Business is booming.

German industry sounds alarm over energy rationing plan

For 400 years, Carletta Heinz’s family has produced bespoke glass bottles for the world’s leading perfumeries in a factory on the edges of Germany’s Franconian forest.

But Russia’s invasion of Ukraine may force the 38-year-old chief executive to close the business before it enters its fifth century.

In the event of prolonged gas shortages, if Moscow decides to cut supplies to European countries that have imposed sanctions on Russia over the war, “we won’t be able to survive as a company”, she said. “We’d have to shut down the [glass-melting furnaces] completely, we’d lose the workforce . . . and it would be very hard to just restart production after a year or two.”

Heinz-Glas is not the only German company raising the alarm. More than half the natural gas consumed in the country each year comes from Russia — the highest share for any major EU economy — and gas-reliant industries are warning that by winter their operations could be at the mercy of Moscow.

Their fears were heightened on Wednesday when the German government, worried Russia would cut off gas supplies after EU states rebuffed Moscow’s demand to be paid in roubles, activated the first of three warning stages in its emergency supply plan.

Under a law put in place during Arab exporters’ oil embargo of the 1970s, German industry would be forced to curtail gas consumption in the event of a shortage, with supplies reserved for critical infrastructure and households.

Such a step would cost Europe’s largest economy tens of billions of euros, estimates suggest, and could plunge it into recession. Union leaders have warned hundreds of thousands of jobs would be at risk.

The German economy could even enter its “worst crisis since the end of the second world war”, Martin Brudermüller, chief executive of BASF, the world’s largest chemical company by sales, told the Frankfurter Allgemeine Sonntagszeitung broadsheet on Thursday.

Christian Seyfert, the head of VIK, which represents energy-intensive German groups such as steel or chemical manufacturers, said the crisis “could definitely be worse than the [Covid-19] pandemic”.

Coronavirus “hit our members very hard, but thanks in part to demand from China, there was soon an economic recovery”, he said. “This is a situation of even greater concern.”

While many German companies have adjusted their earnings forecasts to account for rising energy costs as a result of the war, some of the country’s core industries say they will not be able to operate without sufficient gas supplies.

A worker at Heinz-Glas
A worker at Heinz-Glas. The 400-year-old company faces closure if the Ukraine war causes prolonged gas shortages

Heinz-Glas’s furnaces — most of which are heated with gas to 1,600C — run round the clock, with roughly six glowing bottles emerging from the production line every second of the day. They are delivered to prominent customers across the world, including Yves Saint Laurent, Tiffany and Estée Lauder.

If cooled, the molten glass in the furnaces would solidify and the equipment would have to be replaced, at a cost of millions of euros.

The much larger chemical and steel industries face a similar predicament. About 15 per cent of Germany’s gas supply is consumed by the chemical sector, according to VCI, its representative body. BASF’s plant in Ludwigshafen in south-west Germany — the world’s largest integrated chemical complex — uses almost 4 per cent of the country’s gas.

While gas used for electricity generation can be replaced by coal-fired power stations, its role as a raw material or a fuel for blast furnaces and other industrial processes is not easily substituted.

BASF told the FT that steam crackers — units that break hydrocarbons into basic chemical components — at its Ludwighsafen site would come to a complete standstill if gas deliveries dropped below 50 per cent of their normal level, endangering the supply of substances used for medical, hygiene and food products.

Henrik Follmann, head of family-owned chemicals manufacturer Follman Chemie, based in North Rhine-Westphalia in western Germany, said gas supplies were crucial to making naphtha. “We need this feedstock,” he said. “If we don’t get it, the refineries are going to stop, then the chemical industry will stop and the whole of German industry will stop.”

He added: “I supply chemicals to the wood and furniture industries — if they don’t get it from me what are they going to do? It is the same for the chipmaking industry, which relies on chemicals, or the carmaking industry.”

Steelmakers are similarly alarmed by the government proposals. In the western city of Duisburg, the blast furnaces at Europe’s largest steelworks rely on gas as a back-up if their coal supplies run short.

Carletta Heinz, chief executive of Heinz-Glas, left, and her father and  former company head Carl-August Heinz
Carletta Heinz, chief executive of Heinz-Glas, right, and her father and former company head Carl-August Heinz. Moving production away from Germany would be the last resort, the family says © Lisa Lampert-Müller

A person close to Thyssenkrupp, which owns the plant, said: “Going under a critical amount of gas [supply] would be dangerous. It would cause serious damage to our assets.”

Any cut in Germany’s gas supplies is unlikely to exceed 50 per cent, say analysts. So-called “demand destruction” caused by soaring prices would cut gas consumption, they argue. Meanwhile, roughly a third of Russian imports could be replaced by deliveries from other countries, according to BDEW, which represents German utilities.

Efforts to curb domestic gas use could further reduce the pain. In the event of a supply crunch, according to Allianz economists, “for every one [percentage point] reduction in the gas consumption of households . . . up to 25,000 jobs will be protected in manufacturing”.

It is unclear whether energy suppliers would be deemed liable if they failed to deliver gas to customers. If the government forced suppliers to cut deliveries, utility groups would be shielded from compensation claims, according to Christian Hampel, a partner at BDO Legal who is advising companies on the potential fallout from gas shortages.

But “as long as a replacement procurement is possible, the gas supplier must deliver”, he added. Suppliers’ economic existence “may be at risk” if they are forced to pay exorbitant prices for replacement gas or compensate customers, he said.

While German industry has faced energy crises in the past, the government seemed unprepared this time, according to executives.

Carletta Heinz’s father, Carl-August, led the family’s glass company through the 1970s oil embargo. But the retired 71-year-old said this crisis was “clearly the more dangerous one”.

Moving production away from Germany “would be the very last resort”, Carletta Heinz said. She remained unimpressed by the political decisions that had led to her company facing an existential threat.

Our country has really failed to secure a second source [for gas],” she said. “No company would do it this way.”

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