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BASFs intend to wean itself off cheap Russian gas includes pitfalls

There’s no better spot to experience German efficiency than at Ludwigshafen, a niche site operated by basf, the worlds largest chemicals company, an hours drive south of Frankfurt. Everything is joined together in this city-sized cluster of a large number of plants connected by 2,850km of twisting pipes, from two steam crackers, industrial cathedrals in which a hydrocarbon mixture called naphtha is put into its components, to an immense incineration facility, where residues are placed to rest. Regardless of the vast scale of Ludwigshafen everything is accounted for. Reuse and recycling make sure that barely a molecule is wasted. In accordance with basfs proud tour guide, 94% of the chemicals that enter this technique ensure it is into among the firms 45,000 products.

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Yet basfs success isn’t entirely home-baked. Another essential ingredient is cheap Russian gas, reliably delivered via pipeline. The complex in Ludwigshafen is Germanys biggest industrial consumer of the stuff, piping in about 4% of the countrys total annual gas consumption, enough to heat an incredible number of households through the coldest of winters. basf uses about 50 % to create steam, another half as feedstock. There is absolutely no question that low-priced energy has taken wealth to Germany, says Martin Brudermller, basfs leader. If prices have been higher, maybe elements of our production would already be gone.

Now this energy dividend is defined to be curtailed, even though the war in Ukraine ends soon. For a generation at the very least, Germanys leaders can look to get rid of their countrys reliance on Russian gas and oil. Because of this, Europes largest economy not merely faces a rethink about how exactly much it requires to purchase defence, but an equally difficult economic reckoning. Its industrial titans have began to reconsider their finely tuned business models. basf supplies a revealing research study of the shift.

How severe a blow Germanys economy takes depends on how quickly it could adjust to doing without Russian gas. Several economists led by Rdiger Bachmann of the University of Notre Dame recently estimated that the hit from the sudden halt of Russian energy imports will be substantial but manageable, causing a decline in gdp of between 0.5% and 3%. That’s less severe compared to the damage done by the coronavirus. However in some locales, such as for example Ludwigshafen, the shock of shunning Russian gas could possibly be a lot more dramatic. If pressure in the offing that feeds the giant complex drops below 50% of its normal flow, the complete place will need to turn off. That subsequently may cause chaos further down the chemical-industry supply chain. When Ludwigshafen stops, warns Mr Brudermller, you will see forget about cars, forget about pharmaceuticals no more a great many other things.

basfs boss says he will try to help keep the chemicals flowing by doubling down on the firms existing plans to accomplish away with hydrocarbons, hoping he has time before a European gas embargo takes hold or Russia elects to take off supply. The firm already aims to attain net-zero carbon-dioxide emissions by 2050. Within that process, this past year it bought portion of the worlds biggest offshore wind farm, off the Dutch coast. It plans to obtain stakes in other such projects. That electricity will replace the gas that powers its steam crackers. Green hydrogen and heat pumps will undoubtedly be put into the mix in Ludwigshafen and at five similar sites that basf operates all over the world. Are you aware that gas it requires as a feedstock, much will get to ships as pricey liquefied gas.

The next section of Mr Brudermllers strategy is more surprising. The economic repercussions of the war in Ukraine are pushing his firm eastwards. Higher energy costs and stricter environmental regulations in Europe make China look a lot more attractive, he says. Having lived in Hong Kong for ten years, he’s got long admired what he describes because the countrys pragmatic authorities and dedicated workers. The firms future looks less firmly planted in Ludwigshafen than in Zhanjiang in southern China, where it really is investing $10bn in a state-of-the-art site. The German titan does not have any option to continuing to expand in China if it really wants to remain the worlds biggest chemicals-maker. Greater China already represents about 50 % the planet market for chemicals and can account for over three-quarters of its global growth within the next couple of years, he reckons. Everything we realize about how to create things with less CO2 will undoubtedly be applied there, says Mr Brudermller, adding that the amount of money we shall make in China will undoubtedly be needed to purchase the green transformation in Ludwigshafen.

Chemistry lessons

The risks of this type of strategy are obvious. Although basf has, in Mr Brudermllers words, never seen a theft of technology because it started production in China in the late 1960s, few will be surprised to start to see the firms know-how trickle in to the Chinese chemicals industry. Moreover, the economic decoupling between China and the West may yet exceed some components of high tech, such as for example semiconductors, and reach areas where basf specialises. The chance is that, in attempting to wean itself off one sort of dependencyon Russian energybasf may simply strengthen another. Counting on China may not pose this obvious danger as a Russian finger on a gas pipelines off switch, but banking onto it for a large chunk of profits still leaves the firm vulnerable.

Mr Brudermller appears like probably the most energetic of Germanys big bosses in his drive towards China. But numerous others are reported to be tempted to show more decisively towards the east. They ought to think before embracing a larger reliance on China and instead make an effort to rekindle the spirit of Teutonic thrift and inventiveness that permitted the industrial wonder that’s Ludwigshafen. basf did it before, albeit for a far more dubious purpose. Once the British navy blockaded Germany through the first world war, the firm built a fresh plant to create nitric acid without imported ammonia, thus ensuring the resupply of explosives. Necessity, in the end, may be the mother of invention.

Read more from Schumpeter, our columnist on global business:

Why Americas clean-energy industry is stuck (May 21st)

Activist investors have become tamer (May 14th)

Facebooks retirement plan (May 7th)

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This short article appeared available portion of the print edition beneath the headline “Chemical hazard warning”

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From the May 28th 2022 edition

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