The energy crisis gives the US a chance to woo big European companies

Europe’s heavy industry has had a gloomy few months. Skyrocketing energy prices and fuel shortages triggered by the Russian invasion of Ukraine have left almost 10 percent of crude steel production and half of primary aluminum unused. The fertilizer industry has recently struggled back to half its capacity, and groups like Norway’s Yara are warning that reduced production will lead to food shortages.

The fuel crisis appears to be easing. But the restrictions it caused will continue to influence European business decisions for years to come. Even as companies invest in green energy and improve energy efficiency, some are also reconsidering their geographic footprint.

BASF, the German chemicals maker, said last week that it plans to downsize “permanently” in Europe as it opens a new plant in China. The packaging groups Smurfit Kappa and DS Smith import paper from North America.

The US now has a rare opportunity to court European multinationals at a time when supply chains are already in flux. Pandemic-related shortages coupled with efforts to reduce carbon emissions are prompting business leaders to reconsider far-flung suppliers in low-wage areas. The growing tensions between China and the West are also changing the calculus – German direct investments in China fell during the Corona crisis and have not recovered.

Energy costs will clearly play a role when companies decide which plants to modernize and when it makes sense to start over elsewhere. And this is where the USA has a decisive advantage over Europe: the natural gas supply is local, reliable and consistently cheaper, although the price differential fluctuates greatly.

Line chart of wholesale natural gas prices ($ per million BTU) showing that energy costs are skyrocketing, making European manufacturing less attractive

Consider Shell, which made the decision in 2016 to build a $6 billion petrochemical facility near Pittsburgh, Pennsylvania, in part because it was near natural gas wells. The UK-headquartered energy giant has just completed construction and expects to start manufacturing plastics there by the end of the year.

Outgoing CEO Ben van Beurden described this as part of “a shift to America that certainly appears structurally more advantageous now and perhaps in a few years’ time”.

Like many other European companies, Shell has opted for a factory location close to potential US customers. But other companies that have invested in local manufacturing for Americans have found that the US can be a good base for export. When Mercedes opened a plant outside of Tuscaloosa, Alabama, in the 1990s, it wanted to hit the US market. The plant, which is now five times larger, produces all of the German company’s large SUVs, two-thirds of which are exported. That early decision to choose Alabama continues to resonate. Mercedes recently opted to manufacture its electric SUVs at the same location and open a local battery factory to supply them.

It’s ironic that energy is now a magnet for companies considering US expansion. In the 1970s and 1980s, rising energy costs contributed to the decline in American steel production. But the shale revolution has changed the dynamic, and Russia’s invasion of Ukraine has prompted a security-of-supply wake-up call.

“In 20 years, it could all even out,” says Stephen Schork, an energy analyst. “But as you know, US natural gas is the cheapest in the world and it will remain so for a while.”

As companies reduce their carbon footprint, fossil fuel prices should become less important. But the US is trying to expand its energy advantage with the recently passed Inflation Reduction Act. Enthusiasts believe US wind and solar power, as well as green hydrogen produced by renewable energy, are on track to be among the cheapest in the world. “The IRA amplifies the strategic advantages that the US already possesses. . . and enables the industry to become a dominant energy supplier in the low-carbon economy,” write Credit Suisse analysts.

Important as it is, energy prices are not a determining factor in investment decisions. European corporate leaders also want stable politics and a suitably qualified workforce.

U.S. culture wars over everything from abortion to attitudes to vaccines are painful for outsiders, and the American job market also remains tight, exacerbated by the political deadlock over immigration policy. Some executives also fear that growing factional tensions over green investments will cause problems for EU companies, which must meet climate change mandates set by Brussels.

The Russians have given the US a chance to attract sizeable foreign direct investment into its industrial sector – unless politicians squander the opportunity.

brooke.masters@ft.com

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Video: American LNG Exports Rise With European Demand | FT power source

https://www.ft.com/content/0a78d7e8-c148-41a2-ba9e-6fedd89d2e04 The energy crisis gives the US a chance to woo big European companies

Adam Bradshaw

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