European factories to go dark on higher gas prices

The impact of Russia’s sudden block of natural gas taps to Europe has saturated manufacturers and businesses in fresh risks. Energy prices climbed so fast that some factory owners had to rewrite business forecasts six times in two months. Recently, some manufacturers have put a third of their employees on partial leave to save money.

Some furnaces in glass factories will be idled; the others will be switched from natural gas to diesel, a cheaper but more polluting fuel. It is the most dramatic situation European factories have ever faced.

High energy prices are lashing European industry, forcing factories to cut production quickly and put tens of thousands of employees on furlough. The cutbacks, though expected to be temporary, are raising the risks of a painful recession in Europe.

Industrial production in the euro area fell 2.3 percent in July from a year earlier, the biggest drop in more than two years.

Makers of metal, paper, fertilizer and other products that depend on gas and electricity to transform raw materials into products from car doors to cardboard boxes have announced belt-tightening. Half of Europe’s aluminum and zinc production has been taken offline with expected wider impact on commodity prices on the short term.

Arcelor Mittal, Europe’s largest steel maker is also idling furnaces in Germany. Alcoa, a global aluminum products producer, is cutting a third of production at its smelter in Norway. In the Netherlands, Nyrstar, the world’s biggest zinc producer, is pausing output until further notice.

None of European industries could be immune; not even toilet paper. In Germany, Hakle, one of the largest manufacturers, announced that it had tumbled into insolvency because of a historic energy crisis.

Some industries indirectly generate thousands of jobs in their region, from cardboard factories that package glassware and other products to transport companies ferrying the final products. Operation interruption is expected to impact the European labour market as well.

The shutdown of the furnaces is undoubtedly bad news for workers and high energy prices are having an impact but in the current European case, it is scary how fast things are happening.

The energy crisis is mostly a backfire as a result of European sanctions that were intended to punish Moscow for its invasion of Ukraine. The pain has damaged confidence at European companies and their ability to plan.

The European Commission president, Ursula von der Leyen, proposed offsetting the hit by capping revenue from low-cost electricity generators and forcing fossil fuel firms to share the profit they make from soaring energy prices.

But the solutions may not be fast enough. Costs have already soared beyond what many manufacturers can afford. Thousands of European companies are near the end of fixed energy contracts signed when prices were cheaper, and must renew them in October at current prices. Year-ahead electricity prices, which are tied to the cost of gas, are around 1,000 euros per megawatt-hour in Germany and France, while natural gas is at record highs of around €230 per megawatt-hour.