German industry warns could lose edge through high energy costs

Thu Nov 8, 2012 8:53am EST

* U.S. companies benefit from cheap shale gas - BDI

* German energy policy could cost $446.42 bln by 2030

* Asian industrials also worried by their high gas costs

By Henning Gloystein

LONDON, Nov 8 (Reuters) - German industrials are concerned they will lose a competitive edge against U.S. rivals where a boom in unconventional shale gas production has led to a sharp drop in industrial energy costs, the country's industry lobby group BDI said on Thursday.

German energy costs, by contrast, are rising as its government has decided to exit nuclear power generation, invest billions of euros into expanding the renewable generation sector while largely relying on imports to meet its natural gas demand.

"The strong expansion of shale gas since the start of the century has brought in a period of lower gas prices in the United States and more stable power prices so that industry is now profiting from historically low gas prices and, in international comparison, low electricity prices," the BDI said in a report published on Thursday.

Germany's economy, Europe's biggest, relies heavily on energy intensive industries such as chemical production from industry leaders such as BASF or Bayer or the automobile sector.

Quoting industry experts, the BDI said the U.S. shale gas boom could lead to a re-industrialisation of the United States and warned that this effect will not be replicated to the same extent in Europe.

"Therefore European industrial companies will in all probability have significantly higher electricity and gas prices for the foreseeable future than U.S. companies," the BDI said.

U.S. wholesale natural gas prices currently cost around $3.5 per million British thermal units (mmBtu), compared with $9 per mmBtu in Europe.

The lobby group said that Germany's energy policy of exiting nuclear power generation and investing heavily into renewables, which require government subsidies to operate profitably, would cost Germany 150 to 350 billion euros ($446.42 billion) by 2030.

"The economic viability of the energy switch is in acute danger. Politicians must urgently take care of the overall economic efficiency of its planned measures," the BDI's head Hans-Peter Keitel said.

The European Commission (EC) is also worried about high energy costs, and hopes the creation of a pan-European energy market will help bring prices down.

"We believe a functioning internal market will keep costs down," Commission spokeswoman Marlene Holzner said.

The EC's deadline for a single energy market is 2014, although it has said it is not expected to meet that.

"We have seen that the transition is very, very slow. That's something that will be tackled," Holzner said.

ASIAN INDUSTRIALS ALSO WORRIED

Similar concerns are also being raised in Asia, where industry makes up a high share of economic output in leading economies such as Japan and South Korea, who are the world's biggest importers of liquefied natural gas (LNG).

At $13.50 per mmBtu, Asian spot prices for LNG are even higher than in Europe.

"Japanese policy-makers are increasingly worried about the falling competitiveness of local industry due to an over reliance on Asian LNG supplies with non-flexible, higher pricing slopes," Jason Gammel, analyst at Australian bank Macquarie said in a report.

Rising dependence on natural gas imports risks driving key Asian economies such as Japan down in the global ranking of industrial economies.

In the first half of 2012, Japan bought 18.6 percent more LNG versus the prior year but the cost of these purchases rose 49.2 percent which was enough to drive Japan's first trade deficit in 31 years.

The crisis at Japan's Fukushima nuclear power plant in March last year and resulting idling of the country's nuclear power plant fleet spurred soaring imports of substitute fuels like LNG, causing a record 2.5 trillion yen ($31.30 billion) trade deficit in the first half of 2012.

One hope for European and Asian industrials is that U.S. gas prices may not stay low forever.

Deutsche Bank estimated U.S. LNG exports would cost $9 to $10 per mmBtu between 2016 and 2018, similar to its estimates for British NBP hub spot gas prices, Europe's benchmark gas trading hub.

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.