich-based Ifo Institute expects the development of energy prices to lead to increased investment abroad.

"At first glance, the proportion of energy costs is not that high," says Ifo economist Oliver Falck. Energy costs account for 0.5% of gross production value in the automotive industry, 0.8% in mechanical engineering and 3.1% in the chemical industry.

Effects on competitiveness

"Nevertheless, a sharp rise in energy prices can affect the competitiveness of those sectors in particular that are facing tough international competition and already have relatively low sales margins due to competition." Falck expects "temporary production shutdowns and the relocation of particularly energy-intensive production steps abroad."

According to Falck, energy-intensive production is also very capital-intensive - in other words: expensive. Relocations are not possible without further ado. "However, we will probably see relocations abroad for new investments." At the mechanical engineering association VDMA, a spokesperson says: "Companies will not make such an important decision simply because of energy prices, but sharp rises in energy prices can of course tip the scales in individual cases."

BASF reports one billion euros in additional costs

The immense energy requirements of the most energy-intensive companies can be seen in the data from the Federal Statistical Office. The city of Ludwigshafen, with a population of just 171,000, has the highest gas consumption in the whole of Germany. This is because the city on the Rhine is home to BASF's main plant.

BASF does not provide figures for Ludwigshafen alone, but according to the chemical company, the combined energy costs of the European sites were €800 million higher in the second quarter than a year earlier. Compared to the second quarter of 2020, the additional costs of energy supply amounted to one billion euros.

Disruption to the supply chains

One of the consequences of high energy prices: German domestic supply chains have long since been disrupted, and supply problems are no longer limited to Chinese imports. "We have received a lot of feedback from member associations reporting that their member companies have cut back on production due to the massive rise in energy prices," says Bertram Brossardt, Managing Director of the Bavarian Industry Association (vbw).

BASF has significantly reduced its ammonia production, and the production of acetylene, a basic material for many plastics, textiles and solvents, is also not running at full capacity. According to a BASF spokesperson, demand has fallen because some acetylene downstream products cannot currently be produced competitively.

"The costs for electricity, oil and gas account for around 12 percent of production costs in the chemical industry," says Wolfgang Große Entrup, Managing Director of the industry association VCI. "In basic chemicals, the proportion is even higher at around 16 percent. For individual chemicals, such as ammonia or chlorine, the proportion is even higher at more than 70 percent."

Chemical products are required for the manufacture of almost all industrial products. "In the third quarter, energy costs in the chemical industry were almost 150% higher than in the previous year," says Große Entrup. Within two years, energy costs in the industry have more than quadrupled. Prices for many primary products have also risen by triple digits since 2020.

Electricity is the biggest cost problem

Hard-pressed entrepreneurs see the situation much more dramatically than economists. The biggest cost problem for many industrial SMEs is not natural gas, but electricity. Some companies bought electricity on the spot market for years because the prices there were cheaper than long-term supply contracts.

Spot prices have multiplied, but many companies with long-term supply contracts are now also facing huge increases in electricity prices. In many places, contracts will expire at the end of the year. Many companies previously paid less than 10 ct/kWh, but are now facing prices of around 40 cents, as Andrea Thoma-Böck, Managing Director of the family-run company Thoma Metallveredelung in Heimertingen, reports.

"Only very few companies will be in the fortunate position of still being covered in 2023," says the entrepreneur. "The rest are waking up to this new world of prices that no company can afford." Some companies cannot find anyone willing to sell them electricity: "To make matters worse, many companies are being refused an electricity contract," says Thoma-Böck.

VDA reports restrictions in production

In September, the German Association of the Automotive Industry (VDA) surveyed 103 suppliers as well as bus, trailer and body manufacturers, with 10% reporting production restrictions. Once the high electricity prices take full effect, vbw Managing Director Brossardt expects production to become unprofitable in many companies. "Companies won't be able to keep this up for long. This not only affects energy-intensive companies, but the economy as a whole." Companies are also plagued by uncertainty as to how the gas price cap will be structured.

There was already a more or less gradual exodus of German industry before the coronavirus crisis. According to the Federal Statistical Office, the share of "goods of foreign origin" in German exports has risen steadily, from just under 10% in 1990 to 24.5% last year. This is an indirect indication of how massively German industry invested in foreign production.