The European manufacturing sector is crumbling under the weight of sustained high electricity and natural gas prices. With little prospect of relief, another wave of curtailments and closures looms.
And that's before any rationing of natural gas, potentially later this year, in Germany in the event Russia reduces supply even further. In that scenario, many companies will have no choice but to shut down.
Gas rationing may still be a distant prospect, but the crisis is already here. The price impact on industrial activity is arriving well before the gas supply is interrupted. Governments need to decide right now which companies will get financial support, and which ones won't.
European leaders should sit down at an emergency summit devoted to the energy crisis. Next month will not be too early. Europe needs a continent-wide campaign to save energy and reduce demand. Start now; don't wait for winter.
We're reaching the point of 'no idea is too crazy': keeping nuclear power plants running, wholesale energy price caps, suspension of markets, removal of CO2 costs and limits, burning more coal, re-starting domestic gas production even if that triggers local earthquakes in the Netherlands. Everything has to be backed up with multi-billion-euro loans from governments to key sectors.
The problem isn't just the current eye-watering prices for power and gas. The forward contracts for 2023, 2024 and even 2025, which are used to lock in energy costs, are getting more expensive by the day. "This may be a sustained price rise, rather than something that disappears quickly," Jonathan Brearley, the head of the UK energy regulator Ofgem, said earlier this month.
The months-long crisis that many industrialists penciled into their plans has morphed into a years-long problem. The prospect of bleeding cash for a few months, perhaps half a year, or even a year, was one thing; losing money indefinitely is another thing entirely.
For example, an aluminum smelter would lose about $200 million annually at current forward prices for electricity and carbon dioxide for the next year. And that's despite elevated prices for the metal in the markets. Aluminum may be an extreme example, but it's evidence of the pressures faced by industrialists.
In private, European executives say they'll use the forthcoming quarterly reporting season in mid-July to announce more plant closures. The affected industries will be those with the most intensive energy use: fertilizer, base metals and steel, chemical, ceramic, glass and paper. But increasingly food production will be, too. Heated greenhouses and chicken farms face astronomical energy bills.
A few companies have already announced their intentions. Earlier this month, CF Industries Holdings Inc., the US fertilizer producer, said it will close one of its UK plants permanently as it struggles with high energy costs. Others are on the chopping block. The future of Slovalco, an aluminum smelter in Slovakia in which Norsk Hydro ASA has a majority stake, looks very grim, with the plant likely shutting down in 2023.
The struggle to keep such power-hungry plants open is all about the costs. Look at forward prices for electricity. While spot contracts trade well below the record highs set earlier this year, they are much higher for deliveries in 2023 and 2024. Take the German two-year forward electricity contract, which recently surged to nearly 200 euros ($211) per megawatt hour. That is a record and also significantly higher than peaks in December and just after the Russian invasion of Ukraine in late February. On both occasions, spot prices had jumped. The situation is similar in France, where the two-year forward power contract has risen to a record high of about 220 euros.
It's a similar situation in the natural gas market. The calendar year 2024 contract for TTF gas, a European benchmark, is hovering around 65-70 euros per megawatt hour, near an all-time high, up from the peak set in December of 60 euros. That's forcing European consumers to lock in much higher prices than many had anticipated only a few months ago.
In the words of one European industrialist: We braced for higher for longer, but we never thought that longer meant several years.
Europe isn't going to be able to save every energy-intensive company. Neither should it. What needs to be done is preserve the supply chains that are under threat, food production above all. We have to cut usage now, not when gas is interrupted.
Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. A former reporter for Bloomberg News and commodities editor at the Financial Times, he is coauthor of "The World for Sale: Money, Power and the Traders Who Barter the Earth's Resources."
Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.