Greek industries face the crunch, as energy costs hit the roof

05 March, 2014 | Posted By: Costis Stambolis

By Costis Stambolis

Greece’s ailing industrial sector looks likely to contract further in line with the country’s continuing recession, which registered nearly -4.0% in 2013 with bleak prospects for a rebound later this year in spite of a return to growth scenario which government-controlled media try to propagate. Because of over-taxation, increased social contributions, a bloated bureaucracy and a host of secondary direct and indirect costs, industrial products remain highly uncompetitive in the international markets and unable to contribute to a nationwide export drive effort.
Although companies now face lower wage costs and a more flexible employment regime, introduced under much pressure from the Troika two years ago, production costs remain stubbornly high because of the government’s insistence in levying a wide variety of excise duties on the means of production. Consequently, industrial exports declined last year by 5.8% in what has otherwise been a continuous growth pattern since 2009.
As domestic demand slacked with the country driven into deep recession, manufacturers and service providers sought a way out in export markets. So far, their strategy worked as overall exports rose by 29.12 % over the last five years, according to latest figures by the Greek Exporters Association. However, last year most companies experienced severe pressure as they were unable to slash further their prices due to a combination of government tax policing measures, a simultaneous rise in energy costs and lack of financing from the moribund banks. This resulted in thousands of companies having to close down, thus contributing further to the rise in unemployment which jumped to 28% with more than 1.8 mln people out of work.
However, the biggest challenge are rising energy costs as these are reflected in exceptionally high electricity and gas prices. It seems that the present high costs are equally affecting small and large industrial units although the worst affected is the metals sector and heavy industries such as steel, aluminium and nickel.
According to the Hellenic Union of Industrial Consumers (UNICERN) the electricity and gas tariffs applied to Greek industry are the highest in Europe. UNICERN, whose members represent about half (49%) of consumption of Greece’ high voltage output and 6.0% of total domestic consumption (i.e 3.8 TWh in HV and MV) says that the industrial tariffs in use for high voltage are 77,00 Euros/MWh and 104,40 Euros/MWh for the medium voltage use, compared to 30,00-35,00 Euros/MWh in Italy, 35,00-40,00 Euros/MWh in Germany, 40,00-46,00 Euros/MWh in France and 46,00 Euros/MWh in neigbouring Bulgaria.

Furthermore, electricity tariffs for industry have risen on average by 50% since 2005 reflecting higher production costs by the Public Power Corporation (PPC/DEH), Greece’s state controlled electricity utility, but also a number of other costs imposed on the PPC tariff such as the Public Service Benefits charge, which compensates for expensive PPC production on the islands so that customers there enjoy the same uniform tariffs as those on the mainland. Similar costs include a renewable energy contribution (through which RES producers are paid for the energy they produce and offload into the grid), a special consumption tax lately introduced for industrial consumers and a variety of other minor charges so that the actual electricity tariff ends up to roughly 50% of the final bill.
Natural gas, to which most industrial plants have converted following its introduction in 1996, is also substantially overpriced compared to what is applied to other European industries. UNICERN sources point out that industrial gas tariffs are on average 62% above comparable tariffs in other EU countries because of the higher prices that DEPA, the state owned Public Gas Corporation, has to pay for imports, mainly from Russia’s Gazprom, but also because of a 15% surcharge, known as special consumption tax, introduced two years ago and which industrialists regard as the final deathblow to any serious industrial activity in Greece.
Most industrialists are furious when discussing how artificially high energy costs, literally imposed by ignorant government officials who haven’t got a clue on how industry works, are undermining the performance and competitiveness of the industrial sector resulting in plant closures and rising unemployment.
“At a time when we were forced to lower salary costs by 30% and more over the last five years and trim our operation to a bare minimum, we have witnessed a 50% rise of energy costs because of government complicity. Clearly this is a formula for failure in a grand scale and we are now seeing it happen.” notes a veteran industrialist in the textile sector.

One of the worst hit sectors is that of the steel industry which has seen its output reduced dramatically since the economic crisis started in 2009. From 2.6 mln tons a year production, which covered both domestic consumption and exports for a variety of steel products, this was reduced to 1.0 mln tons in 2013 with a mere 300,000 tons corresponding to domestic consumption. Greece’s largest steel company, ‘Halivourgiki’ operated at 10% capacity throughout 2013 unable to secure export orders due to its high operating costs, of which energy accounts for 50%.
Company executives observe that natural gas tariffs as applied to the steel industry increased by 126% since 2005 as the price then was 23 euros per Mwh and now stands at 52 euros per Mwh. Two weeks ago, the company was unable to sustain mounting losses and decided to suspend its operations, laying off 200 of its 263 employees. Another important steel producer, ‘Halivourgia Ellados’ had followed a similar path earlier in the year shutting down entirely its Aspropyrgos plant and making redundant an equal number of workers.
Most of the remaining steel and metal industries in Greece, which now concentrate on exports, face similar problems due to the abnormally high energy costs they have to pay, with a number of them contemplating closure. Sidenor SA is one of the remaining major steel industries, part of the Viochalko group, which is considered a market leader in SE Europe.
CEO Nicholas Mariou, in a recent interview with Kathimerini newspaper said that the most important factor for the poor state of the industry today is the shrinking of domestic consumption by 85% over the last five years. “Now the challenge for us, i.e the steel industry in Greece, is exports,” noted Mariou.
“But here we are facing stiff competition form Italy, France and Spain whose production is less costly due to lower energy costs. If we re to survive and keep our plants in operation we shall need much reduced electricity and gas prices,” added Mariou.

It seems that the government at long last listened to UNICERN’s and Mariou’s pleas and those by other industrialists who had warned of more plant closures because of high energy costs. In a special session on February 20, the Environment and Energy Ministry announced a series of measures corresponding to 150 mln Euros in potential savings and intended to reduce the energy burden to Greek industry.
According to the ministerial decision, a group of four measures are to be taken including the ‘interruptability’ agreement between the industry and the electricity supplier, which leads to power saving by the grid operator while the industrial client gets compensated by lower tariffs, and a reduction of the special levy on renewables as applied to medium voltage industrial users.
In a separate development, DEPA last month reached an agreement with Gazprom for a 15% discount on gas quantities sold to the Greek utility backdated to July 1, 2013 and with an extension of its contract until 2023. This means that gas tariffs to both domestic and industrial consumers will be reduced by an average 10% since Greece imports gas from two other sources.
The industry’s reaction remains guarded as officials point out that the announced measures are not new.
“They are what we had proposed to the ministry few months ago, but at first glance they are in the right direction,” said a representative of one of the main energy intensive companies. However, a lot of skepticism remains on the part of the industry as it is not clear as to how and when the measures shall be applied.
“If these measures are applied in April or May the game is lost and these or additional measures will not be enough to revive any major industrial activity,” a senior industrialist said during a recent radio interview. What the government has carefully avoided to mention so far is any measures to decrease the special excise duties on gas and electricity which would have a direct bearing on tariff reduction without affecting electricity production costs or gas import costs.
“As long as the government avoids reducing unnecessary taxes, it is unlikely that we shall see any real reductions in energy costs in the foreseeable future and therefore we should be ready to see more plant closures,” a senior industrialist told the Financial Mirror. The next three or four weeks are considered crucial by industry which remains cautious as to the government’s intentions and ability to effect any worthwhile changes.

Costis Stambolis is a Financial Mirror contributor based in Athens.