Europe's energy crisis sends shockwaves through Germany's industrial heart

Germany’s Mittelstand, small and medium-sized businesses that power Europe's largest economy was already facing its worst crisis in a decade, trying to absorb rising energy costs.

The government then warned that it might need to shut off the gas.

The standoff between Russia's top supplier and Berlin over Russia's demand for payment in roubles was part of wider economic titu-for-tat sparked after Moscow invaded Ukraine. This prompted Berlin to activate emergency plans Wednesday, which could lead to gas rationing if Russia interrupts or stops supplies.

hich accounts 25% of German gas demand would be first to be affected, potentially threatening jobs and the country’s economic recovery after two years of pandemic.

"If we don’t get gas, we’ll have to turn off," Craig Barker (managing director of Kelheim Fibres), said to Reuters. Kelheim Fibres fibres are used in everything, from tea bags to tampons.

Kelheim is an example of the Mittelstand, private, family-owned companies that span multiple industrial sectors and employ almost two thirds of all workers. They also account for a third corporate turnover.

The conflict in Ukraine has exacerbated an already tight energy market, and its gas bill will increase by more than fivefold to 100 million euros ($110million).

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The company's future is in jeopardy because it has no alternative energy sources and can't pass on the costs to customers like Kimberly-Clark (KMB.N) and Procter & Gamble [PG.N ] .

Wolfgang Ott, an executive of the 86-year old firm with 600 employees at its Kelheim factory in Bavaria, stated that the current situation was threatening their very existence.

Kelheim has already requested that authorities be made aware of Kelheim's request to be considered a systemically relevant company. This would allow it to access supplies in the event of gas rationing. The fibres of Kelheim are used in several hygiene products.

Moscow's invasion in Ukraine has shown Germany's dependence on Russian gas. Russia was responsible for 55% of Germany’s gas imports between 2021 and 2025.

Alternative sources won't be cheap and available very quickly. Berlin warned that Germany could be without Russian gas for up to 2024.

This leaves businesses and the economy exposed.

"Rising electricity prices and gas prices threaten the economy," stated Siegfried Russwurm (president of Germany's BDI Industry Association and chairman of Thyssenkrupp TKAG.DE). The company has already warned that it may have to reduce working hours by next week.

He said that this increased the risk for companies to consider moving production overseas in order to cut costs.

Germany's largest industry groups, the engineering and chemical associations, have reduced or eliminated their growth forecasts for this year due to rising costs and supply chain problems.

Another stalwart in the Mittelstand's suffering is Ciech Soda Deutschland, a German soda and natron maker Ciech SA (CIEP.WA), which supplies glassworks, pharma, and the automotive industries.

In a letter to Reuters, the German economy minister of Saxony-Anhalt warned that Ciech Soda may have to stop production because of rising gas prices of 22 million euros per monthly.

Minister Sven Schulze wrote to Robert Habeck in a letter pleading for an urgent meeting to discuss the matter.

Ciech Soda Deutschland declined to comment, as did the economy ministry.