The energy crisis is leading European industry to extreme situations. Some companies are forced to close production lines, while others choose to leave the continent in search of cheaper energy and less volatility in the markets. Such is the case of Basfthe German chemical giant that plans an adjustment in his country betting on China with the installation of a gigantic plant in the city of Zhanjiangwhich will have the capacity to annually produce 60 thousand tons of engineering plastic compounds.
“Challenging conditions in Europe are endangering the international competitiveness of European producers and force us to adjust our cost structures as soon as possible”, warned the general director of Basf, Martin Brudermuller, it’s a statement. The conditions to which Brudermüller refers derive from the conflict between Russia and Ukraine, which has meant a drastic change in their energy scheme for the Germans.
Until the start of the war, more than half of the gas that Germany bought came from Russia. But in August 2022, the Russian group Gazprom stopped sending gas through the Nord Stream pipeline.And to fill the gap, Berlin had to buy gas and other alternative energy sources on the expensive spot market. That generated a significant increase in prices for consumers: In December, the government decided to fully assume household gas bills waiting to apply new measures next year.
Economic downturn and adjustment
BASF’s factory, the most important chemical industry in the world, is located in the German city of Ludwigshafen. Its about largest industrial establishment in Europe –10 square kilometres-, a production center with two thousand buildings and 40 thousand employees. But the energy crisis is generating a sharp drop in your earnings.
According to the balance of the third quarter of 2022, Basf’s profitability fell by 27.5 percent compared to the same period in 2021. The multinational recognized that the costs of its plants in Europe must be reduced “permanently” for a triple reason: slow growth, high energy costs and excessive regulation. As Brudermüller described to the Wall Street Journal At the end of june, Basf is “a company threatened by natural gas cuts”.
Basf management recently launched an austerity program to be implemented between 2023 and 2024, in which price and cost adjustments do not seem to be enough. At the end of October, the conservative portal Deutschland Kurier warned that “the industrial exodus feared by many has begun! In the aftermath of the madness of the energy transition, the gas crisis fueled by sanctions on Russia and bureaucratic harassment from Brussels, now the Greens and the European Union can announce a first big ‘success’: the German chemical giant Basf wants to move significant parts of its production from Europe to China and plans to cut jobs at the Ludwigshafen plant“.
Already in the middle of last month, a survey by the Munich Institute for Economic Research showed that a quarter of German companies plan to cut jobs due to rising energy prices. For this reason, 57 percent of companies stated that they wanted to postpone investments planned for the coming months.
Basf’s is not an isolated case. The latest balance of the French company Michelin, specialized in tire manufacturing, showed the same result: a deficit in Europe and a surplus in other markets. This contrast is also suffered by another German company, Mercedes Benz. The carmaker admits in its latest results that its business in Europe is being weakened by the energy crisis. Of the 530 thousand cars that it sold globally during 2022, 42 percent of sales come from China.
China, opportunity and threat?
In recent decades, China has been the main market for most German export products. and business relationships continue to expand. In September this year, Basf opened a large production plant in Zhanjiang, southern China. By 2030, ten billion euros will be allocated to this plant and two-thirds of the growth of Basf come from the Asian giant at the end of this decadeaccording to the newspaper China Daily.
Last Friday the German Chancellor, Olaf Scholzdeclared its intention to continue developing the commercial link with China after meet in Beijing with Chinese President Xi Jinping. “We do not agree to delink economic relations with Chinabut it is clear that for us this is linked to equitable economic relations“.
Scholz, who traveled to China accompanied by a business delegation from his country that included representatives of firms such as Deutsche Bank, Siemens, BMW and Basf, stressed that trade with China has recently become more difficult for Germany due to “market access, very open on the European side, while China excludes many sectors”.
While acknowledging the benefits of the commercial link with China, the German chancellor echoed the discomfort that came from different political and business sectors due to his visit to China.