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German Industry Warns Russian Gas Embargo Is Bad for Business
As the government weighs cutting off imports over the Ukraine invasion, economists are divided over how much pain the nation could suffer.
Monica RaymuntApril 14, 2022, 12:01 PM GMT+8
BASF’s chemical factory in Ludwigshafen, Germany.
Source: BASF SE
Along the banks of the Rhine, Europe’s biggest chemical factory churns out the building-block compounds for the country’s powerhouse car, pharmaceutical, and agricultural industries—all fueled by pipelines filled with Russian gas.
BASF SE’s plant in Ludwigshafen is emerging as a symbol of Germany’s opposition to a full embargo on Russian gas amid rising calls to punish President Vladimir Putin for his war on Ukraine. Cutting it off, BASF says, could render its factory—the biggest supplier of the base chemical acetylene—inoperative, sending shock waves through many industries and causing Germany’s economy irreversible damage.
Cutting off Russian gas could render the BASF factory inoperative—and cause irreversible damage to Germany’s economy.
Source: BASF SE
The warnings, echoed by ArcelorMittal, Thyssenkrupp, and others, have alarmed policymakers in Chancellor Olaf Scholz’s administration, which has been scrambling to offset Germany’s reliance on Russia for roughly one-third of its energy. But debate is raging over whether the economic pain from a gas embargo would be as deep and lasting as the industry says.
Germany could face a €220 billion ($240 billion) hit to output over the next two years should gas supply be severed immediately, according to a joint forecast of economic institutes, the equivalent of a 6.5% annual output cut, tipping the country into a recession of more than 2% next year. But economists disagree over the extent of the shock, and some argue Germany could ride out the pain with a national effort to save energy and secure alternative supplies.
Even if chemical production slows, the impact to other industries could be mitigated as manufacturers turn to suppliers outside Germany, while authorities are working on emergency plans to ensure critical production continues if rationing is required. Germany’s financial firepower remains sound after borrowing heavily during the pandemic, with the lowest debt to gross domestic product ratio among the world’s largest industrialized economies.
“There is no scientific evidence for a doomsday scenario in the event of a Russian gas embargo,” says Ruediger Bachmann, an economics professor at the University of Notre Dame. “The impact would be substantial but manageable if politicians implement the right policies in time.”
BASF’s massive Ludwigshafen facility employs some 40,000 workers across 200 production sites that use roughly the same amount of energy as a million-person city. About half of the gas the factory consumes is used to produce chemicals and can’t be substituted. The other half is used to generate vast amounts of electricity.
BASF’s Ludwigshafen plant employs about 40,000 workers and uses roughly the same amount of energy as a million-person city.
Source: BASF SE
Two steam crackers operate around the clock to break down a liquid hydrocarbon mix called naphtha into smaller molecules. Those are then distilled into the preliminary products for plastics, paints, solvents, pesticides, and vitamins. If the plant receives less than 50% of its normal gas supply, the steam crackers—and the network of plants that feed off them—grind to a halt.
A major supply disruption could also stop production of BASF’s more advanced chemicals, such as polyurethane foam, a material essential for the plastic panels, steering wheels, and seating found in cars built by BMW, Mercedes-Benz, and Volkswagen.
According to Christian Kullmann, chief executive officer of specialty chemicals maker Evonik SE, shutting down such factories would have a devastating cost. “Once chemical plants are shut down, they remain silent for weeks and months,” says Kullmann, whose customers range from Unilever to Airbus to BioNTech. There would be a “huge domino effect through almost all industries.”
At the end of the long supply chain that starts in Ludwigshafen, carmakers are among the companies echoing the chemical industry’s unease. “We got a good idea of what the impact of a shutdown of operations would look like during coronavirus with the lockdown,” says Murat Aksel, Volkswagen AG’s head of purchasing. “We simply cannot shut down for two months or longer. The consequences would be massive.”
So far, BASF is weathering the crisis. The company said recently that profits surged after it raised the prices of its chemicals to help offset soaring energy costs.
Analysts say alternatives exist should the government go through with an embargo. Although costly and disruptive, global supply chains could be rerouted to replace German-made chemicals. The price for shipping liquid chemicals from the U.S. Gulf Coast to Europe’s biggest port in Rotterdam has surged to $80 per ton, up almost 50% since the invasion, according to Eastport Maritime, a data provider. Suppliers in the Middle East and China could also be tapped, according to the consulting firm Oliver Wyman. “There are no shortages foreseen,” says Markus Schaefer, Mercedes-Benz AG’s head of development. “There’s always a global supply and different sources for our polymers.”
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Germany already has backed European bans on Russian coal and oil and has adopted a plan to cut its dependence on gas by 2024. The government has taken temporary control of the German unit of Russia’s Gazprom PJSC and is planning to grant itself powers to put critical energy infrastructure under temporary state control and enable seizure as a last resort, says a person familiar with the plan. Still, the government so far has held fast to the industry view.
“We can only implement measures that we can sustain and that we know won’t lead to severe economic damage for Germany,” Economy Minister Robert Habeck told broadcaster ZDF in March, warning that an immediate ban on Russian oil, coal, and gas could lead to hundreds of thousands of job losses and unaffordable price increases.
Bloomberg economists Jamie Rush and Maeva Cousin say the economic models used to calculate the impact of an embargo are fraught with uncertainty. There’s “no precedent” for such a loss, and “Scholz is therefore right to worry,” they recently wrote.
But accepting gas from Russia to fuel its economy means helping finance Putin’s attacks on Ukraine. It’s one of the most defining moments for the country since it emerged from the atrocities of World War II, and pressure on Germany—from its allies and its own populace—will only intensify with every image of Ukraine’s suffering.
“A complete cutoff from Russian gas isn’t the absolute horror scenario,” says Iris Herrmann, a partner at Oliver Wyman who focuses on the chemicals industry. “If it happens, we have to count on a rapid shift to alternative sources and the creativity of the German economy to manage the transition over time.” —With Wilfried Eckl-Dorna and Chris Reiter
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