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The dramatic rise in electricity and gas prices is hitting the energy-intensive sectors of German industry particularly hard and is exacerbating the structural change already underway at the expense of these sectors. German companies already had to cope with above-average electricity prices before the outbreak of the Ukraine war. The further increase in energy costs is exacerbating the competitive situation and could dramatically accelerate the relocation of production capacities to other locations. This becomes clear when looking at the development of producer prices: Since the beginning of 2021, these have risen by 22 per cent in the industry as a whole. In steel production the increase is 75 percent, in basic chemicals more than 50 percent and in paper production more than 40 percent.
Passing on higher costs to customers is more difficult in an economy dominated by medium-sized companies, which is typical of Germany - large companies with considerable market power have advantages in this respect. Where the potential for productivity increases and innovations in industrial intermediate products is limited, there is a gradual shift of production to lower-cost locations outside Germany. This creeping structural change at the expense of energy-intensive sectors has already been underway for many years. While industrial production increased by 1.2 per cent per year during the past upswing (from 2012 to 2018), glass and building materials production recorded only marginal growth of 0.4 per cent per year. For non-ferrous metals and foundries it was 0.6 per cent. The paper industry, steel production and basic chemicals even shrank, the latter by 1.4 percent per year. Speciality chemicals, on the other hand, recorded above-average growth of 2.4 percent per year.
Abruptly rising energy costs as well as the sudden gas shortage, which could lead to production shutdowns in important sectors such as the chemical industry, thus not only have immediate economic consequences, but also accelerate the structural change already underway. There is a real danger that the affected production capacities will be lost forever once the buyers have (forcibly) switched to other suppliers and these have a potentially higher price competitiveness.
Economic policy must therefore weigh things up: On the one hand, it is not its task to stop structural change by putting certain sectors of the German economy under species protection. However, in view of the more than 700,000 people employed in the six most energy-intensive sectors, accelerated job losses in these industries would have massive macroeconomic and social consequences. Moreover, nothing would be gained for climate protection either: Although the migration of energy-intensive production would improve Germany's CO2 balance, it would have a negative impact on the global climate - which is what ultimately matters.
The migration of energy-intensive production would improve Germany's carbon footprint, but it would tend to worsen the global climate - which is ultimately what matters - because production would take place elsewhere, where it would be associated with higher CO2 emissions than before in Germany. There are therefore some good reasons to take the competitiveness of German companies into account in energy policy and to prevent an excessive increase in energy prices for companies in Germany.
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