Whether Russia turns the taps on the Nord Stream 1 natural gas pipeline back on when its scheduled 10-day maintenance is concluded next week is the subject of much discussion in European circles, along with the potential impact on the supply chain.
The pipeline, which stretches for 760 miles under the Baltic Sea from northwest Russia to northeast Germany, accounted for around one-third of Europe’s 155 billion cubic meters of imported Russian natural gas in 2021.
Natural gas has become a foreign policy weapon, as Russia retaliates against the West’s imposition of far-reaching economic sanctions in response to its war against Ukraine.
Regardless of Moscow’s short-term actions, Europe’s nations are preparing for a “nightmare scenario” in which Russian gas supplies — representing some 40% of the continent’s annual consumption — are switched off permanently.
While much of the public debate revolves around whether European citizens will be able to heat their homes this winter, the impact on the manufacturing industry would also potentially be significant if Russia were to cut off its gas supply.
Russian gas, Germany, and the EU: Chemicals and metals sectors among major gas users
Energy-intensive products such as chemicals, plastics, rubber, metals, and glass rely heavily on natural gas. Germany, which along with Turkey, Italy, and France is most dependent on Russian gas supplies, is a major European manufacturer of these products.
Germany’s chemicals industry, led by companies such as BASF and Bayer, is the largest in Europe and accounted for 10% of German exports worth €137 billion last year.
The sector is the country’s biggest industrial user of natural gas, consuming around 30% of the total, and its business model has been built on the back of cheap Russian supplies.
Chemical firms are also an important supplier of raw materials and parts to German automotive and industrial equipment makers — the manufacturing backbone of the country’s economy — so disruption would cause substantial supply chain challenges.
Interos Data Insights
An analysis of Interos’ global relationship platform data shows that:
- 19% of chemical entities in Western Europe are based in Germany.
- Over 6,400 U.S., European, and Japanese firms are direct buyers of products from German chemical suppliers.
- More than 151,000 U.S., European, and Japanese firms indirectly buy chemical products from German suppliers at Tier 2.
- Aside from other chemical companies and distributors, the key industries buying these products include machinery, automotive components, electronic equipment, and construction and engineering.
In the case of metal production, including steel and copper – industries which collectively are Germany’s second biggest industrial consumer of natural gas — our data analysis reveals that:
- Germany accounts for 10% of Western European metals industry entities.
- Over 4,500 U.S., European, and Japanese companies have tier-1 German metals suppliers.
- More than 116,000 U.S., European, and Japanese firms have German metals producers in their supply chains at Tier 2.
- Major buyers include companies in the machinery, automotive components, electrical equipment, and aerospace & defense sectors.
Interos also identified 104,000+ U.S., European and Japanese firms that have both German chemical and German metal suppliers in their supply chain. These shared relationships indicate that European, Japanese, and German metals & chemicals producers have many supplier relationships amongst each other — compounding the effect of any supply chain disruption.
EU strategies to manage a Russian gas shutdown
In an effort to head off potential gas shortages in Germany and other member states, the European Commission (EC) has been working on a plan based around four main strategies: storage, diversification, demand reduction, and rationing.
In June, the European Union (EU) passed a policy stipulating that natural gas storage facilities should be at least 80% full by November 1st.
As reported by The Economist, some analysts believe Germany is making good progress towards this target and may be able to survive the winter even if Russia cut off its gas supplies from this month onward.
Germany is less well positioned on alternative energy sources in the form of liquefied natural gas (LNG), it notes, because the country lacks its own processing facilities.
Europe has snapped up 30% of the global LNG market in 2022 so far, increasing supplies from countries such as the U.S. and Qatar.
But LNG, along with gas supplies from Norway, Azerbaijan, and other nations, won’t be enough to make up the shortfall in the near term if Russia turns off the taps.
That raises the prospect of demand reduction and rationing. The EC is expected to give more details of its plans for this by July 20th, but measures are likely to include incentives for companies to reduce their gas consumption during the next few months.
Getting a Europe-wide agreement on gas rationing looks far from easy, but manufacturing companies in Germany and elsewhere are already preparing for this scenario — including the option of using coal to power their furnaces.
European energy firms are also under pressure. Last week, Uniper, Germany’s biggest gas importer and storage company, was forced to request a government bailout, warning that its losses for the year could hit €10 billion.
Price increases a risk for manufacturers and the global supply chain
If European manufacturers are forced to shut down chemicals, metals, and other production lines for any length of time because of a shortage of gas, this would have serious supply availability implications for global supply chains. The circumstances would also require that companies have up-to-date insight into disruptions in order to adapt.
Even if this fear proves to be unfounded, the prospect of further price rises for energy and, in turn, manufactured products remains a real risk.
In recent weeks, the cost of oil and key commodities has fallen from the peaks seen following Russia’s invasion of Ukraine in late February, as demand and economic sentiment have declined.
The latest S&P Global/BME Germany Manufacturing Purchasing Managers’ Index (PMI), for example, shows that the rate of increase in both input costs and factory prices slowed for the second month in a row.
But that trend could quickly be reversed if Russian natural gas is permanently switched off.
European spot-market prices for gas have been rising since early June. And U.S. natural gas futures prices have been climbing again in July after falling sharply in June from a high of $9.30 per one million British thermal units (MMBtu) to $5.35/MMBtu.
To learn more about how the Interos platform can help your firm handle the supply chain fallout of a Russian gas shutoff, visit interos.ai.
