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Germany's Natural Gas Crunch Could Cause Supply Chains To Collapse

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Entire supply and production chains could collapse should Russian natural gas supply to Germany fall further, German chemicals giant Covestro said this week in a fresh warning from industry that the severely reduced gas flows via Nord Stream will have a cascade effect on manufacturing activity in Europe's largest economy.

"Due to the close links between the chemical industry and downstream sectors, a further deterioration of the situation is likely to result in the collapse of entire supply and production chains," Covestro said in its second-quarter earnings release on Tuesday, flagging "an increasingly challenging environment."

If gas supply is rationed this year, "this could result in partial load operation or a complete shutdown of individual Covestro production facilities, depending on the level of the cutback," said the chemicals giant, whose German sites account for around a quarter of its production capacity globally.

Like many other major gas consumers in the industry – not only in Germany but also in the rest of Europe – Covestro has launched various measures to cut its gas needs, including by switching to oil-based steam generators. The company said it was also continuously working to improve existing production technologies and roll out new ones to reduce gas and energy consumption further.

In the wake of the Russian invasion of Ukraine, Covestro expects "continued impacts on global supply chains, very high energy price levels, high inflation and weaker growth in the global economy," it said, and revised down its core earnings guidance for 2022.

"In this second half of the year, the macroeconomic risks have once again increased significantly, particularly with regard to the very high energy costs and uncertainties in gas supply at our German sites," CFO Thomas Toepfer said.

The chemicals and other industries in Germany have been forced to reduce or consider reducing production due to very high energy prices and lower gas supplies from Russia. The chemicals industry is the third-largest industrial sector in Germany, after the automotive manufacturing and machinery sectors, and is the single biggest gas consumer in the country, accounting for 15% of total gas consumption.

Related: Shale Giant Chesapeake To Exit Oil As It Focuses On Natural Gas

Germany's chemicals industry has few options left to conserve gas amid uncertainty over Russian supply, with German companies risking shutdowns of production in case the supply situation worsens, Wolfgang Grosse Entrup, CEO at the chemicals association Verband der Chemischen Industrie (VCI), told Reuters in the middle of July.

Since then, Russia has cut gas supply via Nord Stream to just 20% of the pipeline's capacity. The further reduction in deliveries began just days after Gazprom restarted the pipeline at 40% capacity after regular 10-day maintenance.

The situation in Germany's industrial firms has worsened since the middle of June, when Russia first slashed supply via Nord Stream by 60%.

One of every six German industrial companies feels forced to reduce production due to high energy prices, a survey by the Association of German Chambers of Industry and Commerce, DIHK, showed last week. The survey also showed that only half of Germany's industrial companies have covered their annual 2022 gas requirements via contracts. More than a third of industrial firms still have to buy more than 30% of their annual gas needs.

Germany is bracing for a difficult winter for industries and households as Russian gas supply volumes become increasingly difficult to anticipate.

Germany will be among the most exposed EU member states in case Gazprom further limits or cuts off supply to Europe, Wood Mackenzie said after Russia restarted Nord Stream at the end of July after the maintenance.

"One thing is clear – volatility and uncertainty will persist, meaning that demand and solidarity measures across Europe are required now so we can avoid leaving European gas balance to chance," Penny Leake, Research Analyst for Europe Gas and LNG at Wood Mackenzie, said.

By Tsvetana Paraskova for Oilprice.com

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