Russian gas cuts threaten to shutter Germany industry - Dailyforextrading

Russian gas cuts threaten to shutter Germany industry - Dailyforextrading

Petr Cingr is in no doubt about the fate that awaits his chemicals company if Russia cuts off all gas supplies to Germany.


“We have to stop [production] immediately, from 100 to zero,” said the chief executive of SKW Stickstoffwerke Piesteritz, the country’s largest ammonia producer and a key European supplier of fertilizers and exhaust fluids for diesel engines.

Amid rising tensions between Moscow and the West over the war in Ukraine, Russia has already drastically reduced its exports of gas to Europe’s largest economy. Berlin now fears a winter gas crisis that could paralyze industry and leave millions freezing in their homes.

All eyes are on Nord Stream 1, the pipeline linking Russia directly to Europe via the Baltic Sea. Gazprom, Russia’s state-controlled gas giant, reduced NS1’s capacity by 60 per cent in June, and last Monday shut it down completely for routine maintenance.

In normal circumstances, this lasts just 10 days. But the fear in Berlin is that NS1 will not come back into operation as scheduled this Thursday.

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A protracted cut-off beyond this week will stymie Germany’s plans to stock up its gas in storage ahead of the heating season.

The resulting shortage means “companies will either have to reduce their gas consumption or curb production”, said Jörg Rothermel of the VCI, the trade body for the German chemicals industry, which is the country’s third-largest behind automotive and machinery.

Should flows cease completely, most economists expect the eurozone’s economic powerhouse to experience a severe fall in output. No gas this winter would, according to analysts at Swiss bank UBS, trigger a “deep recession” with almost 6 per cent wiped off GDP by the end of next year.

The Bundesbank has warned that knock-on effects on global supply chains would “increase the original shock effect to two-and-a-half times the size”.

As industrial companies across Germany face the real prospect of life without natural gas, some are exploring ways of replacing it with other energy sources. But for those with fuel-specific hardware or those who use it as raw material, there is no alternative.

Among those in the latter group is the country’s largest steelmaker, Thyssen Krupp. It said that without natural gas for processes required to run its blast furnaces, “shutdowns and technical damage to our production facilities cannot be ruled out”.

BASF, the world’s largest chemicals company, has warned that the steam crackers at its gargantuan site in the southwestern city of Ludwigshafen would be forced to idle if gas supplies dropped below about 50 per cent of its regular requirements.

“Some [companies] still have installations that can use alternative fuels, such as heating oil or coal,” said Rothermel. “But according to our estimates only 2-3 per cent of gas consumption in our industry can be replaced in this way. And that’s not enough to solve the problem we face.”

Merck is also preparing to survive without gas. It requires supplies of the fuel equivalent to the needs of a mid-sized city such as Darmstadt, where the chemicals company is based, to produce electricity and steam, and sodium hydroxide, without which “many chemical processes won’t work”, according to the site director Matthias Bürk.

Merck has contingency plans, which include producing steam using on-site fuel oil, but these cannot be used indefinitely, Bürk said.

The government is preparing for the looming crisis. Just over three weeks ago it triggered the second stage of its national gas emergency plan, a move that brings Germany a step closer to rationing supplies.

It is also bringing mothballed coal-fired power stations back on line, building new import terminals for liquefied natural gas, and planning an auction system to incentivize industrial customers to cut their gas consumption.

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Companies, meanwhile, have been told to make preparations for the eventuality of a cut-off. In a recent letter to an opposition MP, the economy ministry said all “operators of critical infrastructure” such as hospitals should acquire emergency power generators. Source: FT


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