Soaring gas prices risk wiping out European factories

Surge in energy costs could make steel too expensive for factories to operate

Swathes of Europe’s industry risks being wiped out by high gas prices if the bloc is forced to wean itself off Russian supplies, energy experts have warned.

The continent’s political leaders have been told they could end up “undermining the entire European industrial model” as they scramble to find alternative energy sources, including more expensive liquefied natural gas (LNG) from elsewhere in the world.

Around 40pc of the EU’s imports of natural gas is bought from Russia but Brussels and the most dependent countries, including Germany, are rapidly drawing up plans to diversify their energy supplies following Vladimir Putin’s invasion of Ukraine.

Europe’s gas prices surged to a fresh record high this week, amid the conflict.

Dr Richard Connolly, a Russian economy expert at the Royal United Services Institute, said that a lot of energy-intensive industry in Europe is “only competitive if it has access to cheap natural gas”.  

Mr Connolly added: “This has the threat of undermining the entire industrial model in the heart of Europe and that’s why they’ve been reluctant to do anything in the past.”

Many manufacturers have been forced to raise prices as their energy costs have soared but they could struggle to stay competitive if they are forced to find more expensive power sources.

David Mirzai, oil and gas analyst at SP Angel, said the switch from Russian gas “in the short to medium term means competing with Asia for LNG cargos, which generally attract a premium to European gas prices”. 

He added: “Depending on how the situation in Ukraine affects 2022 gas supplies from Russia... you would indeed expect to see European manufacturers lose out.”

Mr Mirzai explained that “energy costs make up the largest component of variable cost in industrial activities” as steel prices are pushed higher by the jump in power costs.

Many countries, including Germany and the Netherlands, have become more reliant on energy imports in recent decades, becoming more exposed to the Kremlin by relying on Russian supplies.

The International Energy Agency released a 10-point strategy on Thursday to wean the region off Russian gas in the wake of the Ukrainian invasion. 

It estimates that the EU can cut Russian gas imports by a third within a year by boosting purchases from elsewhere, increasing energy efficiency and accelerating the rollout of renewable energy.

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