A year ago, with the price of natural gas at all-time highs, all eyes were rightly on the European industry. Would it be able to withstand an unprecedented onslaught or would it sink into a spiral of closures, relocations and layoffs? 12 months later, the response is mixed: there were job suspensions and activity stoppages, yes, but the blow has not been, by far, as deadly as feared —and many almost took it for granted—: as in so many areas, here reality has also turned its back on the augured catastrophe. The events also hide a capital paradox: natural gas consumption has sunk in the secondary sector, even more than expected, but industrial production has resisted much better than anyone ever thought.
“It is a truly strange decoupling”, admits Thierry Bros, a renowned energy analyst and professor at the School of International Affairs at Science Po (Paris). “It has been a great surprise for me, that both production and GDP have not suffered such a big hit despite the sharp drop in gas consumption.” In February, the industrial production index grew by 2% year-on-year, according to data published this Thursday by the Eurostat community statistical agency. The sectoral demand for gas, on the other hand, accumulates a 15% drop compared to the average for the 2019-2021 period, according to the Brussels Bruegel study center.
Modern economics sometimes leaves room for this type of contradiction: two variables that should go hand in hand suddenly become disconnected without an obvious explanation. Only time will be able to tell with certainty what has happened, but those who follow the day-to-day activities of the sector are beginning to launch the first hypotheses: a substitution of gas for other more polluting fuels, such as fuel oil, diesel or even coal —something just possible in some industries, not all—; an additional effort in efficiency —with prices skyrocketing, savings yields are greater than ever—; greater imports of intermediate goods —to avoid having to manufacture them on Community soil—, with the European industry concentrating all its efforts on the segments that provide the most added value; and even an accelerated electrification of those segments in which it is possible.
The decoupling between gas demand and final production also reveals a “nonsensical excess of consumption; useless ”, as he cataloged it in February, in these same pages, the still head of the Italian energy giant Enel, Francesco Starace. This excess demand, which would be around – according to his calculations – 15% has been exposed in the current situation, in which the industry has achieved something that is very close to squaring the circle: doing the same – and even more, in some cases—with fewer resources.
With 26% of final energy consumption, the industrial sector is the third pole of demand in the Old Continent —only behind transport and households—, according to data from the community statistics office. Almost a third of this huge volume of energy is gas, another is electricity —where there has also been a marked decrease— and the rest is divided between other fossil or renewable fuels and self-consumption. Chemicals and petrochemicals is by far the most intensive subsector, followed by non-metallic minerals; paper; the transformation of food, beverages and tobacco; metallurgy and steel industry; and machinery manufacturing.
From gas to fuel oil, diesel or coal
Just four sectors – the chemical industry, paper, mineral processing and base metals – account for almost two thirds of the total industrial consumption of natural gas in the EU, despite accounting for only 15% of the workforce. in the secondary sector and 12% of added value, according to data from Ben McWilliams of Bruegel. “In these industries, gas has proven to be much more substitutable than expected,” he notes by phone. “The responses given by the companies have proven useful,” adds Marie Tamba, a senior analyst at the consultancy Rhodium after several years at the European Commission. “And they have been favored by the better state of supply chains, which has allowed them to import some gas-intensive goods that are key in production processes, instead of having to produce them themselves.”
“At these prices, it is more profitable than ever to invest in efficiency. The opportunity cost of not saving is extremely high”, summarizes Gonzalo Escribano, principal investigator at the Elcano Royal Institute. The same is the case with electrification: “Those who technically could and had not taken the step are regretting it and are doing it in an accelerated manner.” That “technically” is key: the limits of electrification are set today by the degree of heat necessary for each industrial process. “In blast furnaces, fertilizers, petrochemicals or ceramics, for example, the required temperatures are still not reached with an electric heat pump.”
Like all statistics, the industrial production index masks the multiple realities by subsector: those who have suffered the most have been, by far, those most dependent on gas, who have seen their bills rise brutally overnight. All in all, even in these areas the damage has been “less than expected”, as endorsed by BBVA Research economists Cristina Valera and Carlos Castellano, authors of a recent study on the subject. The post-pandemic economic reopening, they say, has also rowed in favor. But by no means explains everything.
More intermediate goods from abroad
Valera and Castellano lean, above all, for three: efficiency; replacement of gas by crude oil derivatives; and import of intermediate inputs especially intensive in this fuel. And they give special weight to the last two: “We do not rule out that there have been efficiencies, but since it is such a short-term shock, these processes are not so easy. So we believe that the substitution of fuels and the increase in imports of some products can better explain what happened”. One of the clearest examples of replacement of intermediate products whose production requires a lot of gas is the non-EU purchases of ammonia by the German giant BASF to later conclude its production processes in Europe. Circumscribe gas consumption, ultimately, in what really makes money and outsource the rest.
The one who asks to take the industrial production indicators with a grain of salt is Verónica Rivière, head of the Spanish employers’ association GasIndustrial: “My indicator of the health of the industry, the one that has no trap or cardboard, is gas consumption. It is true that there is some change in fuel and some efficiency, but the drop in industrial demand for gas means that the industry is suffering”. Orders, she maintains, have fallen sharply. “And from Spain we are seeing cases of relocation to other European countries, such as France, Portugal or Germany, whose governments are being more agile with aid and subsidies to the sector.” The last one has directly broken the bank. All in all, Rivière expects “a certain recovery in the coming months”, which should also translate into an increase in gas demand.
Once the worst moment of the crisis has been overcome, doubts about the security of supply in Europe have been cleared up, the price of gas has landed abruptly —the almost 350 euros per megawatt hour (MWh) last summer has become 40 today— and the noose around the industry’s neck tightens, in short, much less than just a few months ago. There are several signs in this sense: many of the business plans to move to other geographies with lower energy costs have been temporarily refrigerated — ready, yes, in case the curves return — and some gas-intensive industries, such as chemicals, are beginning to to end the litany of production stoppages and temporary suspensions of employment.
“The truth is that, although the concerns have not completely disappeared, the EU is tackling the transition and competitiveness in the right direction,” slides Tamba, from Rhodium. “The worst omens, which envisioned the continent as practically becoming an industrial wasteland, have clearly not come true: Europe has shown its ability to avoid the worst at a time of extreme stress, and the energy transition has gone from being a risk to its secondary sector to be an opportunity”, sums up Escribano. “The story is different, but it is still early to claim victory; You have to see how strong US policy is to attract factories to its territory”. A thesis to which Bros adds: “Maybe we haven’t seen everything yet. Brussels has to be much more pragmatic”.
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