Energy crisis: Essity raises prices and may reduce production in Germany

The fear of shortages that led to the boom in toilet paper purchases at the beginning of the pandemic around the world worried consumers again, but this time, for more solid reasons. The high costs of electricity and natural gas, caused by the energy crisis in Europe – mainly in Germany – have raised the prices of cellulose-based products to historic levels.

Faced with this, companies have been looking for alternatives to survive, as they have not been able to pass the costs on to retail – as was the case with Germany’s Hakle, which came to declare itself insolvent.

In the case of Essity, the company chose to raise prices and switch to other fuel sources. At the German plant in Mainz-Kostheim, manufacturing a single two-meter-wide “matrix roll” of toilet paper requires 700 kilowatt-hours of natural gas – enough to heat a home for several weeks during the winter.

For this reason, some tissue manufacturers have already reduced their production and economists fear the impact of this drop on the sector. “From what we’ve heard, this crisis is likely to be more serious for the industrial sector than Covid-19 was,” says Carsten Rolle, director of energy and climate policy at the BDI business association.

According to the German Chamber of Commerce and Industry (DIHK), a survey conducted in July found that 16% of the 3,500 companies consulted are reducing production or halting operations.

Another important factor in this scenario, the war between Ukraine and Russia culminated in the closure of the Nord Stream 1 gas pipeline – one of the main sources of gas in Europe, which runs under the Baltic Sea to the country ruled by Vladimir Putin. Since February, when the Russian invasion began, prices have soared, pushing inflation to a record high in the euro zone. As winter approaches, the fear of rationing increases.

“The lifeline of the industry is energy and if energy costs are not sustainable, companies and people will no longer be able to pay for it. At the current price level, this will mean automatic de-industrialization for Germany”, says the executive president of an industry that supplies the segment. He adds that his company’s main factory is no longer economically viable.

ECONOMIC RECESSION

The current scenario points to a possible recession in Germany. In addition, economists lowered expectations for the economy in Europe, with a forecast of a 3.5% decline next year.

To mitigate the energy crisis, earlier this month, German Prime Minister Olaf Scholz announced a €65 billion aid package, funded by an exceptional tax on electricity producers to help mitigate these effects. The initiative includes one-time payments to help families with their energy bills, as well as an extension of the €5 billion aid package for energy-intensive businesses introduced in July. In August, Scholz also announced a cut in the value-added tax on gas sales from 19% to 7%.

However, prices have risen to the point that Essity believes it has no alternative but to increase the prices of its products, such as Lotus toilet paper, Libero diapers and Bodyform pads, by up to 18%.

Magnus Groth, the company’s CEO, says the company has already secured lower prices for 70% of the natural gas and electricity it consumes. Essity is also rethinking its reliance on natural gas and has already been granted licenses to adapt its factories to alternative energy sources.

At the Mainz-Kostheim plant, pulp is squeezed and rolled before being placed in a Yankee dryer – which consumes natural gas – and then stretched. By early next year, this cylinder will be able to run on liquefied natural gas, which can be imported from the United States and Qatar. The company has also installed a new unloading station and new pipelines to accommodate the LNG, to feed the paper making machines and the mill’s power plant.

Even as the industry shifts to alternative energy sources, fears of rationing could force companies to shut down less essential production lines. “It may not be necessary to produce packaging for chocolate chip cookies, but it is necessary to produce toilet paper,” said Georg Geiger, a spokesman for Die Papierindustrie.