We have written twice over the last week concerning the energy crunch, first in China and then in India.
Thermal coal prices have risen to record levels, threatening to impact GDP growth as a result of electricity rationing.
The Financial Times observes that China has suffered a triple whammy of emissions restrictions on power generation, a shortage of coal, and price caps on electricity that mean demand is unaffected as input costs have risen. India, which relies heavily on coal for its thermal power plant, is facing tight supplies and record prices. Nationally, it has only four days of stocks left.
Europe energy costs on the rise
But energy — whether it is in the form of coal, natural gas or oil — is a global commodity. Both Europe and the U.S. find themselves with their own set of challenges, more skewed to the tight natural gas market and rising global oil prices.
The U.K. is not alone but is possibly the most acutely exposed to Europe’s reliance on imported natural gas, particularly from Russia.
U.S. gas contracts for November delivery surged nearly 40% this week to hit £4 per therm (having started 2021 below 50p).
But a surprise announcement by Vladimir Putin yesterday saying Russia was prepared to increase supplies to stabilize prices prompted a sharp sell-off, sending the price down to £2.87.
Whether it stays there will depend in large part on whether Russia can honor that commitment in the months ahead. Russian state gas supplier Gazprom has come under intense criticism for deliberately shipping to no more than its minimal contractual obligations this year. The reality is Russia’s own inventory levels are also depleted after a harsh winter.
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It is probably fair to say Europe’s energy markets are particularly exposed to supply disruptions despite supposedly being highly integrated.
Many large industrial consumers have complained that the E.U.’s Green Deal to make the bloc climate neutral by 2050 will only push up energy prices further. In turn, that could ultimately lead to social unrest. For example, high energy prices resulted in the French “gilets jaunes,” or yellow vests, demonstrations in 2018-2019.
Inflation, energy cost impacts
Rising energy prices have fueled inflation that was already being stoked by commodity price increase and supply chain problems for much of this year. Rising energy costs and inflation have been contributing factors in the August fall in German industrial orders. Orders fell 7.7%, a far sharper fall then economists had expected.
Meanwhile, rising energy costs have prompted the closure of large energy consumers across Europe, such as ammonia and fertilizer production. Meanwhile, in the U.S., oil prices this week hit the highest level in seven years after OPEC+ decided to maintain current production levels, which will see a planned increase of just 400,000 barrels a day from November.
U.S. administrators have talked about release from the strategic petroleum reserve and even limits or a ban on U.S. exports of crude oil to limit domestic oil price rises. The average price of gas at the pump has reached $3.19 a gallon, the highest in seven years.
The U.S. economy does not appear to be unduly hindered by the price rises yet. The private sector added a higher-than-expected 568,000 jobs in September, the biggest rise in three months. However, with midterm elections next year, high gas prices will not go down well with voters.
Looking ahead
Buyers of European components may expect to see some inflation in prices this year and next. Cost increases are coming, not just from metal prices but energy, wage costs and continuing logistics delays in Europe.
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It is to be hoped the continent copes through this winter and cost increases do not derail the recovery. While manufacturers have been riding a wave of unprecedented demand recovery, it should not be mistaken as unstoppable.
A number of factors are converging to push up costs while potentially dampening demand. That makes a toxic mix for a still-fragile recovery.
By Stuart Burns via AG Metal Miner
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The European Union (EU) wasted so much time preaching the world on renewables and energy transition, politicizing energy, doing America’s bidding on delaying the operation of Nord Stream 2, producing legislations and policies aimed at accelerating energy transition and ditching fossil fuels that it has forgotten to look after its energy security until it found itself facing the shortcomings of renewables and empty gas stores.
If there is a harsh winter, the Europeans will shiver unless Putin shows benevolence towards them.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London