Europe's industry tries to adapt to high energy costs
STAMFORD (Reuters) - Thirty meters from the kiln the heat is palpable. It is converting crushed stone to 'clinker' for cement at temperatures of 1,500 degrees Celsius.
It was designed to burn pulverized coal.
But rising coal prices have prompted Castle Cement, a unit of Germany's Heidelberg Cement HBCB.DH, to replace over half the coal with alternatives -- tires, bone meal, paper.
Across Europe, companies are suffering under high energy costs. Oil hit a record high above $140 per barrel on June 26.
"We've had to increase our use of secondary fuels such as whole tires, meat and bone meal, paper and plastics and recycled solvents," said Gareth Price, General Manager of the Ketton works.
"This keeps our costs down and also reduces the amount of waste going to landfill."
Beyond the 68 meter-long steel tube of the furnace, an enormous cylindrical mill grinds 130 tonnes of clinker an hour to a fine powder with a deafening rumble.
It runs on electricity, which cannot be replaced with other fuels, and power prices have more than doubled in the past year.
With a collapse in British house building following the credit crunch, the company's ability to pass costs onto customers is limited, putting pressure on the bottom line.
Castle Cement is not alone in feeling the pressure.
Shares in the world's top paper and packaging firms Stora Enso Oyj (STERV.HE), UPM-Kymmene (UPM1V.HE), and Huhtamaki (HUH1V.HE), fell sharply earlier this month when the Finnish firms were forced to issue profit warnings on the back of higher energy costs.
Companies in all sectors, from food makers such as Cadbury CBRY.L in the UK to Austria's RHI (RHIV.VI), the world's largest fire proof material maker, have warned that higher oil, gas, coal and power prices are pushing up the costs of manufacturing products and moving them to customers.
FEELING THE PAIN
Industry says the situation has reached a tipping point and urgent action is needed from the European Union and governments to avoid business closures and job losses.
"The real pain is kicking in," David Gilett, director of IFIEC Europe, a lobby group for energy intensive industries across Europe, said.
"If the forward prices for winter power and gas apply when it comes around to actually buying the power and gas, then there will be real difficulties."
Crude, coal and gas prices have risen globally in recent years but businesses in Europe feel they have suffered more than other regions.
Gilett noted that many countries subsidize energy prices, especially in Asia and the Middle East.
In the United States, power and gas prices are often lower than those in liberalized western European markets.
In the past nine months benchmark UK gas prices have been 20-30 percent above U.S. Henry Hub prices, according to data from oil giant BP Plc.
Current baseload UK electricity prices of around 90 pounds per megawatt hour are also much higher than levels recorded at U.S. power hubs in recent weeks.
European businesses blame a failure to implement proper competition in continental power and gas markets.
They are now pressing the EU to push ahead with more vigour in implementing a planned directive that aims to foster competition by separating ownership of power and gas production activities from transportation infrastructure.
"Europe needs to make sure its energy position is competitive with America and elsewhere," said Chris Tane, Chief Executive of Ineos ChlorVinyls, whose Runcorn plant for making chlorine uses as much electricity as nearby Liverpool, England's sixth-largest city.
Industry says Europe's Emissions Trading Scheme is also boosting power prices and the impact on industry is likely to worsen if the EU presses ahead with its plans to make more sectors subject to CO2 emissions caps.
Big energy users would also like to see changes in the tax system to ease their burden, such as cuts in taxes on fuel and power, accelerated depreciation for equipment and a variable corporate tax rate that fall when energy costs rise, Gilett said.
GOVERNMENTS NOT LISTENING
Loathe to give up tax revenues and more concerned with alleviating the impact of high fuel prices on the old and unemployed, governments have not taken heed of industry's case, Gilett said.
"There seems to be no recognition at all of the pressures this is placing on the industrial core," Gilett said.
With a weak economic climate often making it hard to pass higher energy costs on to customers, businesses are forced to make ever-greater efforts to use energy more efficiently.
Castle Cement now mills as much cement as it can at night and the weekends, when electricity prices are lower. In future, it will try to schedule big maintenance projects that require plant shutdowns for the winter, when power prices are higher. Old machines have been replaced with more efficient versions.
High energy costs require Price to run a tighter ship than in the past as operations must run smoothly and reliably to optimize energy use.
Breakdowns caused by poor maintenance of machinery can shift activity to times when power costs are higher and lead to idling equipment elsewhere in the production chain.
"Energy management is now a topic of everyday conversation. We are completely changing the way we work," he said.
(Additional reporting by Niklas Pollard in Stockholm and Christian Gutlederer in Vienna)
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