How much of your sales go to Europe?

Sep 12, 2022 Dieter Adam

“Germany faces a looming threat of deindustrialisation” Headline in The Economist, Sept. 11, 2022

They’re still making steel at ArcelorMittal in Bremen in northern Germany – but by the end of September one of the two production lines here will be shut down “until further notice”.

And they are not the only ones. HAKLE, in business for over 100 years and one of Germany’s iconic brands of toilet paper has gone in a Chapter-11-type insolvency, and an ammonium plant in East Germany has cut back production, meaning, among other things, that Germany’s supply of Adblue is threatened. Altogether, 1 in 10 medium-sized manufacturers in Germany have cut down or shut down production, and in a recent survey over 90% of the 600 companies included told the Federa­tion of German Industries (BDI) that the high energy and raw material costs present a serious (58%) or existential (34%) threat.

When we look at electricity and gas prices below, the reasons become clear quite quickly. As one can expect, there is an awful lot of hand-wringing, finger-pointing and politicking happening around this in Germany and other EU countries. Leaving that aside, and focusing on the implications for New Zealand, what does it mean? There’s one other statistic to be considered here – the contribution of industry to total value creation (GDP), which is almost double in Germany of what it is in the USA, and high throughout Europe.

There is a lot of uncertainty around how this will play out in the long term. In the short term, govern­ments may be willing to go even further into debt to support their industries. But there is no expect­ation that energy costs in particular will be normalized any time soon. That will leave those who can to move even more production to places where conditions are more favourable – the US, for example.

A snapshot of electricity costs in selected countries (€ / MWh):

And gas prices paint the same picture (€ / MWh):

Contribution to GDP from Industry (excluding construction; 2020 data)

Many of the big German and other European manufacturers have a global presence already, some­times leaving no more than a symbolic manufacturing presence where they are headquartered. That comes with its own risks, however, at a time when global trade relations are looking increasing fragile and at risk of falling victim to restrictive measures taken as the struggle for economic and political influence increases in a world that appears to be moving away from American unipolarity. And moving production elsewhere, especially outside of Europe, will not be a realistic option for the myriad of European manufacturers at the small end of the SME spectrum, comparable in size to our manufacturing sector here.

There is another side to this, too. With the USA likely to go into recession and China with its own (sizeable) problems, a serious economic downturn in the region still accounting for 15% of global GDP – the EU – can’t be good for anyone, including for manufacturers in New Zealand who often have a high share of their exports going to the US, and/or Europe.