Energy crisis superimposed on higher carbon prices, European industry faces a "double crisis"

The energy crisis is still ongoing in Europe, how much will it affect European industry?

Producers in chemical, steel, aluminium and cement industries such as SKW Piesteritz, Nordic Chemicals, Yara International and Avidi have all said they have been forced to stop production or cut production due to the recent surge in natural gas prices.

The main reason behind the lack of production profits is the main reason behind it. Taking the aluminium industry as an example, it costs $4,000 for a smelter in Germany to smelt 1 ton of aluminum, which is much higher than the current $3,057/ton price of LME aluminum, even though the price has risen to a highest level since 2008. "Energy prices remain high. In this case, it makes no sense for the enterprise to maintain production. Petr Cingr, CEO of SKW Piesteritz, Germany's largest ammonia manufacturer, said.

In fact, the obstruction of the industrial recovery in Europe has been shown in the data. Data from market research firm IHS Markit showed the eurozone's PMI in September as low as it had been in five months. The eurozone manufacturing PMI fell to 58.7 from 61.4 in August, the lowest since February.

For the dilemma brought by the rise in energy prices to the European industry, Yu Nanping, an expert at the Shanghai Decision-making Consulting Base and a professor at East China Normal University, said in an interview with the first financial reporter that the European industry has been plagued by supply bottlenecks before, and its recovery road has been blocked. The reason why the energy crisis hit the European industry again is because the European industry itself consumes more energy, is under greater pressure from carbon emissions, and some small and medium-sized enterprises have not taken hedging behavior, "If you want to reduce the cost of European industrial enterprises, it is not enough to rely on their own strength, European industrial enterprises need to participate in the global industrial chain extensively." ”

Double whammy

According to the survey of foreign media, European industrial enterprises feel greater price pressure, one reason is that industry accounts for a large proportion of the European economy, and industrial enterprises have always consumed a large energy.

SKW Piesteritz said the company consumes an average of 640 GWh of natural gas per year, which consumes about the total amount of 50,000 ordinary German households. For aluminium, another industry hit hard by energy prices, producing 1 tonne of aluminium consumes about 14 megawatt-hours of electricity, enough to keep an average household in use for more than three years. According to the European Aluminium Association, the region produced a total of 7.6 million tonnes of aluminium in 2019 before the outbreak.

Secondly, foreign media quoted some European industrial enterprises with large carbon emissions as saying that while bearing the pressure on natural gas prices, they are also bearing a heavier burden of carbon emission prices, which means that they are facing two kinds of price increases.

While natural gas prices have skyrocketed this year, carbon prices have also risen. According to the Intercontinental Exchange (ICE) in the United States, the EU carbon price has doubled from just over 30 euros / ton at the beginning of the year to nearly 65 euros / ton.

Denis Chevé, CEO of Befesa, a French company that recycles steel dust and aluminium scrap, complained: "Rising energy and carbon prices are a 'double whammy' for us. We can pass on the cost, but only partially. Because we are in the global market, carbon emission standards in other regions are not as stringent as in Europe. ”

In addition, Yu Said record prices for natural gas, electricity and carbon have had a greater impact on Small and Medium-sized Industrial Enterprises in Europe, which have fewer choices for financial protection and are vulnerable to price fluctuations.

According to foreign media reports, earlier this year, due to the impact of the epidemic, many small German companies no longer sign long-term hedging contracts with upstream energy companies. European gas inventories are now at a low level, and they can only compete with Asian buyers for expensive spot gas. According to S&P Global Platts, the spot price of natural gas in Europe in October has approached $40/mmBD.

How to deal with it?

Some European chemical, steel, cement and aluminium industry groups have urged the EU and member governments to respond in a timely manner. They said that if the European energy crisis continues, the competitiveness of European industrial products will be weakened.

Up to now, Spain, France, Greece and other countries have introduced measures to deal with the energy crisis at the level of member countries, mainly through tax cuts, state assistance and other forms.

European Commission Energy Commissioner Simson said the EU will also introduce measures to stabilize European energy prices in the near future. At the same time, he also said that at the end of this year, the EU will also propose a set of reforms for the EU gas market, especially taking into account issues such as natural gas storage and supply security.

Qin Yan, chief power and carbon analyst at Refiniter and researcher at the Oxford Energy Research Institute, told the first financial reporter that the European Commission has always said that it will come up with a "toolbox", but the measures are nothing more than tax cuts and transfer payment subsidies, but this can only temporarily alleviate the cost pressure on enterprises and consumers in various countries. "At the policy level, the EU's question is how to choose the future energy transition path. The European energy prices have all risen, showing a clear trend of natural gas-thermal coal-carbon price linkage. Whether the future measures of the EU and member states will be effective will only be observed after the price of gas falls. She said.

At the corporate level, some companies said they would respond to the crisis by passing on price increases and signing long-term hedging.

French construction company Saint-Gobain said it expects the company to see raw material costs rise by about 1.5 billion euros this year, but 8 percent of the price increase will be passed on to consumers. German chemical giant BASF said it had signed long-term contracts with a range of natural gas suppliers to avoid being hit by supplier crunch.

In addition, consulting firm Engie Energy Scan also said that some industrial companies have reduced the consumption of natural gas in order to reduce costs. According to data compiled by the company, as of now, the average natural gas consumption of European industrial enterprises in October is 12% lower than the level in 2019. In September, natural gas consumption in the region has already begun to decline, down 5% from 2019 levels.

Yu Nanping believes that although European industrial enterprises have proposed a plan to transfer cost pressure to the downstream, it remains to be seen whether it can be realized. Because the European economy has not fully recovered after the epidemic, downstream companies may not be willing to bear such a cost burden. The crisis has made European industrial companies realize that only by better integrating into the global industrial chain can they better cope with the burden of rising upstream raw material costs.