EU plans to cut industrial CO2 emissions through an emissions trading system are pushing manufacturers of gypsum-based products like plaster and drywall to take their operations outside EU borders, says Jean-Pierre Clavel, president of industry association Eurogypsum.
Jean-Pierre Clavel is president of Eurogypsum, which represents European manufacturers of gypsum-based products.
A curious element in the ‘carbon leakage’ debate is that company relocation had already happened before the climate change package was on the agenda, due to cheaper labour, for example.
Our business is a bit different because you never start a plant if you do not get a gypsum source. So you have to be close to the source. And in our industry when you move, you move for thirty years or at least twenty years. So we are not the type of industry, like the clothing industry, where we move to Turkey or to Asia and then come back.
When we establish a plant, most of the time, the plant stays in that location for thirty, forty or fifty years. So it will not be a sudden quick movement. A plant in our business costs 70 million euro. But it will be a change in the strategy. We will have to change our strategy.
So in simple terms, what you are saying is that the EU Emissions Trading Scheme (EU ETS) would essentially tip the balance from it being profitable to export gypsum products outside the EU to relocating and importing into the EU?
Today, we are competitive in exporting from the EU despite the difference in manpower costs because our plants are more efficient. We have better productivity and we can compensate the cost of manpower. We also have better quality, so we are selling more at a higher price than than our competitors.
But if we increase the burden, we may have a problem. We have just seen that right now for example. When you look at currency movements, I do not know if you follow that in the Ukraine. For example, we have such a drop in the currency right now that we will become non-competitive exporting from the West.
So you can have one thing plus the other. At the end, you have to take another decision.
So what steps are you going to take now?
Firstly, we want to be equally treated to other industries. In Europe, we want to get the same burden if we have a burden. The second one, we just inform that the threshold [for inclusion of sectors into the EU ETS] of maybe a 20 or 30 kilowatt hours is a bit high. It should be lower.
Do you have allies in other industries that say the same thing?
Yes, you know that the cement industry is much more vehement than we are. They just say that they will stop investing in Europe and invest outside.
Do you see them in a different league?
No, it is not so much a deterrent for us as for them, but you know that the MEPs and the Commission should understand that we are taking our decisions of investment for thirty years in line with different criteria of profitability. If we have a payback of, let’s say, ten years in a plant in Ukraine and a payback of fifteen years in a plant in Poland, it will be the plant in the Ukraine.
For example, if you take the map of Poland, we have a gypsum deposit that is to the east of Krakow. You have a lot of gypsum in the region of Lof in the Ukraine.
I just bought a big deposit in Troyan close to Lof. Do you see?
And clearly, we would have expanded our plant in Poland, we will have to make the calculations before we decide to diversify the size of this plant. Maybe it would be much more profitable to build a second plant in Lof instead of having a second line in Poland, because the two plants will be 200 kilometres away from each other.
So if the ETS goes through as it is, if you have to pay these extra costs, you will have gypsum facilities in France, for example, that are not being used?
Yes, of course. Our job is to work for shareholders, so our job is that when we decide an investment, to decide the best option.
And in the options, all the cost base is taken into account. Up to now, we have been able to balance higher manpower costs by more automation, more engineering and much more modern plants than our competitors elsewhere, but we can also be in similar plants in the east. It is what we are doing. We did this in the past when we went from western Europe to Poland. We have just inaugurated a plant in Hungary this year, we are planting in Romania, in the next moment we’ll be there.
Do you think that the climate package as it stands is well-formulated? I mean, there are accusations that the targets are very political.
I cannot challenge the fact that we have to decrease the energy content in our product. But I can also say that in the thirty years that I have been in the industry, we divided the cost of energy in our products by two. And there is still room for progress. So, it is our job in managing the business. Having an incentive to push us to accelerate is okay.
What I am afraid of is the free market for the CO2 tickets because it is out of control. We do not know. When we make a simulation at a certain level, we have no vision of the carbon price. So that is one of the main issues is that the system that they are going to adopt is a system that will give us no vision of what could happen. Maybe it will cost nothing. Maybe it will cost a big amount. So we may take decisions on something that will never happen? They should be conscious about that.
There is another argument that says that if the EU were to harmonise its electricity market, this problem would be solved but it would be better addressed because a company like yours could easily access, let’s say, Danish cheap low carbon off-shore windpower.
Yes, but our biggest usage is gas. Most of the energy that we are using is gas. Using two thirds of gas and one third of electricity.
And do you have long-term supply contracts? Do you have long-term provision contracts based on a fixed price?
No, normally with the variation of the price in gas, it is impossible to have a long-term contract. So what we are is that we are covering our needs. For example, we are fully covered for the next quarter. We are covered 75% for the quarter afterwards but we book ahead our energy and we never buy the best price but we cut the fluctuations.
When you make an offer for refurbishing for example, you make an offer that is available for one year. So if the price is changing every month, how can you absorb it? We have to work with the needs of our customers. What we wish for is stability.
Would you favour a system such as that of France, where energy tariffs are regulated?
I do not know if regulation is the right word but everything that is bringing uncertainty and unpredictability is not good for us because we do not master our costs. It is not good for our customers because they have this issue. If the Commission gets, for example, for refurbishing their offices, an offer at 100 and the guy comes three months later saying it is now 120, I have got the raw material increasing. They are not satisfied, they will not accept that. So, the guy will either lose money or be bankrupt or either just go away.
Is the Commission in a position to provide this kind of certainty?
No, we do not ask the Commission to give certainty. We are in a world where there is no certainty. But we ask them not to increase the uncertainty. And having this type of stock exchange for CO2 values increases uncertainty on our cost base because in addition to the fluctuations of energies, we will have something which we will not master. That is the issue that we have.
Do you have another idea to push industries to become more energy efficient?
Of course. If we could have the type of bonuses, you know, we have to establish a base and have a progress. On that, I agree, because I think that we have to be pushed for that. It could be done by incentive, feed taxes, and all these types of things. You do not need to buy CO2 in the stock exchange. We will realize today the risk of having everything in the stock exchange. It is totally unpredictable.
Some sectors say auctioning is okay but only on the basis of a benchmark, meaning that first you establish technology best practice benchmark, then if you fall below that, then you have to buy permits. Would this idea apply to your sector?
It would be a better solution than the total free open market. It is a good compromise. Of course, now we are in a difficult situation because the market is going down and I think that 2009 will be very, very difficult. So that means that our decision of investment will not be taken in 2009 but in 2010. So we have the time to measure. This is the advantage of the building industry crisis right now.
Having a threshold which is kind of best practice is not an issue. We are doing that. We are putting this incentive to our plan managers. So, if they get a further bonus or a further minus if they are not reaching it, it will be a move in the right direction.
But I do not like the auctioning approach because this approach brings in an uncertainty which is a deterrent from investment decisions. We are in a world that is full of uncertainty. Why should the Commission create another one?
There are clever people in the Commission and they know that they will have to manage the consequences.
As I tell you, when you build a plant, you build it for twenty years or thirty years. So when you take a decision, you cannot reverse it. And you could end up with a part of the industry which we will keep in Europe, which you know is the plant for keeping the minimum quantity to supply in the common market and all the peaks and all the growth, we will have to supply from elsewhere.
Have your industry and perhaps other industries as well reached a kind of breaking point where they are saying ‘you know what, forget it: we are going to make a decision now to invest outside of Europe because whether or not the ETS passes this way or that way, it is simply too uncertain’. Or is there still some patience left?
What I told you is exactly what is happening. The process of decision-making is like this: when you have to choose in between certainty or uncertainty, you avoid the uncertainty.
So carbon leakage is already taking place?
Exactly, it creates for investment decisions an uncertainty. My business is 400 million euros and it employs 14,000 people in the world with, let’s say, more than half of it in Europe. So we look at the additional cost of this and it is very significant. It will be about 10% of our profit in a good situation. Right now, with the profit going down due to the depression, it will be 20 to 25%, except that we will probably have to buy fewer rights because we produce less so we produce less carbon. But nobody wants that.