Energy Crisis Worsens as Rally Hits Europe’s Industry Giants

(Bloomberg) -- A supply crunch that sent European energy prices to records is squeezing profits for some of the continent’s industrial giants, threatening to derail the region’s economic recovery.

Europe’s top chemicals firm BASF SE said it has been unable to fully swerve the impact of record-breaking electricity prices despite producing 80% of its own power. Aurubis AG, the continent’s biggest copper producer, said energy costs have already dragged down profits and will continue to weigh on margins for the rest of the year. Things got so bad in the U.K. that a major fertilizer producer shut two plants and in Norway an ammonia manufacturer also curbed production.

Energy prices have rallied from the U.S. to Europe and Asia as economies emerge from the pandemic and people return to the office. European gas prices have more than tripled this year, while power costs almost doubled as the region faces a supply crunch that risks upsetting the recovery.

“If everybody’s electricity and gas bills are just going to go up, that is obviously going to hurt consumer spending and also hurt industrial consumption,” said Ogan Kose, a managing director at Accenture.

BASF said energy prices have increased “noticeably” in the past few months, spokesman Thomas Nonnast said in an emailed statement. The company’s Ludwigshafen facility is the world’s largest integrated chemical production plant and uses 6 terawatt hours of electricity per year, equivalent to the energy contained in about 3.5 million barrels of crude oil.

“As an energy-intensive company, we feel that too,” he said.

Aurubis said it’s being hurt by rising prices despite having hedging strategies in place. “Our margins are particularly burdened by the high energy prices in Germany,” spokeswoman Daniela Kalmbach said in an emailed statement. 

Norwegian chemical firm Yara International ASA said Friday it would curtail about 40% of its ammonia production due to high gas prices. CF Industries Holdings Inc. said Wednesday it’s halting operations at its Billingham and Ince manufacturing complexes in Britain after costs of the fuel surged. 

“Soaring energy prices are sending costs for businesses spiraling and damaging industry,” the U.K. Labour Party’s Shadow Business and Energy Secretary Ed Miliband said in a statement. “News of manufacturing sites shutting down is extremely worrying.”

Europe could face blackouts this winter if the weather gets cold, Goldman Sachs Group Inc. said, warning that the region’s industrial users will need to curb consumption. The continent is running out of time to refill its depleted storage sites before the start of the heating season in about a month, with inventories at their lowest level in more than a decade for this time of the year.

France’s top sugar producer Tereos SCA already warned of surging gas prices raising production costs “tremendously” for the company. Starch producer Roquette Freres SA, based in northern France, said high energy prices are creating “inflationary pressure on every other cost” that will end up being passed on to customers. CropEnergies AG, one of Europe’s biggest ethanol producers, this week said rising energy costs reduced its profits compared to the previous year even as revenues rose.

The struggles faced by Europe’s industrial giants point to even greater headwinds for smaller energy-intensive firms, which don’t typically have their own power-production facilities and have less access to sophisticated hedging instruments that can help offset price gains.

“We wouldn’t be surprised to see more nitrogen and chemicals production across Europe idled in the coming days until gas prices moderate,” Joel Jackson, an analyst at BMO Capital Markets, said Wednesday in a report.

(Updates with Yara ammonia output cut in second, eighth paragraphs)

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