Who’s already shut down factories, who’s letting workers go, and what are the worst-case scenarios? From Dennik E.
Since last fall, Slovak companies have been issuing warnings that high energy costs will not just shrink their profits, but could even shut them down completely. If they are to survive, they say, the government needs to help them with special subsidies. Unlike many other countries, Slovakia doesn’t have any new government support schemes yet and is only now starting to discuss the idea. In the meantime, companies have moved from pleas and threats towards radical production cuts.
The ferroalloy manufacturer OFZ shut down all its furnaces back in July; aluminum producer Slovalco will do so by the end of September. According to Slovak business leaders, these are the first symptoms of much larger problems that could be coming. They are warning that the longer it takes the government to approve support for companies, the worse the consequences of the energy crisis will be. Especially because their competitors from other EU countries already have access to support schemes from their governments.
It is not just large, energy-intensive factories that are facing production shutdowns and employee layoffs. Many of their suppliers of transport and maintenance services are also in jeopardy. Trade unions estimate that expensive energy could result in up to 10,000 workers being laid off very soon.
Dennik E learned that energy is already a constraint for a number of large, energy-intensive factories, and asked what consequences they foresee in the coming months.
No Plans for September
Nexis Fibers, manufacturer of industrial fibers for car airbags and other products, employs 420 workers in Humenne. At the moment, the company is not reducing production or laying off workers, but according to CEO Jan Kuceravy, interviewed in late August, the company did not know how much it would produce – and what its costs would be – in September.
“Energy costs are really hurting us right now. We won’t know whether we can purchase electricity for September at prices that will make our fibers attractive in the market until the very end of August. Even worse, our clients are at this very moment losing patience with the never-ending price hikes. They are looking at manufacturers from other territories,” he said. Cheaper fibers are coming into Europe from China and even Russia. They are less expensive mainly because their energy costs are much lower.
Soon, Nexis may not have anyone to produce for, as its more expensive fibers will no longer be of interest to potential buyers.
“When this happens, and it could happen as early as September, we will have to shut down our production lines and send our workers home, paying them 60 percent of their wages. Even this, however, can only last so long. Eventually, we, too, will have to start laying people off,” Kuceravy said. If the company is to survive, he said it not only needs the government to compensate it for the high energy costs, but the EU would also have to impose stricter trade barriers against fiber imports from Russia and Asia.
Chemosvit produces food packaging films and textile fibers, employing almost 2,000 workers in Svit. The company has already pre-purchased cheaper energy until the end of this year. When it comes to 2023, however, the outlook is bleaker.
“We are not cutting back on anything for the time being. But we are already worried about what’s coming our way in January, because energy costs cannot keep increasing forever. Our customers are already refusing to accept further price hikes. Expensive energy doesn’t damage just the energy-intensive companies; entire supply chains can grind to a halt, and that’s a real risk,” said Jaroslav Mervart, Chemosvit CEO and board chairman.
More Layoffs at OFZ?
OFZ was the first company to switch off its entire production line, back in July, also announcing it would lay off 150 out of a total of 350 employees. CEO Branislav Klocok now says they will have to let go even more employees, keeping fewer than a hundred.
“We do not foresee electricity prices coming down in the coming months, nor any government effort to help us. We will only keep the bare minimum of employees required for a possible restart of production, in case the situation improves by any chance,” Klocok said.
But if the factory produces nothing, it can survive only until the end of the year at most, the CEO says. Until then, it can use financial reserves from last year, which was unusually profitable, with the company making a profit of 15 million euros. This was possible thanks to a significant increase in ferroalloy prices. Unlike energy costs, however, those prices are already going down, meaning OFZ is facing a double whammy of more expensive inputs and lower income.
“We would love to restart production, but we cannot keep on trusting our government to support us one day. A final decision has to be made at some point, and in our case this will be at the end of the year at the latest,” Klocok said.
Duslo Sala, Slovakia’s largest consumer of natural gas, stopped producing fertilizers in mid-August in order to carry out pre-planned maintenance and revision work for six weeks. The break, however, may end up lasting much longer.
“We’ll see what happens. If gas prices are out of control, we cannot be expected to come back on. We are not purchasing any electricity or gas at the moment. We will only consider restarting production once the prices of these commodities have climbed down,” Duslo CEO Petr Blaha told Hospodarske noviny.
Duslo accounts for 10 percent of Slovakia’s natural gas consumption, its fertilizers playing an important role for farmers not just in Slovakia but also in a number of neighboring countries. It also manufactures additives to reduce emissions from diesel cars and trucks and is one of the largest European companies in this market.
The company had been earning profits especially off the significant increase in fertilizer prices, but these have now become so expensive that farmers are starting to reduce their purchases. This means Duslo now also needs support from the government. By warning that its maintenance break might turn into a longer-term pause, the company, which employs some 2,000 workers, is upping the pressure on the government.
Aluminum in Big Trouble, Steel Scraping By
The only aluminum producer in Slovakia, Slovalco, will pause its primary activity of making aluminum starting this month, until at least 2024. The company blames lack of government support for its inability to purchase electricity for all of 2023. Its only continuing activity will be the smaller business of recycling aluminum waste. Out of a total workforce of 430 employees, they will only keep a little over a hundred.
All of this despite that aluminum, a lighter metal, is one of the key drivers of greener car manufacturing, and that Slovakia has the highest level of concentration of car manufacturers in the world. The coronavirus pandemic has clearly shown that Europe cannot solely rely on Asia when it comes to raw materials – it needs to have its own capacities, too.
The American-owned steelworks U. S. Steel and the Slovnaft oil refinery are two of the country’s largest energy users. For now, neither company is reporting any upcoming energy-related cuts. Of course, high energy costs are also a problem for them, cutting down their profits, but for now, both companies are enjoying the current high prices of their final products.
Last year, U. S. Steel used high steel prices to make a record-breaking profit of 650 million euros, with numbers for the first half of 2022 even better.
Slovnaft also made a lot more money than usual last year. Profit was more than 250 million euros, and that was before this year’s increase in fuel prices.
In both cases, however, it is also true that the market for their products is highly mutable, meaning they, too, might yet feel the impact of high energy costs. At least in the case of steel, this is already starting to be the case. In the second half of 2022, prices and demand are already going down, as steel is becoming too expensive for buyers, who are cutting down on their purchases.
Energy prices, on the other hand, keep going up. Sources at U. S. Steel told Dennik E that if energy prices keep rising while steel prices keep shrinking, they, too, will have to start considering cuts.
In the case of Slovnaft, there is one more issue alongside the high price of energy. Sanctions on Russia set to kick in next year will prohibit the company from exporting products made with Russian oil to any country except the Czech Republic, and in 2024, this final option will also end, although exports of products made from non-Russian oil will not be restricted.
Chemical maker Fortischem is also feeling the pinch. Similar to Slovalco, it too relies heavily on production by the highly energy-intensive process of electrolysis. The company cut its production by two-thirds last spring, citing the combined blows of high energy prices and a lack of raw materials from Russia and Ukraine. Only extraordinary financial support from its owner, the Czech industrial group Kaprain, has made it possible for the factory to keep its 800 employees on the payroll.
Paper mills and rubber manufacturers also consume a lot of energy. Dennik E has approached the German-owned Continental rubber factory, as well as the country’s two largest paper mills, Mondi SCP and Bukoza, but they have not responded so far.
Rising energy costs, however, are also taking their toll on smaller companies. A number of smaller regional bakeries, for example, have already announced they are shutting down production. They do not have the large financial reserves typically enjoyed by bigger companies, and so they are unable to cope with the current energy costs.
Why Companies Are Demanding Government Support
- No significant reduction in energy prices is expected anytime soon. Russia’s war on Ukraine – the main driver of higher gas and electricity prices – continues with no end in sight. Where a year ago, electricity was selling at 60 or 70 euros per megawatt hour, the current figure is more than 500 euros. In the same time period the price of natural gas in Europe rose from 30 euros to over 200 euros per megawatt hour.
- OFZ’s Klocok warns that unlike Slovakia, many EU countries have already introduced compensation schemes to help industries manage high energy costs. Finland, with a population size similar to that of Slovakia, has made 800 million euros available for its energy-intensive industry, he says.
- In a difficult market, it will be exactly this type of compensation that decides the winners and the losers. Companies receiving compensation will have a significant advantage. Germany, for example, will repay companies up to 50 percent of losses caused by the high year-on-year price growth, with the figure reaching as much as 70 percent in the case of energy-intensive industry.
- In some EU countries, price caps have also been introduced. In early August, Klocok told Hospodarske noviny that Spain had capped electricity prices at 150 euros per megawatt hour for the country’s energy-intensive producers. This is around a third or a quarter of the market price, which is oscillating dramatically. In France, he says, one third of energy is sold at cost.
Employer associations have already submitted overviews of government support schemes in other EU countries to the Slovak government. The cabinet is yet to take up the issue. Compared to other EU countries, the government is springing into action far too late. Moreover, it has not yet promised the companies anything specific.
[Former] Economy Minister Richard Sulik talked about compensating industry for high energy prices for some time, but his proposals were never accepted by Finance Minister Igor Matovic, as the two had been involved in an intense personal conflict, leading to Sulik’s right-liberal SaS party [leaving the governing coalition].
Money for compensation should be available, among other sources, from the state Environment Fund, where Slovak companies deposit fees for emission allowances to the tune of some 500 million euros a year. Until now, Slovakia has used the fund only to rebate energy-intensive companies a couple of percentage points of what they paid in as a way of compensating them for rising energy prices. Other EU countries are paying them back as much as a fifth of their contribution.
Another source could be payback from corporate taxes paid through the government’s “kurzarbeit” [short-time work] system, introduced so that companies can keep their employees even when their production is down. Currently, companies are asking the government to ease the rule that this support scheme can be used only for six months in a two-year period. High energy prices can threaten businesses for much longer than that.
Ivan Haluza is a business journalist in Slovakia. He contributed this article to the economics news site Dennik E, published by Dennik N. Republished with permission.
Translated by Matus Nemeth.