Energy Crisis Squeezes Smaller Firms That Power Europe’s Economy

“We didn’t want to go further in debt,” says Ms. Vandenheuvel, a 41-year-old former schoolteacher. Local bakeries and regional meat suppliers are losing customers, she says, “and I think it’s not the end yet.”

Many smaller companies in Europe—from bakeries and masons to makers of clothing and carpets—lack the economies of scale to shoulder the surge in energy prices fueled by the war in Ukraine and Russia’s decision to throttle the flow of natural gas to Europe. Global giants that produce steel, chemicals, fertilizer and other energy-intensive goods have been among the first to feel the sting of higher gas prices, closing smelters and other high-cost operations in Europe.

Katrien Vandenheuvel shut her family’s grocery store near Antwerp, Belgium, last month after sales couldn’t keep up with rising energy bills. Sander de Wilde for The Wall Street Journal

European firms without a global footprint, however, are finding it hard to quickly shift production outside the continent, where energy prices are lower. Instead these companies say they are getting squeezed by suppliers and unable to pass higher costs along to customers. The burden comes on top of supply-chain shocks that are snarling shipments and causing long wait times for raw materials, just as many businesses were mounting a recovery from the worst of the pandemic.

Price hikes will be tougher on Europe’s smaller and midsize companies than on multinationals, says Hauke Burkhardt,

Deutsche Bank AG’s

head of corporate lending, based in Germany. Mr. Burkhardt said much of the pain will take several more months to ripple through European balance sheets.

Bigger companies also benefit from long-term energy contracts they negotiated before energy prices leapt. Some use financial-market derivatives to hedge price-volatility risks, and they invested more in cutting their energy usage before the worst price jumps hit, according to economists and bankers watching their loan books for signs of distress among business customers.

“Size, purchasing power, efficiency and cost structure,” says

Heimo Scheuch,

chief executive of listed Austrian construction-materials giant

Wienerberger AG

, checking off reasons for his edge over struggling smaller peers. The world’s biggest brickmaker, Wienerberger operates across Europe and sells bricks and plastic pipes in the U.S. and Canada. “It’s actually very dangerous for European industry,” Mr. Scheuch says.

Companies with fewer than 250 employees make up around 99% of European Union businesses and more than half of the bloc’s gross domestic product, according to the European Commission. They employ around 100 million people, according to commission data.

“Smaller companies are a mixed batch,” says

Holger Schmieding,

an economist at Germany’s Berenberg Bank. “Some of them have already curtailed production and will have to do more of it.”

German insurer

Allianz SE

expects natural-gas price hikes this year to shave around $150 billion from 2022 earnings before taxes and other expenses for European small and medium-size firms in the manufacturing sector. That is a hit of about 2 percentage points off the estimated margin of those manufacturers, says Ana Boata, Allianz’s head of economic research. She says the hardest-hit will be energy-thirsty makers of metals, paper and pulp, chemicals, food and beverages, and textiles.

“The situation is actually pretty dramatic right now,” says Pau Vila, 27 years old, the general manager and fifth generation of a family-run paper business in the Catalonia region of Spain with about 130 employees.

The LC Paper 1881 SA factory makes gigantic rolls of tissue that become toilet paper and kitchen towels for hospitals, airports and offices, and also produces retail-packaged toilet paper for supermarkets. “Customers have big purchasing power, and they expect a lot of stability,” says Mr. Vila. Sometimes gas prices go up so quickly a sale makes no economic sense by the time the order is completed, he says.

Raising prices to cover energy bills can hurt demand, so LC Paper might cut back a work shift to save money, Mr. Vila says. But buyers are shopping by price, and costs are affecting many manufacturers of commodity products like toilet paper. Manufacturers have increasingly been asked to shrink the volume of rolls to keep prices from rising too dramatically, Mr. Vila says.

“We’re not giving you a cheaper product, we’re giving you less product,” he says. “Supermarkets don’t want to raise prices.”

In Portugal and Italy, privately operated textile mills have all but written off hitting year-end holiday production targets, companies say. Some have voluntarily curtailed production to save on natural gas by running boilers fewer days a week or extending employees’ late-summer holidays.

Mário Jorge Machado, 60, employs 320 people in his textile business near the northern Portugal city of Porto. His company, Adalberto Estampados, dyes fabrics that he says end up in clothes carrying labels such as Hugo Boss and Moschino.

He says his natural-gas costs, essential to the dying and fabric-drying processes, are more than 10 times what they were a year ago.

“Every time that you sell a meter of fabric, you are losing money,” says Mr. Machado, who says he is hopeful Portuguese officials will increase relief for textile-industry companies battered by energy costs. But subsidies won’t be enough for some companies, he says.

“There are many small players in the industry that have limited financial capacity and limited reserves,” says Dirk Vantyghem, head of the European textiles and apparel trade group Euratex.

Some industries are also worried they will end up at the back of the line if gas supplies run short and EU governments are forced to triage which industries need to receive the fuel.

Demand for household and industrial ceramics remains robust, feeding everything from toilets and tableware to clay bricks and drainage pipes, so European factories have mostly kept humming, says Renaud Batier, head of European ceramics trade group Cerame-Unie.

But it is getting harder for individual companies trying to conserve gas while maintaining production, executives say. “If the governments decide to prioritize and not allocate gas to our industry, there will be a very long-term and downstream effect,” Mr. Batier says.

Write to Jenny Strasburg at [email protected]

“We didn’t want to go further in debt,” says Ms. Vandenheuvel, a 41-year-old former schoolteacher. Local bakeries and regional meat suppliers are losing customers, she says, “and I think it’s not the end yet.”

Many smaller companies in Europe—from bakeries and masons to makers of clothing and carpets—lack the economies of scale to shoulder the surge in energy prices fueled by the war in Ukraine and Russia’s decision to throttle the flow of natural gas to Europe. Global giants that produce steel, chemicals, fertilizer and other energy-intensive goods have been among the first to feel the sting of higher gas prices, closing smelters and other high-cost operations in Europe.

Katrien Vandenheuvel shut her family’s grocery store near Antwerp, Belgium, last month after sales couldn’t keep up with rising energy bills. Sander de Wilde for The Wall Street Journal

European firms without a global footprint, however, are finding it hard to quickly shift production outside the continent, where energy prices are lower. Instead these companies say they are getting squeezed by suppliers and unable to pass higher costs along to customers. The burden comes on top of supply-chain shocks that are snarling shipments and causing long wait times for raw materials, just as many businesses were mounting a recovery from the worst of the pandemic.

Price hikes will be tougher on Europe’s smaller and midsize companies than on multinationals, says Hauke Burkhardt,

Deutsche Bank AG’s

head of corporate lending, based in Germany. Mr. Burkhardt said much of the pain will take several more months to ripple through European balance sheets.

Bigger companies also benefit from long-term energy contracts they negotiated before energy prices leapt. Some use financial-market derivatives to hedge price-volatility risks, and they invested more in cutting their energy usage before the worst price jumps hit, according to economists and bankers watching their loan books for signs of distress among business customers.

“Size, purchasing power, efficiency and cost structure,” says

Heimo Scheuch,

chief executive of listed Austrian construction-materials giant

Wienerberger AG

, checking off reasons for his edge over struggling smaller peers. The world’s biggest brickmaker, Wienerberger operates across Europe and sells bricks and plastic pipes in the U.S. and Canada. “It’s actually very dangerous for European industry,” Mr. Scheuch says.

Companies with fewer than 250 employees make up around 99% of European Union businesses and more than half of the bloc’s gross domestic product, according to the European Commission. They employ around 100 million people, according to commission data.

“Smaller companies are a mixed batch,” says

Holger Schmieding,

an economist at Germany’s Berenberg Bank. “Some of them have already curtailed production and will have to do more of it.”

German insurer

Allianz SE

expects natural-gas price hikes this year to shave around $150 billion from 2022 earnings before taxes and other expenses for European small and medium-size firms in the manufacturing sector. That is a hit of about 2 percentage points off the estimated margin of those manufacturers, says Ana Boata, Allianz’s head of economic research. She says the hardest-hit will be energy-thirsty makers of metals, paper and pulp, chemicals, food and beverages, and textiles.

“The situation is actually pretty dramatic right now,” says Pau Vila, 27 years old, the general manager and fifth generation of a family-run paper business in the Catalonia region of Spain with about 130 employees.

The LC Paper 1881 SA factory makes gigantic rolls of tissue that become toilet paper and kitchen towels for hospitals, airports and offices, and also produces retail-packaged toilet paper for supermarkets. “Customers have big purchasing power, and they expect a lot of stability,” says Mr. Vila. Sometimes gas prices go up so quickly a sale makes no economic sense by the time the order is completed, he says.

Raising prices to cover energy bills can hurt demand, so LC Paper might cut back a work shift to save money, Mr. Vila says. But buyers are shopping by price, and costs are affecting many manufacturers of commodity products like toilet paper. Manufacturers have increasingly been asked to shrink the volume of rolls to keep prices from rising too dramatically, Mr. Vila says.

“We’re not giving you a cheaper product, we’re giving you less product,” he says. “Supermarkets don’t want to raise prices.”

In Portugal and Italy, privately operated textile mills have all but written off hitting year-end holiday production targets, companies say. Some have voluntarily curtailed production to save on natural gas by running boilers fewer days a week or extending employees’ late-summer holidays.

Mário Jorge Machado, 60, employs 320 people in his textile business near the northern Portugal city of Porto. His company, Adalberto Estampados, dyes fabrics that he says end up in clothes carrying labels such as Hugo Boss and Moschino.

He says his natural-gas costs, essential to the dying and fabric-drying processes, are more than 10 times what they were a year ago.

“Every time that you sell a meter of fabric, you are losing money,” says Mr. Machado, who says he is hopeful Portuguese officials will increase relief for textile-industry companies battered by energy costs. But subsidies won’t be enough for some companies, he says.

“There are many small players in the industry that have limited financial capacity and limited reserves,” says Dirk Vantyghem, head of the European textiles and apparel trade group Euratex.

Some industries are also worried they will end up at the back of the line if gas supplies run short and EU governments are forced to triage which industries need to receive the fuel.

Demand for household and industrial ceramics remains robust, feeding everything from toilets and tableware to clay bricks and drainage pipes, so European factories have mostly kept humming, says Renaud Batier, head of European ceramics trade group Cerame-Unie.

But it is getting harder for individual companies trying to conserve gas while maintaining production, executives say. “If the governments decide to prioritize and not allocate gas to our industry, there will be a very long-term and downstream effect,” Mr. Batier says.

Write to Jenny Strasburg at [email protected]