German inflation: Soaring costs and shortages push industry to the brink
Siempelkamp Giesserei has had its fair share of crises in its 99 years. But pandemic shutdowns, supply chain disruptions and soaring energy prices have thrown the metals factory in Düsseldorf in uncharted territory.
“There’s never been anything like this before,” Georg Geier, the company’s chief executive, told CNN Business.
The major difference between the past and the present? Customer demand is high, but Siempelkamp cannot find or afford the iron, nickel and energy it needs.
It’s a similar story at many German manufacturing companies, which contribute almost a fifth of its GDP, according to the World Bank. Industry giants like Volkswagen (VLKAF) and Siemens (SIEGY) are also grappling with supply chain bottlenecks, but it’s Germany’s roughly 200,000 small and medium-sized manufacturers that are least capable. to withstand the shock.
These companies are a vital part of the “Mittelstand”, the 2.6 million small and medium-sized enterprises that account for more than half of Germany’s economic output and nearly two-thirds of the country’s jobs. Many are family businesses and deeply embedded in rural communities.
The Siempelkamp smelter burns enough energy each year to power a town of 20,000 people. For years, the company paid between €40 ($43) and €50 ($53) per megawatt-hour of electricity. But his bills soared around September and “exploded” to historic highs after Russia invaded Ukraine, Geier said. Average prices in March were around €250 ($267) per megawatt-hour.
“We are aware [of our energy costs] almost every day,” Geier said. “When we get up until we go out.”
The war has fueled global inflation, which had started accelerating last year when economies reopened after pandemic shutdowns, causing demand for energy and goods to rise. Today, Western sanctions on Russia’s coal and oil exports – and efforts by the European Union to reduce consumption of its natural gas – have pushed prices up again. Sanctions against Russia, a major metals exporter, have further scrambled supply chains.
Europe’s largest economy is particularly vulnerable. According to the International Energy Agency, Germany depended on Russia for around 46% of its natural gas consumption in 2020. This number has likely decreased since the start of the war, but any sudden interruption in imports from Russia would be “catastrophic” for manufacturers. like Siempelkamp, says Geier.
So far, Siempelkamp has not reduced its production, but pass on the considerable cost increases for its customers, such as copper and cement producers who use its crushers and electric car manufacturers who use its machines. In turn, it expects its customers to pass the costs on to consumers.
Annual producer price inflation in Germany – that is, the price of goods leaving factories – topped 30% in March, the highest level in 73 years.
Ex-factory price feed the consumer price inflation, which hit a 41-year high of 7.3% last month. In both cases, soaring energy prices were the main contributor. There was no relief in April, with consumer prices rising 7.4% from the same month last year, according to a preliminary estimate.
In Berlin, an ice cream parlor is also under severe strain.
Florida Eis is partly immune to high prices — it has shifted much of the energy it uses for production and delivery to renewable sources — but its suppliers are not. The company now pays between 30 and 40% more for its milk.
Its owner Olaf Höhn shudders at the thought of the loss of Russian gas.
“The sugar industry needs a huge amount of energy. If they had no more gas, there would be no more raw sugar,” Höhn said. “We cannot buy raw sugar on the world market due to European regulations.”
“We would have huge reductions until a complete shutdown,” he added.
The price spike has rattled a country that has long boasted of a stable economy and still harbors a deep-rooted fear of the kind of hyperinflation of the 1920s and 1930s that is widely seen as having helped the Nazi Party take the power.
Siempelkamp chief executive Dirk Howe wonders how long this can all go on.
“We’re kind of on a spiral right now,” he told CNN Business.
Germany’s appetite for relatively cheap and reliable Russian energy has long been a competitive advantage and helped it weather past economic crises, said Tamas Vonyo, associate professor of economic history at Bocconi University. .
This advantage has now become a handicap.
EU leaders pledged to reduce Russian gas consumption by 66% before the end of this year and to break the bloc’s dependence on Russian oil and gas by 2027. The ministry German economy said last month that it had already cut Russia’s share of total gas imports fell from 55% to 40%.
But a sudden stop would be disastrous. After Putin threatened to turn off the taps if countries did not pay in rubles, the German government launched the first of a three-step emergency plan that could lead to gas rationing. Households and hospitals would have priority over many manufacturers.
Russian energy giant Gazprom cut off gas supplies to Poland and Hungary on Wednesday because they failed to make ruble payments. Many fear that Germany will be next.
A sudden break would reduce German GDP by almost 2% in 2022, according to the country’s central bank. An analysis carried out this month by five of the country’s leading economic institutes also indicated that a sudden embargo would lead to the loss of 550,000 jobs in 2022 and 2023.
“Natural gas is likely to remain expensive after an embargo or a supply cut for quite a long time,” Sebastian Dullien, research director at the Macroeconomic Policy Institute, told CNN Business.
He warned of “structural damage” to the German economy if Russia cut off its gas – damage that will be harder to recover from than the 2008 financial crisis. It could create a recession at least as deep and potentially much longer than ten years ago.
Inflation is only part of the story.
The German economy may already be heading in a recession. The German Council of Economic Experts, a government advisory group, last month cut its forecast for GDP growth in 2022 from 4.6% to 1.8%, citing inflation and the war in Ukraine.
Manufacturing output contracted this month, falling to its lowest level since June 2020, according to a survey S&P Global data and collapsing confidence could lead to a prolonged downturn.
“The risk [of a recession]I would say, is over 50% right now,” Dullien said.
Germany, and indeed much of Europe, is now facing stagflation – that nightmarish combination of high inflation and low economic growth.
Companies and countries are grappling with shortages of staple foods and raw materials. For example, soaring energy prices have contributed to a drop in production of zinc, a metal used to protect steel, while Russia’s invasion of Ukraine has jeopardized supplies. world in wheat. Together, the two countries account for about 30% of the world’s wheat trade.
The German Association of Small and Medium Enterprises, said some of its members were already reducing production due to shortages.
“[Production cuts are] not the consequence of a lack of electricity or high electricity prices, but [because] they don’t have the materials to produce the goods,” Hans-Jürgen Völz, the association’s chief economist, told CNN Business.
“For example, aluminum, steel and all [else] it’s in short supply all over the world right now because of the sanctions against Russia.
The war in Ukraine raises fears of a fall in the region’s raw material exports. Prices for nickel, a metal used in electric vehicle batteries, hit a record high in early March, doubling to $100,000 per metric ton and causing the London Metal Exchange to suspend trading.
This is bad news for the German auto industry, which is still struggling with a shortage of semiconductor chips.
Delays at China’s port of Shanghai – one of the busiest in the world – due to a strict coronavirus lockdown in the city have also hampered global supply chains in recent weeks. The bottlenecks could not have come at a worse time for German importers.
Florida Eis’ Höhn calls himself an optimist, but even he can’t ignore the “dark clouds” gathering over the German economy.
“We have to face it,” he said.