Russian gas cuts threaten to shutter Germany industry | Financial Times

Tuesday, July 19, 2022 6:02 PM

I was lucky tonight. He had a gun, but I had a tire iron.—Phillip Marlowe, 1958

Tuesday, July 19th, 2022

Dear Friends + Interlocutors,

I woke up in Munich with a headache this morning to see an alarming item in the Financial Times, reproduced below. The FT is not part of the underground press. It’s mainstream. 

Looks like Germany, and hence Europe, and hence the world, is in real trouble. Economic trouble due to Russia’s fisticuffs with Ukraine. Once again, I must say, “Thank you, Washington!” 

Never, ever, for one moment forget the immortal words of Victoria Nuland in 2014, ”Fuck the EU!” Washington’s top policy-maker for Europe and chief hands-on architect of the Ukraine fiasco was making an important point. We are seeing it come to fruition.

Did the numskulls in charge of the EU and Germany listen and take heed? No. They continued to dance to the tune blasting from the White House and State Department. Hence, the present slow-motion train wreck for Germany, Europe, and the world.

My headache this morning may have been caused by Paul Krugman yesterday. He’s part of the tag-team wise-man duo of the NY Times, the other being the all-knowing Tom Friedman. Krugman wrote yesterday about the recent Euro-Dollar rough parity. The Euro has been falling like a stone. 

Krugman, current or ex-professor of economics at Princeton, takes what seemed like forever to explain why—“the meaning of the plunging euro”— before finally coming to the point. It’s not the surge in interest rates by the FED to fight runaway inflation. No, the central reason is, “…a major downward revision of investors’ views of European competitiveness, and hence of the perceived long-run sustainable value of Europe’s currency.” 

And why is that, pray tell? “….over the past couple of decades Europe—especially Germany, the core of the Continent’s economy—has tried to build prosperity on two pillars: cheap natural gas from Russia and, to a lesser extent, exports of manufactured goods to China.” Oh, the horror!

I think it's called “globalism” or free-enterprise or just taking care of business or whatever. It is not a mystery. Nothing inherently wrong with that. But now, wait for it, according to Krugman, “…One of these pillars is completely gone thanks to Vladimir Putin’s bungled invasion of Ukraine.” Ah, yes, it’s Putin’s fault! Of course. That “bungled invasion”. 

Wrong. It’s not the fault of Putin. Rather it is Germany’s and the EU’s response to Putin, prior to and now in the aftermath of, the Russo-Ukraine war which is at fault. The EU and Berlin took their knee-jerk cue, as always, from the mischief-makers in Washington. 

You wanna sanction Russia? You wanna cut off your nose despite your face? You wanna engage in yet another messianic crusade to nowhere like in Iraq? Be my guest. But if you do that, dear crusaders, there will be consequences.

As the German, Jorg Rothermel, says in the FT article, “There is now a danger that we won’t be able to produce certain thing in Germany any more.” 

To put it crudely, in the words of that unspeakable battle-axe Nuland, “Fuck the EU!” She’s done it!

When will the Europeans wake up? 


Russian gas cuts threaten to shutter Germany industry

Many companies have few options, if supplies dwindle or Moscow halts all flows

Montage to illustrate German industry
Berlin fears a winter gas crisis that could paralyse industry and leave millions freezing in their homes 

Petr Cingr is in no doubt about the fate that awaits his chemicals company if Russia cuts off all gas supplies to Germany.

“We have to stop [production] immediately, from 100 to zero,” said the chief executive of SKW Stickstoffwerke Piesteritz, the country’s largest ammonia producer and a key European supplier of fertilisers and exhaust fluids for diesel engines. 

Amid rising tensions between Moscow and the west over the war in Ukraine, Russia has already drastically reduced its exports of gas to Europe’s largest economy. Berlin fears a winter gas crisis that could paralyse industry and leave millions freezing in their homes.

All eyes are on Nord Stream 1, the pipeline linking Russia directly to Europe via the Baltic Sea. Gazprom, Russia’s state-controlled gas giant, reduced NS1’s capacity by 60 per cent in June, and last Monday shut it down for routine maintenance. In normal circumstances, this lasts just 10 days. But the fear in Berlin is that NS1 will not come back into operation as scheduled this Thursday. 

A protracted cut-off beyond this week will stymie Germany’s plans to stock up its gas in storage ahead of the heating season. The resulting shortage would mean “companies will either have to reduce their gas consumption or curb production”, said Jörg Rothermel of the VCI, the trade body for the German chemicals industry, which is the country’s third-largest behind automotive and machinery.

Should flows cease, most economists expect the eurozone’s economic powerhouse to experience a severe fall in output. No gas this winter would, according to analysts at Swiss bank UBS, trigger a “deep recession” with almost 6 per cent wiped off GDP by the end of next year. The Bundesbank has warned that knock-on effects on global supply chains would “increase the original shock effect to two-and-a-half times the size”.

As industrial companies across Germany face the real prospect of life without natural gas, some are exploring ways of replacing it with other energy sources. But for those with fuel-specific hardware, or those who use it as a raw material, there is no alternative.

Among those in the latter group is the country’s largest steelmaker, ThyssenKrupp. It said that without natural gas for processes required to run its blast furnaces, “shutdowns and technical damage to our production facilities cannot be ruled out”.

BASF, the world’s largest chemicals company, has warned that the steam crackers at its gargantuan site in the southwestern city of Ludwigshafen would be forced to idle if gas supplies dropped below about 50 per cent of its regular requirements.

“Some [companies] still have installations that can use alternative fuels, such as heating oil or coal,” said Rothermel. “But according to our estimates only 2-3 per cent of gas consumption in our industry can be replaced in this way. And that’s not enough to solve the problem we face.”

Merck is also preparing to survive without gas. It requires supplies of the fuel equivalent to the needs of a midsized city such as Darmstadt, where the chemicals company is based, to produce electricity and steam, and sodium hydroxide, without which “many chemical processes won’t work”, according to site director Matthias Bürk. 

Merck has contingency plans, which include producing steam using on-site fuel oil, but these cannot be used indefinitely, Bürk said.

The government is preparing for the looming crisis. Just over three weeks ago it triggered the second stage of its national gas emergency plan, a move that brought Germany a step closer to rationing supplies. It is also bringing mothballed coal-fired power stations back on line, building new import terminals for liquefied natural gas and planning an auction system to incentivise industrial customers to cut their gas consumption.

Companies, meanwhile, have been told to make preparations for the eventuality of a cut-off. In a recent letter to an opposition MP, the economy ministry said all “operators of critical infrastructure” such as hospitals should acquire emergency power generators. 

It is not just a total shut-off that is worrying companies. European benchmark natural gas prices have soared eightfold over the past 18 months, rising from about €20 a megawatt hour to above €160 a megawatt hour. The price doubled in the past month alone, leading many companies to warn that they could not continue to operate at that rate.

“We are financing the war,” said Cingr, who added that his own costs were now more than 40 times as high. 

That price was already destroying demand for SKW’s fertiliser products by between 50 and 70 per cent, he added. Farmers were baulking at the increased costs, with some accessing illegal imports from Russian fertiliser producers smuggled into the EU via Serbia. The company would, he said, only be able to keep factories running for a few more weeks.

The current situation “is a clear signal to [the market] that our environment is unstable and if they can have a choice where to invest, they will definitely rather invest in America or in other regions”, he said.

The government has stepped in to help, offering €5bn in grants this week to energy-intensive companies. The bulk will go to companies making chemical products, glass, steel, metals and ceramics. 

But Rothermel fears that even with such measures, the country is becoming a less attractive place to do business. “There is now a danger that we won’t be able to produce certain things in Germany any more because there just won’t be the gas, or the energy costs are so high that it’s no longer competitive,” he said. 

Additional reporting by David Sheppard in London