Cost explosions on the horizon? Industry warns of inflation rampage in 2023 as energy prices bite

02 Sep 2022 --- Record high energy prices project a shadow of a cold winter and a somber 2023, where inflation will persist and potentially increase in less energy-secure countries like Germany. Industry players from the European country reveal their uneasiness with the situation.

Electricity prices for 2023 in Germany are, according to Siegfried Russwurm, head of the BDI – which represents over 100,000 companies in the country and eight million workers – at “more than 15 times the level of past years.”

“The cost increases are so dramatic that at some point, they will have to be passed on to the price, at least in part. But that’s something each company, each brand, decides for itself. Consumers are aware of the fact that for all food producers, the cost pressure is enormous,” Nina Göllinger, from The German Brewers’ Association, tells FoodIngredientsFirst.

“A gas supply stoppage would result in an avalanche of production losses throughout the food industry,” warns Göllinger.

Sky-high food inflation
Like elsewhere, these cost increases are already happening in Germany as food inflation in the country hit 16.6% in August, compared to last year, with further increases across the F&B arenas being a real possibility.

“A gas supply stoppage would result in an avalanche of production losses throughout the food industry,” warns Göllinger.“Increased global energy and transportation costs, interrupted supply chains, more expensive raw materials and sharp increases in the cost of packaging on a scale not seen in a long time are currently having an immense impact on the food production of all food manufacturers,” explains Thierry Krauser, spokesperson at the Oetker Group, maker of the Dr. Oetker frozen pizzas and other bakery products.

“Against the backdrop of the current global economic situation, this situation has worsened further, with the result that the current cost increases make further price increases absolutely necessary,” he highlights.

“Due to these very unusual circumstances, we cannot come close to compensating for the massive price increases and have to pass on our cost increases, at least in part,” admits Krauser. 

The German market energy inefficiencies fuel pessimism even as food commodity prices eased considerably in July and continued going down – albeit in a more moderate manner – in August. The UN Food and Agriculture Organization puts food commodity inflation at 7.9% year-on-year.

“We are standing at the beginning of this development. The real cost increases will come in the fall with the increase in gas prices and next year when long-term supply contracts expire and new prices are set. So many effects are on a time fuse – they won’t be felt by food companies until 2023,” underscores Göllinger. 

However, some companies have already “stopped production altogether” under the “enormous pressure” of sky-high energy prices, according to the country’s economy minister, Robert Habeck. 

One in ten businesses polled by the DMB, the German association of small and medium enterprises, says that their “existence is under threat,” with three-quarters of companies experiencing a “severe strain” due to energy costs.

From gas to oil
In June, the EU backed gas as a climate-friendly and green energy source. However, its scarcity is forcing a trend of companies moving to oil, which makes processes more efficient. 

Habeck admits that companies have been working hard to make this switch to alternative fuels from gas. With Russwurm saying the German industry as a whole is using 21% less gas than a year ago.

With companies forced to use oil or shutdown production, businesses will have to choose between operating or following their climate target roadmaps.The food industry is the second most gas-intensive sector in the manufacturing industry in Germany after the chemical industry.

“Even if the development of gas availability and energy costs is not foreseeable at this time, we have a clear goal: ensure the supply of food in Germany,” says a spokesperson for Nestlé Germany. 

“With our climate roadmap on the road to net zero emissions, we are continuously working until 2050 to switch to renewable energies, alternative fuels and new technologies and to basically save energy. In Germany, Nestlé already receives more than 60% of its electricity from renewable energies,” explains the business.

However, the crisis forcesthe Swiss food giant to examine various options to avoid having to shutdown production lines. One of them is the possible conversion from gas to oil burners, admits the spokesperson.

This is the same in the brewing industry. 

“Breweries are looking into the possibility of temporarily switching to oil as the primary energy source, at least for emergencies. There is also the possibility of downsizing if necessary,” explains Göllinger. 

German beer producer Krombacher is one of the companies stockpiling oil reserves to be able to switch its energy mix with short notice if needed.

With a switch to oil and a need to cut on energy costs, plastic might make a comeback in the beverage sector. Furthermore, it could cut back on some of the greenhouse gas emissions (GHG) of companies as glass can produce more GHG than plastic.

Some companies are switching to oil given the scarcity of gas.Glass, too expensive
Beer producers admit that the brewing process is very energy intensive, with the industry being particularly susceptible to the current gas price increases.

“Despite our comprehensive measures taken, we remain concerned about the coming months and the cost explosion in all areas. It remains to be seen to what extent this will be reflected in the prices of our products,” says a Krombacher spokesperson.

The company flags maintaining close ties with partners and suppliers as key in these times to stock up in a comprehensive and timely manner. The company does not expect to shutdown production.

Despite sophisticated sustainability concepts and investments in state-of-the-art technology, it is currently impossible to replace gas as the main energy source for the sector, flags Göllinger.

“For larger operations, temporarily switching to other brewing sites could also be an option. There are still a few adjusting screws. However, there are not many left,” underscores Göllinger. 

Moving to other sites is an option that the Oetker group is already considering as it admits it “could switch to international production sites with a more secure gas supply,” according to Krauser.

The food industry is the second most gas-intensive sector in the manufacturing industry in Germany after the chemical industry. 

“[Industry] is absolutely dependent on upstream suppliers – in our case, for example, the malt houses or the manufacturers of returnable bottles. The entire industry is therefore deeply concerned about a possible blackout if it comes to regional or nationwide cuts,” concludes Göllinger.

By Marc Cervera