Inflation Fears Hit Fever Pitch As Gas Rally Continues

1. IEA Calls For Tripling of Investment into Clean Energy by 2030

- The International Energy Agency (IEA) stated that investment into renewable energy should triple by 2030 to effectively fight climate change

- Whilst almost 70% of new power generation capacity additions have been renewables-based in 2020-2021, hydrocarbons still provide 80% of the global energy supply.

- The IEA forecasts that if energy consumption continues along its current path, temperatures will jump by 2.6°C by 2100, well above the 1.5°C threshold.

- Global emissions have been increasing this year and are on track to add 1 gigatonne year-on-year, bringing the annual CO2 tally to almost 34 gigatonnes.

2. Floods Add Salt to China’s Energy Crunch Wound

- China’s power generation facilities are continuing to vie for available hydrocarbons to burn as flooding in key coal-producing regions Shanxi and Shaanxi aggravated domestic supply issues.

- Whilst China has made significant headway in cutting its coal imports over 2019-2020, the total tally of September 2021 was the fifth-highest in history, up 76% year-on-year at 32.88 million tons.

- At the same time, two available sources of additional coal, namely Mongolia and Russia, remain curtailed amidst lacking railway capacity.

- As a consequence, China’s most traded thermal coal futures in Zhengzhou reached an all-time high of $255 per metric ton, tripling over the course of this year.

3. Metals Soar Amidst Production Cuts Across the Globe

- Metal prices have concluded their best week since 2016 as electricity utilization mandates are bringing output down across the globe.

- Copper has put on an especially strong performance, trading above $10,200 per metric ton already amidst a global drop in exchange inventories.

- The copper cash-to-three-month spread traded at its steepest backwardation since 2012 as it is increasingly seen as a safe bet against inflationary trends in Asia.

- Even though zinc markets are far from experiencing any supply shortage so far, zinc futures have soared above $3,500 per metric ton on the back of Chinese smelter closures.

4. High Gas Prices in Europe Stoke Inflation Fears

- Just when it seemed that Europe might finally take a breather and day-ahead TTF prices dropped to €80 per MWh on Friday, the bull run in gas prices continued and readings are once again around €100 per MWh.

- Rising energy prices have been sending inflation levels up, with Eurostat reporting a 3.4% consumer price index growth by September, almost double of the ECB’s inflation target.

- China is even worse off than Europe as the nationwide energy crunch sent inflation levels to 10.7% from a year earlier, the highest inflation in more than 25 years.

- Dutch bank ABN Amro believes European gas prices would fall to normal levels only around 2023 amidst high global demand for gas, weaker-than-expected LNG supply increases, and high carbon prices in Europe.

5. Asia Starts HSFO Buying Spree as it Seeks LNG Replacements

- The arbitrage of high sulfur fuel oil (HSFO) from Europe into Asia has opened wide as buyers seek residual fuel oil as a power generation replacement amidst ever-increasing gas and coal prices.

- Whilst HSFO departures to China halved month-on-month to a mere 60kbpd, India emerged as one of the key buyers this month, averaging 150kbpd, even though it barely imported any as recently as August.

- Asia’s main swing country in terms of LNG demand – Pakistan – is still yet to start buying more HSFO, despite its failed LNG supply tender and dropping hydropower generation.

- Flows to both Singapore and United Arab Emirates have surged to multi-months highs this month, pointing towards a bunkering layer to the overall story as well.

6. Lithium Prices Expected to Remain Robust

- Lithium prices are expected to remain strong in the upcoming decade, a dedicated panel agreed at this year’s LME Week.

- Demand for lithium is expected to rise by some 600,000 metric tons of lithium carbonate equivalent by 2025 as the EV penetration rate will be moving from 7% currently to 18%.

- Plug-in light-duty EV sales are expected to grow sevenfold this decade, surging to 21 million units from their current level of 3 million units.

- With supply lagging behind surging demand, lithium carbonate prices are expected to remain above the $20,000 per metric ton, i.e. well above the average breakeven cutoff of a high-cost lithium extraction project.

7. Chinese Copper Investments Abroad Inevitable, Says Study

- With China consuming roughly 14 million tons of copper each year and producing only around 2 million tons, the fundamentals indicate that a Chinese expansion into production capacities abroad is inevitable.

- Chinese companies have spent more than $16 billion on copper-related investment since 2010, a tally that is bound to increase with time.

- Despite China’s difficulties in managing Congolese cobalt mines, Africa would be the prime investment destination for Chinese copper projects as most of Latin America is ramping up political pressure against foreign acquisitions.

- China is expected to follow the Japanese example as their top copper importers (Sumitomo, Marubeni, and Mitsui) own 70% of the concentrate they bring in.