Surviving winter: How three factories are coping with Europe’s energy crisis

The pain of high gas prices has become ubiquitous across Europe this year. But for some companies the added costs are more than a management headache and a crusher of profit margins. They are an existential threat.

These companies are the continent’s energy intensive manufacturers, hot and grinding operations where annual energy bills can run into millions of euros. Temperature control for them involves not lowering the office thermostat but burning natural gas to generate the extreme heat that is a non-negotiable part of their production lines.

For them, the energy crisis has meant shutdowns, firing workers or even filing for bankruptcy. But the worst may not be over.

The sternest test for Europe’s factory owners will come in the cold and costly winter months ahead, when freezing temperatures and blackouts threaten to push them even closer to the brink.

The Financial Times will follow the fortunes of three companies across the eurozone. In this piece, the companies tell us about the scale of the challenge, how they are coping, and their hopes and fears for the months ahead.

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‘This is the worst crisis our business has faced’

Glassmakers have crafted incandescent vases, chandeliers and other trinkets on the tiny island of Murano, next to Venice, for eight centuries. The sector is now facing a make-or-break moment: finding the means to fund the soaring price of the gas used to keep the furnaces burning at more than 1,000C around the clock.

Running a furnace cost €7,000 a month before Russia’s full-scale invasion of Ukraine this year sparked a surge in gas prices. It now costs up to €110,000 — a situation that is “impossible to manage”, says Andrea Perotta, the co-founder of New Murano Gallery. “Energy is the main thing, but it’s not only energy. Raw materials, packaging, transport. The price of everything has increased.”

“This is definitely the worst crisis our business has faced,” says Francesco Scarpa, his co-founder, who like Perotta is in his sixties.

Harking back to 1966, when the premises of his father — also a glassmaker — were flooded, sending the business into bankruptcy, he says: “Back then we bought new furnaces and we were back in 10 days. Now there is no end in sight.”

One-hundred and eighty silver pipes feed into the guts of Realonda’s factory furnace, pumping in a nonstop supply of natural gas that burns in a 1,200C inferno, its scorching heat turning slices of soft clay into hard-baked ceramic tiles. Keeping the furnace burning is more than enough to make David Fernández-Valladares sweat.

As Realonda’s managing director, he says energy bills are eating up one of every two euros in sales generated by the tile sector in Spain. His company still ekes out a profit, but its margins have collapsed by about three-quarters since last year. “It’s brutal,” he says.

Almost one-tenth of the country’s entire industrial gas supply is consumed by tile makers. Realonda is based in the town of Onda on a road that is home to a large part of the industry, all corrugated iron walls, vapour-breathing chimneys and towering pallets of tiles.

The energy crisis has already forced the permanent closure of some factories in the wider Castellón province, caused hundreds of staff to be made redundant, and put 9,000 of the sector’s 17,000-strong workforce on notice that they may soon be furloughed, although they have not all been sent home yet.

Fernández-Valladares is determined to retain all of his 100 employees. “We’ll have to see how much we suffer along the way. But I have no doubt in my mind that we will get through,” he says.

Henrik Follman is the third generation of his family to run Follman Chemie, an enterprise that epitomises the German Mittelstand.

These small, often family-run, businesses endured decades of turbulence during the postwar period to form the foundation of Europe’s largest economy. Follmann says his father had recently reminded him that the business had survived the energy crisis of the 1970s, which was so severe that the government banned driving on Sundays. “Every generation has its obstacles,” he says. “How we respond defines who we are.”

But Follmann worries about the fate of Germany’s chemical industry, which eats up roughly a third of the gas consumed by the country’s manufacturing base.

The pandemic was hard enough, with “tremendous” price increases in raw materials, which Follmann largely passed on to customers. The question now, he says, is how much customers of the German chemical industry will be willing to shoulder the burden for higher energy costs before they start looking for new suppliers in Asia or North America — both regions not affected by the gas crisis.

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‘We are living day by day’

New Murano Gallery is surviving because of government help — since October, Italy’s businesses have been able to access tax credits for up to 40 per cent of their energy bills. The gallery has also been forced to make drastic decisions about the design of its products.

“If we produce a collection with eight colours, we will have to have eight furnaces on,” says Perotta, explaining that each oven produces glass in one colour. “Rather than stopping production, we decided to reduce the use of the ovens, which means that we are working with one or two colours at the same time.”

It also switched its focus to higher-margin works. “Instead of producing 300 glasses we produced three glass sculptures,” says Scarpa. The price of one glass starts at €50 while the price of a centrepiece sculpture could vary from €700 to €2,000.

The gallery produced a piece for Vera Molnár, a Hungarian artist considered a pioneer of computer art and generative art, which was exhibited at the Biennale art show in Venice. More collaborations with her are planned for shows in Paris and New York. “The crisis has been a great lesson in this respect,” says Perotta, as he explained how events had forced the company to rethink its business model.

Luciano Gambaro, president of the Murano glassmakers’ consortium — an association of about 100 small businesses that sell most of their products outside Italy — also thinks that the crisis has pushed Murano in a more artistic direction. It could, he says, “be a moment for renewed momentum”.

Putting more than half of New Murano Glass’s 11 furnaces out of action has had an impact on its team of master glassmakers, who must work in close and sweltering conditions, a situation which Perotta describes as “challenging”.

However, it viewed that as a better alternative to leaving its highly specialised workers, who practice centuries-old techniques, without employment. “They are like pianists. If they don’t play for months, it will take time for them to get back to it.”

Despite all the cost-saving measures, the business is only “just surviving”, says Perotta. “We are living day by day. We have no certainty.”

Realonda has passed on some of its higher costs to clients. Fernández-Valladares has authorised one set of price increases since Russia’s invasion of Ukraine, on top of two earlier rises that reflected surging gas prices driven by the post-pandemic economic bounceback. In total, his prices are up by an average of 30 per cent since October 2021. A typical porcelain bathroom tile with a matt finish used to cost distributors €8.75 per square metre but is now €12.05.

How do clients react? “There’s always a debate,” says Fernández-Valladares. “Always.”

He has not passed on the full cost to customers, partly because he fears that Realonda could lose them to international rivals in Turkey, Brazil and India, none of which face such grave energy crises. “You shouldn’t be defending your profitability at any given moment,” he says. “You should be defending your global position in the medium term.”

That is “why the decisions are so difficult”.

Despite the huge cost of running the 113-metre-long furnace 24 hours a day, seven days a week, it is hard for him to do anything else. It would take two to three days to turn it off, then another two or three days, and even more gas than usual, to fire it up again.

Before the end of this month Realonda’s boss has to place his biggest bet yet on the gas market. His annual supply contract is expiring and he needs to choose between a new fixed-price deal or one that ties his bills to market moves. “It’s a total bet,” he says. “It gets your pulse racing.”

Either way, he will find a contract that gives him the flexibility to change without punitive fees. Playing the forecasting game is not something he relishes. “My crystal ball is broken,” he says.

Follmann Chemie’s sprawling plant in the town of Minden in North Rhine-Westphalia features reactors that churn chemicals into road markings, adhesive glues or water-resistant resins; state-of-the-art packing terminals where workers blast out the heavy metal of Rammstein; and one brand-new addition: an oil tank.

The tank was bought to prepare for the possibility of gas rationing during the winter. It will, says Follman, “last us two days”. If the company is without gas for longer than that, “then we have much bigger problems”.

The family business has already stopped producing at weekends because of soaring energy prices and, aside from the oil tank, Follmann has recently replaced two gas engines used to cool and heat reactors with ones that can also be run using oil. The new engines cost the company roughly €400,000. Follmann says he continues to pay staff full salaries despite the reduced working hours.

“Energy costs used to be 2 per cent of our turnover — now it is 6 per cent, and I have no idea what it will be next year,” Follmann says, adding that companies are running out of options to hedge costs as energy futures are becoming too expensive.

Follmann, which makes just over €260mn in annual revenue, has spent nearly €10mn more on energy this year compared with before the war in Ukraine.

“If the price of gas will return to 12 to 16 cents per kilowatt hour it will be tough, but we will survive,” he says. If prices were to go back up to 40 or 50 cents — as they were earlier this year — “then no, we won’t survive”.

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‘I feel totally abandoned’

While Perotta insists that the business is “very grateful” for subsidies provided by the Italian government, he thinks more radical solutions are needed for long-term survival. That includes glassmakers weaning themselves off gas.

Referring to the trigger behind the soaring price of the fuel — Russian president Vladimir Putin’s decision to invade Ukraine — Perrotta says: “Our survival can’t be at the mercy of one or two people in the world who in one moment can change our fate.”

“We want renewable energy; we want solar panels; we want to be able to produce with much lower costs,” says Scarpa. Yet panels are banned on the island, under regulation aimed at preserving the historical landscape. “We don’t want this millenarian tradition to die, we hope to give a future to the sector,” says Perotta. “We want to not only keep the existing master glassmakers in work, but train the next generation.”

Fernández-Valladares must be vigilant about his emerging market competitors, but the ones that exercise him most are in another European country: Italy.

It is the one other part of the EU that makes a lot of tiles, and although its companies face the same energy crisis as Realonda, the Italian government has stepped in with far more generous subsidies than Madrid. While Rome now pays up to 40 per cent of Italian companies’ energy bills, the Spanish government in March offered gas-intensive businesses just a single one-off payment equal to €5,000 per worker for up to 80 employees. The lack of support has left him feeling “totally abandoned”.

“You can imagine the discrimination that this creates for us. And this discrimination is happening in Europe,” he says. “So what the hell is our government doing? I’m flat broke.”

The crisis has left Follmann feeling frustrated. “Germany could have managed it much better — we risk losing big parts of our industry,” he says. “And when it’s gone, it’s gone.”

He laments successive governments’ decision to abandon nuclear power when competitors such as France and the UK were building and maintaining reactors. The decision to not bother to build liquid gas terminals until now was “so arrogant”.

It was, he says, an accident waiting to happen. “Sure, the timing is because of the war between Russia and Ukraine but [a gas crisis] was inevitable because of the decisions we as a country have taken in the past five years or so,” he says.

The German government, brandishing its economic firepower, has promised to deploy a €200bn “protective shield” over its citizens and key industries. The most recent proposal included a subsidy of industrial gas prices from early 2023, but details were only announced in mid December.

Follmann, who is active in chemical industry bodies that have been consulted by the government, says he welcomes a subsidy, but argues that it has taken too long for the government to provide certainty. “Customers are asking ‘what will prices be next year?’ and I can’t answer them.”