Glowing glass, seething steel, smoking chimneys, flickering gas torches; heavy industry consumes more than 40 percent of all Dutch energy. Not surprising: making steel, fertilizer or diesel requires more energy than an office tower full of PCs. So it is not surprising that this sector is having a hard time. Of course, the whole of the Netherlands is groaning under the high energy prices, but the blow hits the country’s five largest consumers: the chemical industry, the building materials sector, paper producers, the food industry and the fossil sector.
Compared to the total Dutch economy, the size of these five seems modest: only 6.3 percent. The size of the chemical sector is even smaller, 1.5 percent, says Hugo Erken, who leads the team at Rabobank that analyzes the state of the Dutch economy. ‘But the impact of chemistry on the rest of the economy is enormous.’
This is because many other companies depend on basic products supplied by the chemical industry for their production processes; hardly any other industry is so intertwined with the Dutch economy. This also applies to a lesser extent to other energy-intensive industries. ‘If they have to scale down their production, have to charge much higher prices or even collapse, this will give significant shock waves to the rest of the economy,’ says Erken.
Effects
The effects are already visible. In construction, for example, where the price of glass has gone through the roof. The beverage industry is also seeing the price of beer and bottles for soft drinks rise.
Now that energy prices have been at a high level for a longer period of time, companies further down the chain are starting to feel the pain. On average, it takes six months to nine months for the next industry to feel the effects, before finally reaching the consumer, the economists at RaboResearch calculated.
The energy-intensive industry is in a difficult position. While support measures are being set up for citizens and SMEs, the government is not offering any help for this category for the time being. “There will be no specific compensation scheme,” said a spokesperson for the Ministry of Economic Affairs and Climate (EZK).
How long can the sector last? Can companies fail if energy continues to be expensive? Do they drag companies further down the chain with them?
Production ceased
The start is there: heavy industry has already stopped parts of production. In the first months after the outbreak of the war in Ukraine, things were not that bad, says Edse Dantuma, Industry sector economist at ING Research. At that time, production in, for example, the chemical industry was about 4 percent lower. ‘But since June and July, production has already been 8 percent lower than in January.’
The burden of the sharply increased energy prices is becoming heavier, partly because more and more companies have their fixed energy contract expiring. Anyone who has switched from a fixed energy contract to a variable contract at home knows what that means: much higher prices. So there must be savings. This is no different in industry: gas consumption in the chemical sector was almost 30 percent lower this year. In September even 50 percent.
But something remarkable is going on: production remains reasonably stable. How is that possible? ‘We wondered that too,’ says Dantuma of ING. The industry gets some of its raw materials from elsewhere. Take fertilizer production. It requires huge amounts of natural gas. Producers are looking for alternatives, for example by obtaining the required ammonia from outside Europe, where natural gas is less expensive. Other manufacturers are trying to switch fuel, according to the ING economist. The petrochemical industry more often uses oil products, such as naphtha, or its own residual gases, such as refinery gas, to keep the production process going. As a result, less natural gas needs to be purchased.
Some of the savings may have been distorted. For example, part of the petrochemical industry was shut down last spring for major maintenance, such as the Shell refinery in Pernis. This resulted in significant energy savings, which have nothing to do with the high gas prices. Now that the refinery has started up again, the demand for energy seems to be rising again.
‘Russian gas is not coming back’
One thing seems certain: the worst is not over yet. ‘We don’t think Russian gas will come back,’ says Erken. This year, European countries have succeeded in partially replenishing their gas reserves with Russian gas, but this will become a lot more difficult next year if the important connection Nord Stream 1 remains closed.
This is a lot of gas: under normal circumstances, Europe imports about 150 billion cubic meters from Russia. Alternatives must be sought for this. The most important is liquefied gas (LNG), which is brought in by ship.
As far as LNG is concerned, things look favourable: the export capacity of the United States (now Europe’s largest LNG supplier) will grow by another 25 billion cubic meters from the end of this year. Europe is also talking to gas giant Qatar. In order to be able to receive all that gas, the European import capacity is being expanded. This ends the good news. For example, there are not enough ships to transport all that extra LNG. They still have to be built and that will take years.
Asia is also an uncertain factor. Of the 25 billion cubic meters of additional LNG that Europe imported in the first half, an estimated 10 to 15 billion cubic meters were originally intended for this continent. Thanks to lockdowns and a faltering global economy, gas was not needed there. But it is by no means certain that this will remain the case.
Shortages and skyrocketing prices
The total sum is therefore not favourable: the lost Russian supply cannot be replaced for the time being with LNG or extra natural gas from Norway. ‘Because the stocks are full, we will get through this winter, if it is not too severe. I’m more worried about next year’, says Erken. ‘Without Russian gas, it is uncertain whether we will be able to replenish the stocks next spring and summer.’
The chance that European industry will face shortages and skyrocketing prices again next year is therefore real, say the economists of Rabo and ING. ‘Unlike money, natural gas simply cannot be produced by central banks or governments’, Erken outlines.
Will industries collapse? It doesn’t look like that for the time being, says Dantuma of ING. Rabobank economists also do not see entire industries collapsing yet. The Dutch industry has come out of the corona pandemic reasonably well. So there are some financial buffers.
Nevertheless, risks are mounting as energy prices are likely to remain elevated for a longer period of time. Should the government also support energy-intensive industry in addition to citizens and SMEs? This does happen abroad, for example in France and Germany. So just to keep a level playing field, you could consider supporting the industry as a government, Dantuma says.
According to the Ministry of EZK, there is indeed support for the sector, in the form of subsidies for greening and government guarantees for investments. Although sustainability is a long-term process, it helps to both reduce emissions and preserve the sector for the Netherlands, the ministry says. There is currently no widespread support. “But we’re monitoring the situation.”
Careful with intervention
Rabobank economist Cristian Stet, who specializes in the energy transition, warns to be cautious about intervening. ‘The market itself selects which products should no longer be made because they are too expensive. If you keep companies or even sectors that are not viable, you disrupt the system’, he says.
Moreover, a price ceiling, as currently agreed for citizens, could have the opposite effect, says Stet. See Spain, where the price of natural gas was capped. Subsequently, Spanish gas-fired power stations started producing electricity that was sold to France, where prices were much higher. Ultimately, more gas was used. ‘The chance of unintended side effects is high,’ says Stet. The discussion about a price cap for natural gas from outside the EU is particularly worrying for economists. ‘If you do that, you run the risk of LNG that came to us before going back to Asia.’
So don’t intervene? There are also strategic considerations that do justify government intervention. ‘Do we want the base metal to collapse? Do we want to be dependent on steel from China in the future? Or from the United States, if Trump might be re-elected?’, Erken wonders. There are therefore also political considerations that can justify an intervention. ‘As a government, you have to take a good look at which sectors are important for the Dutch economy. What do you want to keep and what could possibly disappear? Those considerations have to be made now’, says Dantuma of ING.
In principle, it does not matter whether the European steel industry is located in Spain or in the Netherlands, economists say. But then Europe must jointly consider what it wants to do with heavy industry. If this does not happen, there is a risk that countries will keep certain sectors afloat indefinitely. Or are essential parts of the economy going under. ‘What you don’t want,’ says Erken, ‘is that you look back in five years and find that you have not saved certain industries, even though you are dependent on them.’
Silence in the Aldel factory
Two halls with a row of one kilometer long electric ovens were once the sizzling heart of aluminum producer Aldel. The furnaces went out a year ago because electricity prices went through the roof. The company from Delfzijl then obtained part of its raw material from China and was able to continue to produce with fewer staff.
But the foundry has also recently been shut down. It runs on natural gas. ‘We made a little profit at the beginning of this year, but when the gas price rose above 150 euros, it stopped,’ says Eric Wildschut. There was no support from The Hague, to the frustration of the financial director. ‘In Europe there are three countries that do not support their industry: Malta, Cyprus and the Netherlands.’ Of course, he thinks the market must do its job. “But we’re at war, so the government has to step in.”
Aldel says it has electrified much of its processes and developed a green agenda to become, as Wildschut puts it, “the greenest aluminum producer in the world.” That process is also at a standstill.’
Now the staff is at home and there is a strange silence in the factory. Wildschut hopes that gas prices will fall to below 150 euros after the winter, so that the ovens can work again. He is hopeful that his people will return. “They are very loyal to our company.”