Rising costs and shortages push German industry to the brink

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“There’s never been anything like it,” Georg Geier, the company’s chief executive, told CNN Business.

The big difference between past and present? Customer demand is high, but Siempelkamp cannot find or afford the necessary iron, nickel and energy supplies.

These companies are an essential part of the “Mittelstand”, the 2.6 million small and medium-sized enterprises that account for more than half of Germany’s economic output and nearly two-thirds of the country’s jobs. Many are family owned and deeply integrated into rural communities.

Siempelkamp’s foundry burns enough energy each year to power a city of 20,000. For years, the company paid between €40 ($43) and €50 ($53) per megawatt hour of electricity. But bills skyrocketed around September, “exploding” to record highs after Russia invaded Ukraine, Geier said. Average prices in March were around €250 ($267) per megawatt hour.

“We are informed [of our energy costs] almost every day,” Geier said. “When we get up until we get out.”

The war has fueled global inflation, which started to accelerate last year as economies reopened after pandemic lockdowns, pushing demand for energy and goods soaring. Now, Western sanctions against Russia’s coal and oil exports — and attempts by the European Union to cut its natural gas consumption — have pushed prices back up. Sanctions against Russia, a major metals exporter, have further shaken supply chains.

Europe’s largest economy is particularly vulnerable. According to the International Energy Agency, in 2020 Germany depended on Russia for about 46% of its natural gas consumption. That number has likely fallen since the start of the war, but a sudden interruption in imports from Russia would be “catastrophic” for manufacturers like Siempelkamp, ​​Geier said.

Spiral Prices

So far, Siempelkamp has not reduced production, but it will pass at dazzling cost increases for its customers, such as the copper and cement makers who use their grinding mills, and electric car makers who use their machines. In turn, it expects its customers to pass the costs on to consumers.

Annual inflation of the German producer price – that is the price of goods leaving factories – reached 30% in March, the highest level in 73 years.
Prices at the factory gate feed the consumer price inflation, which reached a 41-year high of 7.3% last month. In both cases, rising energy prices were the main contributors. In April there was no lighting. According to a preliminary estimate, consumer prices rose by 7.4% compared to the same month last year.

In Berlin, an ice cream machine also feels the tension.

Florida Eis is partially insulated from high prices — it has switched much of the energy it uses for production and delivery to renewable sources — but its suppliers have not. The company now pays between 30% and 40% more for its milk.

Owner Olaf Höhn shudders at the thought of losing Russian gas.

“The sugar industry needs an enormous amount of energy. If they run out of gas, there is no more raw sugar,” said Höhn. “We cannot buy raw sugar on the world market because of EU regulations.”

“We would have massive budget cuts to a complete stop,” he added.

Lightning-fast prices have shaken a country that has long been proud of its stable economy, and which still carries a deep-seated fear of the kind of hyperinflation of the 1920s and 1930s that is widely believed to have brought the Nazi Party to power. has helped.

Siempelkamp director Dirk Howe wonders how long all this can take.

“We’re kind of in a spiral now,” he told CNN Business.

Germany’s hunger for relatively cheap and reliable Russian energy has long been a competitive advantage and helped it weather economic crises, said Tamas Vonyo, an associate professor of economic history at Bocconi University.

That benefit has now become an obligation.

EU leaders have pledged to cut Russian gas consumption by 66% by the end of this year and break the bloc’s dependence on Russian oil and gas by 2027. The German Ministry of Economy said last month that it had already cut Russia’s share of total gas imports from 55% to 40%.
But a sudden stop would be disastrous. After Putin threatened to turn off the tap if countries did not pay in rubles, the German government launched the first of a three-stage emergency plan that can result in gas rationing. Households and hospitals would be given priority over many manufacturers.
Fuel prices on a sign at a Total gas station in Berlin, Germany, on Tuesday, March 15, 2022.
Russian energy giant Gazprom on Wednesday halted gas deliveries to Poland and Hungary for failing to make payments in rubles. Many fear that Germany could be next.
An abrupt interruption would cut nearly 2% of German GDP by 2022, according to the the country’s central bank. An analysis by five of the country’s top economic institutes this month also said a sudden embargo would result in 550,000 job losses in 2022 and 2023.

“Natural gas is likely to remain expensive after an embargo or a supply freeze for quite some time,” Sebastian Dullien, research director at the Macroeconomic Policy Institute, told CNN Business.

He warned of “structural damage” to the German economy if Russia cuts off its gas — damage that will be harder to repair than the 2008 financial crisis. That could spark a recession at least as deep and potentially lasting much longer than a decade. past.

Fear of ‘stagflation’

Inflation is only part of the story.

German economy may already be on its way go inside a recession. The German Council of Economic Experts, a government advisory group, last month lowered its forecast for GDP growth in 2022 from 4.6% to 1.8%, citing inflation and the war in Ukraine.

A woman walks with her shopping cart through a supermarket in Neubiberg, Bavaria, on March 31, 2022.

Manufacturing output shrank this month and fell to the lowest level since June 2020, according to the survey data from S&P Global, and falling confidence could spell a prolonged downturn.

“The risk [of a recession]I’d say is over 50% right now,” said Dullien.

Germany, and indeed much of Europe, is now staring at stagflation – that nightmare combination of high inflation and weak economic growth.

‘We have to cope’

Companies and countries are struggling with shortages of basic food and raw materials. For example, skyrocketing energy prices have contributed to a decline in zinc production, a metal used to protect steel, while Russia’s invasion of Ukraine has endangered global wheat supplies. Together, both countries account for about 30% of the global wheat trade.

German Association for Small and Medium-sized Businesses, said some of its members were: production has already been scaled back due to shortages.

†[Production cuts are] not the due to a lack of electricity, or high electricity prices, but [because] they have no materials to produce the goods,” Hans-Jürgen Völz, chief economist of the association, told CNN Business.

“For example, aluminum, steel and everything [else] that is currently in short supply around the world due to sanctions against Russia.”

The war in Ukraine has led to fears of a decline in the export of raw materials from the region. The price of nickel, a metal used in electric vehicle batteries, rose to an all-time high in early March, doubling to $100,000 a tonne, prompting the London Metal Exchange to suspend trading.
That’s bad news for the German auto industry, which continues to struggle with a shortage of semiconductor chips.
Delays in the Chinese port of Shanghai – one of the world’s busiest – due to a strict coronavirus lockdown in the city has also disrupted global supply chains in recent weeks. The bottlenecks could not have come at a worse time for German importers.

Höhn, in Florida Eis, considers himself an optimist, but even he cannot ignore the “dark clouds” gathering over the German economy.

“We have to cope,” he said.



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