Surviving winter: how three factories battled through Europe’s energy crisis

Back in November David Fernández-Valladares, managing director of Spanish tile maker Realonda, faced a choice between locking in gas prices with a new contract or putting his faith in the whim of energy markets.

He chose the latter and is counting his blessings after plunging market rates helped lower the energy bill it pays to heat its kiln by hundreds of thousands of euros a month. “Thank goodness I didn’t agree to a fixed price,” he said.

The tile maker was one of three energy-intensive businesses that the Financial Times has followed through the European winter to see how they coped with the energy crisis triggered by Russia’s full-scale invasion of Ukraine.

After wholesale costs rose to a peak of €311 per megawatt hour in August, businesses across Europe, including Realonda, feared for their future. Some national governments injected hundreds of billions of euros into the economy, with subsidies to help businesses and households keep the heating on.

This year, however, prices have plunged and are now at their lowest level in more than 18 months. After worries about a severe contraction in output, economists now expect the eurozone’s economy to grow at an average rate of 0.5 per cent, according to forecast aggregators Consensus Economics.

Lower prices are not only saving energy-intensive companies a fortune. They have also put the colour back in the elaborate creations of the Italian glass blowers at New Murano Gallery.

Each of the firm’s 11 1,000 degree furnaces produces glass with a different hue and, after the company had to turn half of them off last year, almost all are back on. “We have nearly the full palette,” Francesco Scarpa, one of the gallery’s co-founders, said with a grin.

“As we are heading towards summer, there shouldn’t be surprises in prices,” said Andrea Perotta, the gallery’s other co-founder. “We hope that the latest trend in price will continue until at least the winter.”

Not everyone shares Perotta’s optimism, however.

Henrik Follmann, chief executive of German chemicals producer Follmann Chemie, remains concerned that costs could shoot up again. Energy prices might be coming down, but the rampant knock-on inflation that their jump produced had not yet run its course, he argued.

“While prices have come down, they are far from predictable,” he said, adding that his company was still taking on high levels of risk when setting long-term prices for customers.

While blockages in supply chains have eased, they are still not operating smoothly. BASF, the world’s largest chemical company and one of Follmann’s suppliers, has permanently closed one of its ammonia plants because of the higher European gas prices, choking chemical companies of critical industrial feedstock.

With price growth and uncertainty rampant, the standard length of contracts has dropped.

“Our suppliers are telling us: ‘Sorry, we cannot give you a six-month contract, we have to give you a three-month contract — we cannot guarantee the price for that long’,” said Follmann.

Both Follmann and Realonda are struggling to remain competitive despite energy costs falling. Fernández-Valladares described the mood of the tile-making sector that dominates his small town in Castellón province as “generally quite pessimistic”.

Sales have plunged. Since December, demand from clients — which are mostly wholesale buyers — has dropped 30 per cent.

In January, the factory resorted to the radical option of turning off the kiln for an extended period, shutting it down for 22 days to save on gas.

Fernández-Valladares said he could not rule out more shutdowns. “We normally work through the Easter holidays and I don’t know if we’re going to have to stop.”

Although the drop in tile sales is partly about economic uncertainty and the end of coronavirus pandemic-induced home renovations, Fernández-Valladares links it principally to decisions he made to raise prices to avoid falling into the red.

Wholesalers now pay an average of 30 per cent more for Realonda’s tiles — and even that has not fully covered the rise in energy bills compared with before the Ukraine war. Fernández-Valladares said he was going to have no choice but to lower prices eventually.

Follmann is also struggling to match rivals in Asia and the Americas. “Exporting is becoming a problem because American customers can now buy it cheaper in America or from other sources,” he said. Sales were still 10-15 per cent below what “they used to be — or should be” for the German chemicals firm.

For the New Murano Gallery, its crisis-induced decision to produce higher-end products, including using local and international artists, has meant sales have held up. “We are suffering less because ours is a luxury product,” said Scarpa, with Perotta adding that customers from the US had returned.

They are now looking to hire more workers. But, with unemployment in northern Italy low, they are struggling to fill some of the roles.

Some trainee glass blowers had ditched the sector, said Perotta, as they thought “there was no certainty” after the twin blow of the pandemic and energy crisis. “Our role as entrepreneurs is to create this certainty again.”