European heavy industry steps up measures to deal with energy crisis

Some of Europe’s biggest energy users, from steel to chemical companies, are stepping up production cuts amid warnings that soaring prices and weak demand are rapidly eroding competitiveness.

Several steelmakers, including Europe’s largest, ArcelorMittal, have in recent days announced plans to idle some of their blast furnaces from the end of this month. ArcelorMittal’s German operations warned that the high costs were putting a “heavy strain” on its competitiveness. In Spain, Ferroglobe has temporarily shut two furnaces.

Miles Roberts, chief executive of FTSE 100 packaging company DS Smith, said businesses had to be prepared for energy to be rationed this winter.

“We are expecting there to be rationing across Europe, that’s what we’re preparing for. It may not happen, but we have to plan for that now,” he told the Financial Times.

The company, which relies on gas for up to 70 per cent of its energy usage, is combating high prices through hedging, diversifying its energy use and reducing consumption.

Russia’s decision this month to indefinitely cut off supplies through the critical Nord Stream 1 gas pipeline has intensified worries for manufacturers across Europe about an energy shortage this winter. At the same time, companies face lower demand from customers that are themselves struggling with higher operating costs. Russian gas supplies to the EU have been cut by approximately 80 per cent since the start of Russia’s invasion of Ukraine.

EU energy ministers on Friday backed a windfall tax on energy producers to help address costs for households and businesses.

Christian Kullmann, chief executive of Germany’s Evonik, a speciality chemicals company headquartered in Essen, said the country needed to keep its remaining nuclear power stations running.

“I am worried about a sharp recession in the winter . . . It will be necessary to keep running the three nuclear power plants,” he said. Manufacturers, he added, faced “an acute price crisis”. “We don’t yet have a supply crisis but there are warning signs”.

Evonik is substituting up to 40 per cent of natural gas at its domestic sites with liquefied petroleum gas. It is also continuing to operate a coal-fired power plant.

Chemicals group BASF said it had already reduced its gas demand since March, including by switching to alternative fuels such as oil where possible. The company said in a statement that it could continue to operate its large Ludwigshafen site with a reduced capacity if natural gas supply did not fall below “around 50 per cent of our maximum natural gas demand”.

Stefan Borgas, chief executive of RHI Magnesita, a FTSE 250 listed maker of refractory products — heat resistant materials used in linings typically found in steel mills — that operates four plants in Germany, said Europe had a “structural disadvantage in energy costs” compared with the rest of the world because of the Ukraine war as well as a “structural lack of investment in energy over the past 25 years”.

In the UK, where the government last week announced plans to subsidise energy supply, concerns about the scope and cost of support remain. Steve Hammell, chief financial officer of Sheffield Forgemasters, said he was worried about rationing.

“Rationing is a risk to us that we have to be mindful of,” he said, despite the company having been nationalised by the government last year. Sheffield, which makes forgings and casting for Britain’s nuclear submarines, had applied for an exemption from electricity rationing as a precaution given its work in defence, said Hammell. The company has implemented energy efficiency measures at its site in Yorkshire.

DS Smith’s Roberts said the company was looking to reduce energy consumption at its plants in the UK by 15 per cent — to match the EU’s reduction target.

“That’s purely a company issue, we’re saying we think it’s right that every part of our business works to reduce energy consumption. The fact the UK government isn’t asking for it is a bit irrelevant.”