Europe's Industrial Crisis: The Limits of Cheaper Natural Gas

Natural gas prices in Europe have recently fallen to levels not seen since before Russia's invasion of Ukraine, with current benchmark prices around €27 ($30) per megawatt-hour. However, this decline has not alleviated the ongoing industrial crisis across the continent. Many manufacturers, having faced years of elevated energy costs, are now grappling with structural challenges that cheaper energy cannot resolve. Raoul Ruparel, director of the Boston Consulting Group’s Centre for Growth, noted that companies that have relocated production to lower-cost jurisdictions are unlikely to return solely due to short-term price changes.

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The repercussions of high energy prices have been severe, with corporate insolvencies in Western Europe reaching 190,449 last year, the highest in over a decade, according to Creditreform. This trend reflects a broader decline in industrial demand, which remains about 20% lower than pre-war levels. In Germany, chemical plants are operating at only 70% capacity, the lowest in 20 years, as manufacturers continue to face energy costs that are three times higher than those in the United States. The situation is exacerbated by stringent carbon regulations, which further inflate operational costs.

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Major companies like BASF SE and Dow Inc. have begun closing plants in Europe and shifting investments to regions with lower costs, such as China. Thyssenkrupp Electrical Steel GmbH has also announced temporary closures of its plants in Germany and France, citing competition from imports priced below EU production costs.

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Europe's industrial competitiveness has not fully recovered from the energy crisis, lagging behind the US and China. The reliance on liquefied natural gas (LNG) imports has increased, with LNG accounting for 45% of the EU's gas imports at the start of 2025, compared to about 20% before the war. This shift has created a structural disadvantage, as European gas prices must often exceed those in the US to maintain import flows. Markus Beyrer, director general for BusinessEurope, emphasized that the energy price differential remains a critical factor in investment decisions for European companies.

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Despite the challenges, the energy crisis has accelerated the adoption of renewable energy sources. Combined power generation from wind and solar has surpassed natural gas, exceeding it by nearly 50% in 2023. However, the intermittent nature of these energy sources means that Europe will continue to rely on gas imports for stable energy supply. Martijn Rats, Morgan Stanley’s global commodities strategist, acknowledged that while lower gas prices are beneficial, they do not significantly enhance Europe's competitiveness.

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The recent decline in natural gas prices has not resolved the underlying issues facing European industry. Structural challenges, high operational costs, and increased competition from abroad continue to hinder recovery. As companies reassess their production strategies, the future of Europe's industrial landscape remains uncertain, with many businesses opting for stability in lower-cost regions rather than returning to a volatile European market.

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