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

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

European heavy industry has endured a grim few months. Sky high energy prices and fuel shortages sparked by Russia’s invasion of Ukraine have left close to 10 per cent of crude steel production and half of primary aluminium idle. The fertiliser industry has recently clawed its way back to half capacity and groups such as Norway’s Yara are warning that slashed production will lead to food shortages.

The fuel crisis appears to be easing. But the strictures that it caused will hang over European corporate decisions for years. Even as companies invest in green energy and improve energy efficiency, some are also rethinking their geographic footprint.

BASF, the German chemicals maker, said last week that it planned to downsize “permanently” in Europe as it opened a new plant in China. Packaging groups Smurfit Kappa and DS Smith are importing paper from North America.

The US now has a rare opportunity to woo European multinationals at a time when supply chains are already in flux. Pandemic-related shortages combined with efforts to reduce carbon emissions are leading corporate executives to reconsider far-flung suppliers in low-cost jurisdictions. Growing tension between China and the west is also changing the calculus — German direct investment in China tailed off during Covid and has not rebounded.

As companies decide which plants to modernise and when it makes sense to start over somewhere else, energy costs will clearly play a role. And here, the US has a crucial advantage over Europe: natural gas supplies are local, reliable and consistently cheaper, although the price gap has fluctuated wildly.

Consider Shell, which took the decision in 2016 to build a $6bn petrochemical plant near Pittsburgh, Pennsylvania, in part because it was close to sources of natural gas. The UK-headquartered energy group has just completed construction and expects to start making plastics there by the end of the year.

Outgoing chief executive Ben van Beurden described it as part of “a shift to the Americas, which look to be more structurally advantaged certainly now and maybe some years to come”.

Like many other European companies, Shell also chose a plant site that was near potential US customers. But other companies that have invested in local production for Americans have found that the US can be a good base for exports. When Mercedes opened a plant outside Tuscaloosa, Alabama in the 1990s it was looking to tap the US market. Now five times larger, the facility makes all of the German company’s large SUVs, and two-thirds are exported. That early decision to choose Alabama continues to resonate. Mercedes recently opted to make its electric SUVs at the same site, opening a local battery factory to supply them.

It is ironic that energy is now a draw for companies contemplating a US expansion. Back in the 1970s and 1980s, rising energy costs helped drive the decline of American steel production. But the shale revolution changed the dynamics, and Russia’s invasion of Ukraine has provided a wake-up call on reliability of supplies.

“In 20 years, this might all even out,” says Stephen Schork, an energy analyst. “But the known known is that US natural gas is the cheapest in the world and it is going to stay that way for a while.”

As companies cut their carbon footprints, fossil fuel prices should become less important. But the US is seeking to extend its energy advantage with the recently passed Inflation Reduction Act. Enthusiasts believe the US’s wind and solar power as well as green hydrogen, which is generated with renewable energy, are on track to become among the cheapest in the world. “The IRA magnifies the strategic advantages the US already holds . . . and enables the industry to become a dominant energy supplier in the low carbon economy,” write analysts at Credit Suisse.

However important, energy prices are not dispositive in investment decisions. European corporate executives also want stable politics and appropriately skilled labour.

US culture wars over everything from abortion to diverse hiring to vaccines are painful for outsiders to navigate, and the American labour market also remains tight, exacerbated by political gridlock over immigration policy. Some executives also fear growing partisan conflict over environmentally driven investing will cause problems for EU companies that must comply with Brussels-driven climate change mandates.

The Russians have handed the US a chance to win substantial foreign direct investment into its industrial sector — unless politicians blow the opportunity.


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Video: American LNG exports surge with European demand | FT Energy Source

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