Germany’s chemical industry seeks new wage deal in shadow of Ukraine war

LONDON (ICIS)–The 2022 collective bargaining for the 580,000 employees in Germany’s chemicals and pharmaceuticals industry was set to be difficult even before the Ukraine war, with rising energy and feedstock costs weighing on producers’ margins, along with the ongoing supply chains problems and fallout from the coronavirus pandemic.

Furthermore, there are the longer-term challenges producers face: the energy transition (Energiewende), decarbonisation of production processes, plastics recycling, as well as the shift toward electric vehicles (EVs) in the automotive customer market – all of which require massive investments.

Then, on 24 February, Russian President Vladmir Putin’s attack on Ukraine made things that much harder for chemical employers’ trade group BAVC and labour union IG BCE.

Instead of the expected post-pandemic recovery, with the war Germany could be in for a longer economic downturn in 2022-2023, research institutes warned this week.

In the west, Germany will be the country that will bear the brunt of the economic fallout from the EU sanctions on Russia, and Russian retaliation for sanctions.

Russia supplies about 55% of Germany natural gas, and a suspension or end to those supplies “entails the risk that the German economy slides into a recession with significantly higher inflation rates”, said the German Council of Economic Experts, which advises the government on economic policy.

Another group, DIW Berlin, said that Germany’s GDP likely already shrank in Q1, and would continue to decrease in Q2 because of the Ukraine war.

After Germany this week activated the first stages of its national natural gas emergency plan, chemical producers warned to prepare for the worst – that is, widespread shutdowns of chemical production facilities should Russian gas supplies be disrupted in the wake of the war.

This would make for “a drastic, a dramatic scenario”, with massive job losses in chemicals and in all the manufacturing sectors the chemical industry supplies, officials said.

INFLATION
Before the war, chemical labour union IG BCE had said that as a minimum it would aim for a collective deal that compensates workers for the loss in purchasing power due to rising inflation.

However, BAVC said that the inflation argument cuts both ways, as inflation harms chemical producers as well, and not just workers.

Inflation jumped up from 0.5% in 2020 to 3.1% in 2021, a trend that continued in the early months of 2022, with March inflation reaching 7.3%.

Consumer price index, Jan-March 2022:

	+/- year on year	+/- month on month
January	4.9%	0.4%
February	5.1%	0.9%
March (preliminary data)	7.3%	2.5%

Source: Wiesbaden-based Statistisches Bundesamt

A similarly high inflation rate in Germany was last recorded 40 years ago when oil prices rose sharply after former Iraqi dictator Saddam Hussein attacked Iran, Germany’s federal statistic agency noted this week.

The union, arguing that the chemical industry could well afford to grant higher wages and salaries, has pointed to the industry’s strong recovery from the coronavirus pandemic, with 2021 sales rising nearly 18% to €225bn:

	Change from 2020
Production	+5.3%
Excluding pharma	+5.0%
Chem producer prices	+9.3%
Sales	+17.9%
Domestic sales	+19.5%
Export sales	+17.0%

Source: chemical producers’ trade group VCI

Going into 2022, the outlook for the industry was not bad, with producers’ trade group VCI  initially forecasting 2022 production to rise 2% and sales to rise 5%.

24 FEBRUARY
However, with the start of Russia invasion on 24 February, everything has changed and all assumptions became invalid.

VCI scrapped its 2022 outlook and did not issue a new one, saying that the  war uncertainties make it impossible to make reliable forecasts for production and sales at this time.

A VCI flash survey of member companies showed deep concerns about rising raw material and energy costs, with many producers expecting their production and sales to decline this year.

Both union and employers know that the bleak prospects, rather than the  industry’s strong 2021, will dominate the collective bargaining, which is due to resume on 4 April.

In the initial federal collective bargaining round on 21 March, IG BCE had not even put forward a specific demand, in percentage terms, for a rise in wages and salaries.

The key for a viable collective deal is that both sides come to a common assessment of the current situation and the outlook – which seems almost impossible as even VCI is unable to provide a projection.

Neither side wants to be stuck with “a bad deal”:

– The union wants to avoid committing to an increase in wages and salaries that may turn out to be too low and could quickly be offset by soaring inflation in the wake of the war
– The employers are wary of committing to a raise in wages and salaries, and the resulting cost burden, given the current uncertainties.

The key concern for both sides is now the spectre of plant shutdowns throughout the industry.

BASF’s massive Ludwigshafen petrochemicals hub, which employs about 40,000 people, would need to be shut down if natural gas supplies fall by 50% or more, the company warned this week.

Such a reduction in gas supplies would make it impossible to maintain the stability of the site’s highly-integrated production system.

However, it is not just Ludwigshafen: all the major petrochemicals production sites – Marl, Krefeld, Dormagen, Leverkusen, Cologne, Gelsenkirchen, Wesseling, Leuna, Burghausen, Frankfurt-Hoechst and others – would be hit, VCI president Christian Kullmann has said.

Furthermore, with about 90% of all production processes in Germany depending on inputs and materials provided by energy-intensive chemical production, it will take only a couple of days for chemical plant shutdowns to hit production at the many sectors that use chemicals for their production – automotive, building and construction, packaging, pharmaceuticals and many others, Kullmann said.

Simplified, this means: “No chemistry = No industrial production”, as VCI director general Wolfgang Grosse Entrup put it.

BRIDGE SOLUTION
Hans Oberschulte, who leads the collective bargaining for BAVC, said that employers’ would support a “bridge” solution – that is, a short-term compromise deal that balances the costs and challenges companies face with employees’ concerns about maintaining their purchasing power.

“Exceptional circumstances call for exceptional measures,” he added.

In the 4 April bargaining round, employers and union needed to assess which of the cost burdens companies are facing now will be of a permanent nature, and which will be temporary, he said.

Ralf Sikorski, who leads the bargaining for IG BCE, indicated in a webcast Q&A  session with union members this week that IG BCE is open to such a “bridge”, which could imply a deal with a short duration, to be renewed once conditions normalise.

As it stands, it remains completely unclear by when conditions may normalise, or what the new normal may look like.

The industry may well be at the beginning of a war-induced paradigm shift with massive plant shutdowns and job losses, making bargaining about wages and salaries a low priority.

In fact, the 2022 collective bargaining may come down to a cut in wages and salaries, in real terms, to preserve as many jobs as possible.

The previous 29-month collective deal agreed in 2019 expired on 31 March 2022.

It provided for a 1.5% increase in wages and salaries, effective 1 July 2020, and an additional 1.3% increase, effective 1 July 2021. It also included one-off payments and improved health benefits.

Front page picture: The Chemiepark facilities in Marl, Germany; archive image
Source: Hans Blossey/imageBROKER/Shutterstock

Focus article by Stefan Baumgarten

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