Germany: Medium-Term Energy Challenges of the Manufacturing SectorSovereigns
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The recent energy crisis has changed the medium-term outlook for the German manufacturing sector. Although gas and electricity prices have receded from their August 2022 record highs over the past months, they seem unlikely to return to their pre-crisis levels over the next few years. This commentary highlights some of the main factors that are likely to keep German electricity prices elevated over the next years and assesses the vulnerability of different manufacturing industries to high-for-longer energy prices. The commentary lays out that an energy price shock would impact the German manufacturing sector in a very asymmetric way. Potential scarring effects are likely to be concentrated in certain manufacturing industries, notably the chemical industry, as industrial energy consumption is heavily skewed towards selected industries. Furthermore, these energy-intensive manufacturing industries are exposed to various degrees of global competition which, in turn, impacts their ability to pass on higher energy input costs to their customers.
• Gas-related energy costs are unlikely to revert to pre-crisis levels due to higher reliance on more expensive LNG.
• Future price trajectory of electricity is uncertain and depends crucially on capacity additions to renewable energy.
• Energy consumption within manufacturing is heavily skewed towards certain industries.
• Potential scarring effects are likely to be clustered in energy-intensive industries which face strong global competitive pressures, such as chemicals.
“High-for-longer energy prices are likely to impact certain energy-intensive industries markedly,” said Yesenn El-Radhi, Vice President of the Sovereign Group at DBRS Morningstar. “Efforts by the government to minimize the overall scale of potential scarring effects should focus on expanding renewable energy production capacities strongly over the next years.“