Germany's manufacturing malaise set to curb demand for EUAs

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The downturn in Germany’s manufacturing sector has entered its third year.

The HCOB Germany Manufacturing PMI fell to 42.4 in August (a reading below 50 indicates a decline in activity), down from 43.2 in July, and the lowest level of activity since March. The main factor driving the sharper fall in activity during August was an acceleration in the decline in new orders, in particular from the construction industry and the export market.¹

Overall European manufacturing activity also continues to weaken; the HCOB Eurozone PMI was stuck at 45.8 in August, unchanged from July. Weak manufacturing activity in Europe is mirrored in assessments of global manufacturing. The S&P Global Manufacturing PMI fell to 49.5 in August, down from 49.7 in July, and while modest, the drop in activity was the steepest witnessed since December 2023.

Compliance deadline nears

Recent developments in German manufacturing activity are a crucial indicator of European industrial demand for EU emission allowances (EUAs). The rebound in the EUA price since late February was, at least in part, built on the premise that industrial activity and emissions had rebounded. The renewed slowdown in German manufacturing activity strikes at the heart of that source of fundamental demand.

The weakness is especially pertinent as we approach the deadline for obligated emitters to submit EUAs to cover their 2023 compliance demands. Remember that the EU ETS deadline is 30th September this year. In early 2023 the European Commission (EC) announced its intention to push back the deadline five months from its usual spot of 30th April. The intention being to give governments more time to calculate and deliver industrial emitters their free allocation of EUAs, avoiding the situation whereby they have to borrow EUAs from their current-year issuance to pay off the prior year’s compliance.

The shift has given obligated emitters a 17-month window in which to ensure they have met compliance. It appears to have resulted in industrial firms pacing their EUA buying activity across the compliance window, enabling them to benefit from lower prices when they occur (as witnessed during the first quarter of 2024), and avoiding a last minute rush for EUAs ahead of the end of September. Many industrials have also stuck to the traditional timetable, ensuring that their compliance requirements were satisfied before the end of April.

Second order deindustrialisation

Germany’s industrial model, previously reliant on Russian energy and Chinese export markets, has been brought to the brink by high energy prices, a slowdown in demand from it’s main export market, and increased competition from Chinese exports such as cheaper EVs.

The petrochemical sector was always going to be particularly vulnerable to deindustrialisation. The high energy intensity of chemical production and its reliance on a dense network of pipelines built up over decades meant that remaining competitive was fraught with difficulty.