The Economist May 28th 2022 Business 63Chemicalhazardwarning
T
here is no better place to experience German efficiency than
at Ludwigshafen, a site operated by basf, the world’s largest
chemicals company, an hour’s drive south of Frankfurt. Every
thing is joined together in this citysized cluster of dozens of
plants connected by 2,850km of twisting pipes, from two steam
crackers, industrial cathedrals where a hydrocarbon mixture
called naphtha is split into its components, to an immense incin
eration facility, where residues are put to rest. Despite the vast
scale of Ludwigshafen everything is accounted for. Reuse and re
cycling ensure that barely a molecule is wasted. According to
basf’s proud tour guide, 94% of the chemicals that enter this sys
tem make it into one of the firm’s 45,000 products.
Yet basf’s success is not entirely homebaked. Another essen
tial ingredient is cheap Russian gas, reliably delivered via pipe
line. The complex in Ludwigshafen is Germany’s biggest industri
al consumer of the stuff, piping in about 4% of the country’s total
annual gas consumption, enough to heat millions of households
through the coldest of winters. basfuses about half to produce
steam, the other half as feedstock. “There is no question that low
priced energy has brought wealth to Germany,” says Martin Bru
dermüller, basf’s chief executive. “If prices had been higher, may
be parts of our production would already be gone.”
Now this energy dividend is set to be curtailed, even if the war
in Ukraine ends soon. For a generation at least, Germany’s leaders
will look to end their country’s dependence on Russian gas and
oil. As a result, Europe’s largest economy not only faces a rethink
about how much it needs to invest in defence, but an equally diffi
cult economic reckoning. Its industrial titans have started to re
consider their finely tuned business models. basfoffers a reveal
ing case study of this shift.
How severe a blow Germany’s economy takes will depend on
how quickly it can adapt to doing without Russian gas. A group of
economists led by Rüdiger Bachmann of the University of Notre
Dame recently estimated that the hit from a sudden halt of Rus
sian energy imports would be “substantial but manageable”, caus
ing a decline in gdpof between 0.5% and 3%. That is less severe
than the damage done by the coronavirus. But in some locales,
such as Ludwigshafen, the shock of shunning Russian gas could
befarmoredramatic. If pressure in the pipeline that feeds the
giant complex drops below 50% of its normal flow, the whole
place will have to shut down. That in turn will cause chaos further
down the chemicalindustry supply chain. “When Ludwigshafen
stops,” warns Mr Brudermüller, “there will be no more cars, no
more pharmaceuticals and no more many other things.”
basf’s boss says that he will try to keep the chemicals flowing
by doubling down on the firm’s existing plans to do away with hy
drocarbons, hoping that he has time before a European gas embar
go takes hold or Russia elects to cut off supply. The firm already
aims to achieve netzero carbondioxide emissions by 2050. As
part of that process, last year it bought part of the world’s biggest
offshore wind farm, off the Dutch coast. It plans to acquire stakes
in other such projects. That electricity will replace the gas that
powers its steam crackers. Green hydrogen and heat pumps will be
added to the mix in Ludwigshafen and at five similar sites that
basfoperates around the world. As for the gas it needs as a feed
stock, much will arrive in shipsas pricey liquefied natural gas.
The second part of Mr Brudermüller’s strategy is more surpris
ing. The economic repercussions of the war in Ukraine are push
ing his firm eastwards. Higher energy costs and stricter environ
mental regulations in Europe make China look ever more attrac
tive, he says. Having lived in Hong Kong for a decade, he has long
admired what he describes as the country’s pragmatic authorities
and dedicated workers. The firm’s future looks less firmly planted
in Ludwigshafen than in Zhanjiang in southern China, where it is
investing $10bn in a stateoftheart site. The German titan has no
alternative to continuing to expand in China if it wants to remain
the world’s biggest chemicalsmaker. Greater China already repre
sents about half the world market for chemicals and will account
for more than threequarters of its global growth in the next few
years, he reckons. “Everything we know about how to make things
with less CO 2 will be applied there,” says Mr Brudermüller, adding
that “the money we will make in China will be needed to pay for
the green transformation in Ludwigshafen.”Chemistry lessons
The risks of such a strategy are clear. Although basfhas, in Mr Bru
dermüller’s words, “never seen a theft of technology” since it
started production in China in the late 1960s, few would be sur
prised to see the firm’s knowhow trickle into the Chinese chem
icals industry. More importantly, the economic decoupling be
tween China and the West may yet go beyond some elements of
high tech, such as semiconductors, and reach areas in which basf
specialises. The danger is that, in trying to wean itself off one kind
of dependency—on Russian energy—basfmay simply strengthen
another. Relying on China might not pose such an obvious danger
as a Russian finger on a gas pipeline’s off switch, but banking on it
for a big chunk of profits still leaves the firm vulnerable.
Mr Brudermüller looks like the most energetic of Germany’s
big bosses in his drive towards China. But many others are said to
be tempted to turn more decisively towards the east. They should
think twice before embracing a greater reliance on China and in
stead try to rekindle the spirit of Teutonic thrift and inventiveness
that made possible the industrial wonder that is Ludwigshafen.
basfhas done it before, albeit for a more dubious purpose. When
the British navy blockaded Germany during the first world war, the
firm built a new plant to makenitric acid without imported am
monia, thus ensuring the resupplyof explosives. Necessity, after
all, is the mother of invention.nSchumpeter
basf, like its German homeland, needs to wean itself off cheap Russian gas