The energy crisis gives the United States a chance to woo big European companies
European heavy industry has endured a few dark months. Skyrocketing energy prices and fuel shortages caused by the Russian invasion of Ukraine left almost 10% of crude steel production and half of primary aluminum unused. The fertilizer industry has recently returned to half capacity and groups such as Norway’s Yara are warning that reduced production will lead to food shortages.
The fuel crisis seems to be easing. But the restrictions it has caused will weigh on European business decisions for years to come. Even as companies invest in green energy and improve energy efficiency, some are also rethinking their geographic footprint.
BASF, the German chemical maker, said last week that it planned to cut its workforce “permanently” in Europe when it opened a new factory in China. The Smurfit Kappa and DS Smith packaging groups import paper from North America.
The United States now has a rare opportunity to woo European multinationals at a time when supply chains are already in flux. Pandemic-related shortages, combined with efforts to reduce carbon emissions, are causing business leaders to reconsider remote suppliers in low-cost jurisdictions. Growing tension between China and the West also changes the calculus – German direct investment in China has declined during Covid and has not rebounded.
As companies decide which factories to upgrade and when it makes sense to start over elsewhere, energy costs will clearly play a role. And here, the United States has a crucial advantage over Europe: the supply of natural gas is local, reliable and always cheaper, although the price differential has fluctuated wildly.
Consider Shell, which made the decision in 2016 to build a $6 billion petrochemical plant near Pittsburgh, Pennsylvania, in part because it was close to sources of natural gas. The UK-based energy group has just completed construction and plans to start manufacturing plastics there by the end of the year.
Outgoing chief executive Ben van Beurden described it as part of “a shift towards the Americas, which appear to be structurally more advantaged, certainly now and perhaps in years to come”.
Like many other European companies, Shell also chose a factory site close to potential US customers. But other companies that have invested in local production for Americans have found that the United States can be a good base for exports. When Mercedes opened a plant outside of Tuscaloosa, Alabama in the 1990s, it was looking to tap into the American market. Now five times larger, the factory manufactures all of the German company’s large SUVs, and two-thirds are exported. That early decision to choose Alabama continues to resonate. Mercedes recently opted to manufacture its electric SUVs at the same site, opening a local battery factory to supply them.
It’s ironic that energy is now attracting companies considering expansion into the United States. In the 1970s and 1980s, rising energy costs contributed to the decline of American steel production. But the shale revolution changed the dynamic, and Russia’s invasion of Ukraine raised alarm bells over the reliability of supplies.
“In 20 years, this could all balance out,” says energy analyst Stephen Schork. “But what we do know is that US natural gas is the cheapest in the world and will be for some time.”
As companies reduce their carbon footprint, fossil fuel prices should become less important. But the United States is looking to extend its energy advantage with the recently passed Inflation Reduction Act. Enthusiasts believe that wind and solar power from the United States as well as green hydrogen, which is generated from renewable energy, are on the way to becoming among the cheapest in the world. “The IRA amplifies the strategic advantages the United States already holds. . . and enables the industry to become a dominant energy provider in the low-carbon economy,” the Credit Suisse analysts write.
As important as they are, energy prices are not decisive in investment decisions. European business leaders also want a stable policy and a skilled workforce.
America’s culture wars on everything from abortion to diverse hiring to vaccines are difficult for outsiders to navigate, and the U.S. labor market also remains strained, exacerbated by the political impasse over employment policy. ‘immigration. Some leaders also fear that growing partisan disputes over environmentally-focused investments could cause problems for European companies that have to comply with climate change mandates from Brussels.
The Russians have given the United States a chance to win substantial foreign direct investment in its industrial sector – unless the politicians miss this opportunity.
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