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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.”
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.
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.
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.
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”.
“When you know exactly what you want to shut down, you need to immediately start thinking about how do I get the new technology in the ground?” he pointed out.
Companies and investors have scouted other countries offering attractive subsidies and cheaper energy prices.
“You’re going to see a bit of recovery, but I think we’re going to see a significant structural demand destruction in the energy-intensive industries,” Krebber warned.
Analysts have painted a bearish outlook for Europe’s largest economy. Germany’s five leading economic research institutes recently slashed growth forecasts for the country. German gross domestic product will grow just 0.1 per cent this year, they said, because of a decline in exports.
Berlin maintains that it is pouring money into transitioning the economy, positioning it for major future competitive advantages in a carbon-neutral world. But Germany’s industrial stagnation has become a politically sensitive topic, with the country’s influential industrial lobby, the BDI, lashing out at “dogmatic” green policies that were hitting manufacturers.
Samantha Dart, head of natural gas research at Goldman Sachs, sees permanent closures of industrial capacity in Europe that will not come back. She expects lower gas prices and better economic conditions to spur some demand, but adds that “going back to pre-crisis is a bigger, bigger challenge”.
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.
Instead, manufacturers are turning to the US. “You have a coherent and comprehensive policy in the US to incentivise getting manufacturing back into the country,” Krebber said. “Europe has the same intention, but not yet the right measures.”
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.
On top of cheap energy with gas prices one-sixth the prices in Europe, lucrative subsidies in the Inflation Reduction Act for decarbonisation technologies are attracting European companies.
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. While Brussels has released its own rival industrial policy to prevent an investment exodus, companies say it lacks the IRA’s simplicity and economic might.
RWE is one of the largest clean energy investors in the US, where it employs 1,500 employees following the $6.8bn acquisition of Con Edison Clean Energy Businesses last year.
Krebber seemed sanguine about the fate of the IRA if Donald Trump is elected president later this year, noting that many Republican states have benefited from investments linked to its incentives and demand for renewables would remain strong.
“If they call it ABC after, I don’t care. The question is will there be a long-term investment environment, which is favourable? And if not, we stop investing, but the investments are needed,” he said.
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