Energy, Geo-politics & Money - 2023.11.07
In this roundup, we look at:
Oil’s return to normal, with the Gaza War related risk premium being wiped out as traders focus on the outlook for the global economy; something OPEC at least believes is a mistake
Why the IMF believes the EU should keep interest rates at 4% throughout 2024, even though (or especially because) that higher rates are a major drag on the economy
China’s continued push forward on semiconductors
Why a Trump win would change the world
Neste’s Life Cycle Assessment of chemically recycled plastics, which says it is a lower GHG emitting end-of-life solution for plastics (compared to incineration), as well as a lower GHG emitting plastics production route (compared to producing and cracking fossil feedstocks)
Aramco’s experimental foray into e-fuels
The companies that are looking to create the “crop of the future” that will enable significant increases in renewable fuels production
BlackRock’s $550 million support for STRATOS, the world’s largest Direct Air Capture (DAC) facility being developed by Occidental, which is designed to capture up to 500,000 tonnes of CO2 per year
How China's BYD went from bargain battery maker to Tesla's biggest rival
General Energy News
Both Brent and WTI declined to the lowest since July 24 on Tuesday, writes Reuters. Traders are now clearly less concerned about the potential for Middle Eastern supply disruptions, and are instead focused on weak demand resulting from economic headwinds. On Wednesday morning, Brent crude futures ticked up slightly by 4 cents to $81.65 a barrel, WTI futures dipped 14 cents to $77.24 a barrel.
Bloomberg reports on the data that is causing the negative sentiment among oil traders. It says, there are worries over the state of the economy in China, the world’s biggest importer, and fresh doubts on whether the Federal Reserve has finished tightening. On the supply front, Russian shipments are running near a four-month high, while industry data showed US crude stockpiles increased by almost 12 million barrels last week. Bloomberg has an additional report on the situation in China, where refining margins are falling, crude and fuel stockpiles are building, and the hoped-for sharp jump in air travel still hasn’t eventuated.
Nevertheless, OPEC expects the global economy to grow and drive fuel demand, the producer group's secretary general - Al Ghais - said according to Reuters, “When we talk about demand and our outlook, maybe for the short term to medium term, we still see a healthy global economy growing despite all the challenges and pressures". Al Ghais also said that demand growth in India and in other parts of Asia looked positive, and the aviation sector globally was expected to continue to drive fuel demand. "In the airline sector, there is still room for improvement, so we are quite positive on demand," he said. EPM notes that OPEC is typically optimistic in its outlook. We repeat our EPM view that in modern history, interest rate hikes have always led to recessions, and we see no reason why this time things would be any different, especially considering a concurrent geopolitical crisis.
Macroeconomics
Rapid wage growth in the euro zone could keep inflation elevated longer and the European Central Bank should hold interest rates at or near record highs through next year to extinguish price pressures, the International Monetary Fund said according to Reuters. Alfred Kammer, the head of the IMF's European Department, argued that the ECB's deposit rate should stay close to its record high 4% level through all of next year. Inflation soared to over 10% a year ago but has been on a steady downward path since, even if the "last mile" of disinflation is seen the toughest and could still take two years to get from around 3% to 2%. The IMF sees price growth back at target in 2025, an exceptionally tight labour market could push this date back to 2026, it warned. Which is why it believes the ECB should use interest rates to essentially force the economic bloc into recession.
A mammoth semiconductor factory project led by China's government in the east of the country has raised another $39 billion yuan ($5.3 billion), writes Nikkei. Changxin Xinqiao Storage Technology, a semiconductor company based in Hefei in Anhui province that will operate the 150 billion yuan factory. According to Chinese media, Changxin Xinqiao plans for the site to produce dynamic random-access memory (DRAM) chips, which are used in computers and a wide range of other electronics. The company has already started bidding for equipment for the new factory and will speed up those purchases and other procedures with the latest injection of capital. It aims to start mass production within three years. For context, Nikkei adds that China's semiconductor self-sufficiency rate is estimated to stands at 20% to 40%, and that chips have become the country’s largest import item, surpassing crude oil.
Geopolitics
Eventually, you will find EPM starting to cover the US presidential election process. As to why, Martin Wolf of the Financial Times writes that “a Trump win would change the world”. Wolf notes that recent polls suggest that almost 55 per cent of US voters disapprove of Joe Biden’s performance. They also suggest that Trump is slightly ahead of Biden in head-to-head polling before the election now a year away. Finally, they suggest that Trump is ahead of Biden in five of the six most important “battleground” states. In all, a Trump victory is clearly plausible. The result would be a change in the US government, making the country more like Viktor Orbán’s Hungary or even Recep Tayyip Erdoğan’s Turkey, Wolf says. Geopolitically, this would weaken, if not destroy, the trust on which current US alliances are based. In the economy, Trump is proposing to introduce a 10 per cent across-the-board tariff on all imports. This would surely lead to retaliation. It would also do huge damage to the World Trade Organization, by repudiating US commitments to lower tariff barriers over many decades.
Energy Transition & Technology News
Finnish company Neste says petrochemical feedstock derived from chemical recycling has a 35% lower carbon footprint than petrochemical feedstock derived from fossil resources, if one assumes waste plastic is incinerated as the end of life treatment, writes Hydrocarbon Processing. Neste has big plans in the field of chemical recycling, as it wants to be a global leader in the area, as it is in the field of biofuels. The details of its LCA can be found here. In one studied case, Neste compared the GHG emissions impact of chemical recycling into a petrochemicals feedstock as an end-of-life treatment for plastics, with incineration. In this case it found chemical recycling provides a reduction in GHG emissions of 50 – 60%. In another case study, when chemical recycling was compared to the production of virgin fossil naphtha and consecutive steam cracking and polymerization into polypropylene, chemical recycling provides a GHG emissions reduction of at least 60%.
Aramco is progressing with e-fuels, writes Hydrocarbon Processing. It has partnered with ENOWA, NEOM’s energy and water company, to construct and establish a synthetic electro fuel (e-fuel) demonstration plant, producing 35 barrels per day of synthetic gasoline from renewable-based hydrogen and captured carbon dioxide (CO2). The e-fuel technology has the potential to reduce CO2 emissions by over 70 percent on a complete life cycle basis, compared to conventional fuels. Once complete, the integrated facility will generate 12 tons of synthetic methanol per day from green hydrogen and CO2. The synthetic methanol will then be converted into low-carbon gasoline.
Occidental issued a press release stating that BlackRock will invest $550 million in the development of STRATOS, the world’s largest Direct Air Capture (DAC) facility, in Ector County, Texas. STRATOS is designed to capture up to 500,000 tonnes of CO2 per year. Construction activities for STRATOS are approximately 30 percent complete and the facility is expected to be commercially operational in mid-2025.
Bloomberg has an article on the companies that are looking to create the “crop of the future” that will enable significant increases in renewable fuels production. All four of the so-called ABCD group of major crop merchants—Archer-Daniels-Midland, Bunge, Cargill and Louis Dreyfus—have opened facilities, or announced plans to build or expand renewable fuels facilities in the next few years. Researchers at startups and biotech giants alike are exploring ways to formulate a new kind of legume through selective breeding or genetic modification that generates more oil per bushel, in order to feed these facilities. One of the startups, ZeaKal, funded in part by seed giant Corteva, plans to introduce its first batch of high-oil seeds for commercial planting in 2024. Scientists have tricked the plant into sustaining photosynthesis for longer with genetic modification, ultimately producing more oil as well as more protein. Oil makes up as much as 23% of the altered seeds, which is higher than the 20% average for conventional seeds. Future varieties might have even more, the San Diego-based startup says.
Climate Politics
In an interview with S&P Global, the IEA's Fatih Birol says COP28 could be turning point for energy markets. A successful conference would mean stronger commitments on decarbonization. Governments would agree to triple renewable capacity, and agree to double energy efficiency improvements, while the oil and gas industry commit itself to Paris Agreement goals and set goals accordingly, including a big reduction in methane emissions..
The Electrification of Transport
Nikkei writes about how China's BYD went from bargain battery maker to Tesla's biggest rival. In the third quarter of this year, BYD came within a hair's breadth of beating Tesla in terms of EV units sold worldwide, selling 431,603 battery-powered EVs, up 23% from the previous quarter, while Tesla delivered 435,059 vehicles worldwide. The gap between the automakers was just 3,456 units. Outside China, the world's largest EV market where BYD is the undisputed champion, in several months this year the company claimed the throne of bestselling EV in Thailand, Sweden, Australia, New Zealand, Singapore, Israel and Brazil.
As to how it got there? It started in 1995 when Wang Chuanfu, a 29-year-old battery researcher, resigned from a state-owned research institute and borrowed 2.5 million yuan (about $343,000 today) from a relative to build a factory to make mobile phone batteries which he called BYD, for “Build Your Dream”. BYD did not build its first car, the gasoline-powered sedan F3, until 2005, with a battery-powered version, the F3E, built the following year. In 2008, a subsidiary of Warren Buffett's fund Berkshire Hathaway agreed to purchase HK$1.8 billion (US$230.2 million today) of BYD shares. At the time, the company was still primarily a producer of rechargeable batteries, albeit the world's second-largest. BYD's EV sales did not start to soar until 2021, however, when a combination of the pandemic and surging prices, including for gasoline, fed new interest in EVs, allowing BYD to begin exporting its passenger vehicles in large volumes. The company sold 1.8 million units overall in 2022, more than triple its numbers from a year earlier.
Analysts attribute much of BYD's success to its cost-cutting efforts: During its initial stages of growth, it stripped back the manufacturing process of cars to rely on cheap manual labor as much as possible, rather than capital-intensive machines. The company also makes many components in-house, including batteries, which alone account for around 30% of a vehicle's total cost. The company also uses a massive and vertically integrated network of factories to build everything from battery parts to the ships that transport cars abroad. BYD's industry peers, by contrast, buy components at market rates from commercial suppliers.
A recent tear down by investment bank UBS of BYD's Seal – a pure electric sedan that is the Chinese maker's closest peer to Tesla's Model 3 – revealed that 75% of the components were made in-house. That compares to 46% of components for a Tesla Model 3 made in China. UBS concluded that this helped the Seal achieve a gross profit margin of 16%, compared to 14% for the made-in-China Model 3. The tear down also revealed that BYD’s cost advantage stems not only from inexpensive labor or a low-cost supply chain, but primarily from the company’s improvement in engineering and technological innovation. The end-result is a value proposition to customers of “a lot of value for money”.