German industrial power rocked by war in Ukraine

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(Bloomberg) – Germany’s industrial base, fresh from a pandemic and unprecedented supply chain challenges, is taking another hit as Russia’s war on Ukraine hits its powerful manufacturers of cars, chemicals and precision machinery.

As the conflict pushes energy costs to new heights and a wave of inflation builds, dozens of companies including BMW AG, BASF SE and ThyssenKrupp AG have warned their profits will plummet as others even refused to make a prediction. Economists have lowered growth forecasts.

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“If the war continues, it would pose a serious threat to a world order that has brought freedom and prosperity to many parts of the world over the past decades,” Volkswagen AG CEO Herbert Diess said this month at the annual press on company results. conference. “Europe would suffer the most in such a scenario.”

In Berlin, the government recognized the scale of the difficult situation, but its options – both economic and political – are limited by decades of energy policy that has made Germany one of the most gas-dependent countries and Russian oil in Europe. Even before the invasion, Germany’s energy-intensive industrial base faced significant change with the planned exit from nuclear and coal alongside the highest electricity costs in Europe.

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Economy Minister Robert Habeck has set up a task force to collect data from industry on gas and electricity usage and prices, production plans, bottlenecks supply bottlenecks and dependence on Russian energy.

On Friday, Habeck, who plans to lock in other energy sources, said Germany wanted to end imports of Russian gas by mid-2024. Habeck led a group of executives from companies including BASF, Deutsche Bank AG, Commerzbank AG and RWE AG to Qatar and the United Arab Emirates last week to secure liquefied natural gas shipments.

But these measures cannot provide the immediate relief businesses seek, and signs are emerging that the war could cause lasting economic hardship for export-focused German manufacturers, which have been rising sharply for years at the behest of China and efficient supply chains. Finance Minister Christian Lindner has warned that Germany is in danger of stagflation as high inflation persists alongside an economic slowdown.

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A range of gauges has gone dark in a country that depends on its manufacturing sector to keep humming along. The production of goods accounts for around 22% of economic activity in Germany, compared to 11% in France.

The Kiel Institute slashed its growth outlook for Germany in 2022 by almost half to 2.1%, as the shock waves of war offset the upsurge in demand following the depth of the pandemic and the inflation accelerating to 5.8%, the highest level since the country’s reunification in 1990. An index of German manufacturing industry fell further in March and a key business climate survey fell by one record. Even so, businesses as well as the general public are strongly in favor of sanctions against Russia.

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Germany’s coalition government reached an agreement on Thursday for its second package aimed at easing the burden of energy costs, bringing total relief spending to around 30 billion euros ($33 billion). But there is still no cohesive plan to avert a crisis that ripples through so many layers of the economy, said an official, who spoke on condition of anonymity.

“With energy and raw material prices soaring, our current main business is survival and safeguarding jobs, and no longer making a profit,” said Ralf Stoffels, director of BIW Isolierstoffe GmbH, a producer of medium-sized silicon in the former industrial heartland of Germany. North Rhine-Westphalia.

Stoffels is not alone. According to a survey of 3,700 businesses by business lobby DIHK, 78% said the war was hurting their business and more than half complained about rising prices or disrupted supply chains.

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“What hurts us the most are electricity prices,” said Simon Eickholt, managing director of Kern Microtechnik GmbH, which makes precision milling machines. The company’s energy costs have roughly doubled, he said.

Supply chain disruptions and raw material costs are also weighing on Kern, which makes around 40 million euros in annual revenue. The company’s mechanical engineering business receives several notices each week of longer lead times and price increases of up to 15%, Eickholt said.

Steffen Auer, managing director of steel trader Schwarzwald Eisenhandel GmbH & Co KG, said prices “are completely crazy” after the price per tonne of sheet almost doubled by 2,200 euros in a week, forcing the company to increase prices almost daily.

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“Some of our customers can’t afford those prices,” Auer said.

Russia supplies about two-thirds of Germany’s gas, half of its coal and about a third of its oil. The biggest concern for businesses in Germany right now is a possible shutdown of Russian energy supplies – either by President Vladimir Putin or the European Union.

Speaking on Friday, Habeck highlighted Germany’s difficult situation.

“Even if we become less dependent on Russian imports, it is too early for an energy embargo at this stage,” Habeck said. “The economic and social consequences would still be too serious.”

So far, the EU has refrained from cutting off Russian gas and oil, acknowledging that such a move would send shockwaves across the continent. If Europe were to do so, Stoffels of BIW Isolierstoffe expects his business would have to shut down, impacting manufacturers such as automakers who depend on his silicon.

“We face the danger of not having enough energy to maintain our production, even if we produce something that is needed in all kinds of sectors,” Stoffels said.

©2022 Bloomberg LP

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