Every country will wrestle with energy costs particularly for large manufacturing industries. The large manufacturing companies likely grew over the years and one of the factors was relatively low-cost energy prices. However, along the way was productivity improvements, new technologies and the continual update of the processes. All of that takes input from the company and supplier companies and how much does the company do internally and how much can it or does it want to outsource the process? At the present time, there is political pressure to ensure the energy comes from renewables as much as possible, but the reality is oil, gas and coal are still needed. How does a country such as Germany cope?

In an article by Irene Galea of Reuters, major German manufacturers say the country’s high energy prices and lack of reliable energy sources are forcing them to consider restricting domestic production or moving their operations aboard.

For context, before Russia invaded Ukraine, Germany was dependent on relatively inexpensive Russian oil and gas. That came to a stop when the European Community backed Ukraine and the pipeline blew up. Germany had to scramble and build new facilities to allow the oil and gas from Norway and the US and elsewhere to make up the shortfall, however prices rose and fell, but are still twice as expensive as a few years ago.

51% of large companies in Germany with over 500 employees and 45% of firms with high electricity costs are considering relocating facilities and cutting domestic production or already doing so. This is according to the 2024 Energy Transition Barometer survey by the German Chamber of Commerce and Industry. These figures are up 8% and 7% respectively from last year. The chamber’s survey was conducted between June 10 and 30 and included responses from 3,283 companies.

Germany aims to reach net greenhouse neutral by 2045 and legally mandate coal phase out by 2038. The government has committed billions of dollars to the transition including a $6 billion subsidy for companies in energy intensive industries (steel, glass, chemicals and paper production).

Companies such as BASF and Speira GmbH (an aluminum supplier) have cut back production.

In Germany, manufacturing accounts for 20% of the country’s economy as of 2021, according to the German federal statistics office.

Linking to dividend paying stocks, all companies have inputs to production and when gross margins fall because of unexpected increases in basic production, something has to be done to cut costs to ensure margins are met or can be increased in the near future. Companies are started for various reasons, originally, they were on a river or lake because transportation was by water. Then we moved to railroads and finally to highways and airplanes to move goods and services. There are advantages to all of the methods of transportation and ideally business loves a stable pricing system. Productivity improvements including technical improvements can be a great help but still the costs creep into the equation. Companies will move to where they benefit the most or have the greatest options, notwithstanding their connection to the place they started.

There are more questions than answers, till the next time – to raising questions.