Energy costs hit German chemical industry

The German chemical industry is bracing for a recession due to surging energy prices resulting from the invasion of Ukraine and the ensuing sanctions against Russia. Natural gas prices have risen 70% since the start of the war to over $165 per MW h.

Before the war, VCI, Germany’s main chemical industry association, had forecast that the German industry would grow by 1.5% in 2022. Any forecast now “would be highly speculative,” VCI general manager Wolfgang Große Entrup told journalists at a briefing.

Russia and Ukraine account for almost 3%, or $7.5 billion, of German chemical and pharmaceutical exports, and these sales are affected by the war, the association said.

VCI recently surveyed its members, which include BASF, Evonik Industries, and Lanxess, and found that 70% have “big problems.” Some 85% say they face increasing production and procurement costs that they are able to pass on to customers only partially or not at all; 54% say they are experiencing production and sales declines.

The broader European chemical sector faces a challenging environment as a result of the Ukraine war. The conflict will drive down profits at the continent’s diversified chemical firms an average of 5% this year, according to the investment firm Jefferies Group.

More than half of the natural gas and coal and one-third of the oil consumed in Germany comes from Russia. Germany is under political pressure to ban these imports, but a ban would have enormous consequences across multiple industries in Germany, Große Entrup warned. In that scenario, “a severe and multiyear recession with a massive loss of jobs must be expected,” he said.

German chancellor Olaf Scholz similarly warned politicians that an immediate embargo on Russian fossil fuels would trigger a deep recession in Germany. “Entire branches of industry are on the brink,” he said in a speech to the German parliament.

VCI is calling on the European Union to reduce the sector’s energy tax and suspend the phaseout of coal-fired power generation. Amendments to the EU’s Registration, Evaluation, Authorisation and Restriction of Chemicals legislation should be paused, Große Entrup said, and the move to renewable energy must be accelerated.