High energy prices could prompt manufacturers to flee Europe

Soaring energy costs in Europe are shutting down businesses and threatening a bloc-wide recession. However, not everyone accepts this fate. Some companies are moving to cheaper places: the United States

The steel giant ArcelorMittal said earlier this month that it would halve production at a steel plant in Germany and one unit at another plant, also in Germany. The company said it based its decision on high gasoline prices.

Separately, ArcelorMittal recently warned that it expects its steel production for the fourth quarter of the year to be 1.5 million tonnes lower than it was in the last quarter of 2023, again citing excessive prices and falling demand.

Meanwhile, ArcelorMittal announced earlier this year that it planned to expand an operation in Texas, describing the state as a “region that offers highly competitive energy and, ultimately, competitive hydrogen.” According to a report by David Uberti of the Wall Street Journal.

Uberti quotes industry executives who said it wasn’t exactly a tough call. Fundamentally, according to the report, it is a simple dilemma between bending in the face of exorbitant energy bills and moving to a much cheaper energy environment, with new incentives for certain industries.

Chemicals, batteries, green energy – all of these areas stand to benefit significantly from the Cut Inflation Act passed last month. It is therefore not surprising that companies active in these fields consider it a good idea to relocate or expand in the United States.

Meanwhile, in Europe, more and more companies are going into survival mode. Indeed, for many of them, the time has come to renew their electricity supply contracts with the public services. Thanks to energy inflation, these are expected to be well above current year contracts, with prior year prices reaching over $1,000 in France and Germany.

Liz Alderman of The New York Times wrote in recent history that energy-intensive industries such as manufacturing and fertilizer production were particularly vulnerable precisely because of their higher energy requirements. She cited the case of a glass major, Arc International, which is also closing production units to cope with rising energy costs.

The European Commission has promised help by capping the revenues of electricity generators that use a primary energy source other than gas and by taxing the “excessive” profits of oil, gas and coal companies. According to the EC, making money in the current circumstances was wrong, even if the profits themselves were good.

It is expected to raise some 140 billion euros – almost the equivalent of the same sum in dollars – to be distributed among struggling households and businesses. The reviews, however, Remark that will not be enough to prevent companies from going bankrupt. European Aluminium, the industry association, even said that energy costs could lead to the collapse of the aluminum industry in Europe.

“I think we’re going to get by for two winters,” chief executive of refractory maker RHI Magnesita told the Wall Street Journal. However, if gas doesn’t get cheaper, Stefan Borgas said, “companies will start looking elsewhere.”

It seems that companies packing their bags and moving to cheaper jurisdictions is another unintended consequence of the policies favored by European governments, particularly in the energy field. It is also an additional risk for the survival of the block as a competitive industrialized formation in the future. And this risk presents one more enigma that the governments and the Brussels administration must resolve quickly.

By Irina Slav for Oilprice.com

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