German companies stop production to absorb rising energy prices

German manufacturers are halting production in response to the surge in energy prices due to pressure on Russia’s gas supply, a trend the government has described as “alarming”.

Economics Secretary Robert Habeck said the industry has been working hard in recent months to reduce its gas consumption, including by switching to alternative fuels such as oil, making its processes more efficient and reducing production.

But he said some companies had also “stopped production altogether,” a development he said was “alarming.”

“It’s not good news,” he said, “because it could mean that the industries involved are not just being restructured, but are experiencing a rupture — a structural rupture, one that is happening under tremendous pressure.”

He spoke as Russia halted gas flow through the Nord Stream 1 pipeline for three days of scheduled maintenance. The outage comes with European countries already battling drastic cuts to Russian gas supplies, pushing gas prices to record levels.

German business leaders say the pain of more expensive energy inputs is exacerbated by recent rate hikes in the US and slowing growth in China, one of Germany’s largest export markets.

Habeck’s comments matched Siegfried Russwurm, head of Germany’s main business lobby, the BDI, who this week said industry gas consumption was down 21 percent in July from a year ago.

“But that often has nothing to do with efficiency gains, but with a dramatic drop in output,” he said. “It is not a success, but the expression of a huge problem.”

Russwurm said the price of electricity had risen to more than €700 per megawatt-hour by 2023, “more than 15 times the level of recent years”.

“The situation for many companies is, or will soon be, toxic, not only because of the gas shortage, but mainly because of the ridiculous price increases,” Russwurm said.

Habeck said rising gas prices affected everyone from large industrial groups to small trading companies and the medium-sized enterprises that make up Germany’s “Mittelstand”. “Wherever energy is an important part of the business model, companies experience pure fear,” he said.

He said the business model of much of Germany’s industry was based on the abundance of gas from Russia that was cheaper than gas from other regions. That competitive advantage “won’t come back anytime soon, if it ever comes back,” Habeck said.

The pessimism was underlined by a recent survey by one of Germany’s leading economic think tanks, the Ifo Institute, which found that German business confidence had fallen for the third month in a row.

The index, based on a monthly survey of 9,000 companies, fell to a more than two-year low of 88.5 from 88.7 last month.

According to a poll published Wednesday by the DMB, a lobby group representing the Mittelstand, 73 percent of companies experienced “severe pressure” from higher energy prices. When asked about their business prospects for the next six months, 10 percent said their “existence is under threat.”

“Confidence in the government’s economic crisis powers is disappearing and small and medium-sized enterprises in particular feel left alone by the government,” said Marc Tenbieg, head of the DMB.

Businesses are particularly disappointed with the government’s slowness in putting together a third emergency package to cushion the blow from higher energy prices.

The cabinet, led by Chancellor Olaf Scholz, held a retreat this week at Schloss Meseberg, a government pension outside Berlin, and there were widespread expectations that it would unveil a number of new measures at the close. But Scholz said at the last press conference that it wasn’t done yet.

However, Treasury Secretary Christian Lindner insisted the next package of measures would be “huge”, representing “single digit billions” for this year and “double digit billions” for 2023.

The two previous aid packages introduced in the wake of the Russian invasion of Ukraine were worth €30 billion together.

Lindner demanded reforms of the electricity market, where high gas prices caused an automatic rise in electricity prices, which resulted in unexpected gains for a number of energy suppliers.

Echoing Lindner, Habeck said it was a matter of “taking the root cause” of higher energy prices, not just mitigating their effects.