Energy, (Geo)Politics & Money - 2024.04.15
Welcome to EPM, where we take our daily look at the interconnected worlds of Energy, (Geo)Politics and Money. Curated from the world’s leading sources of information, we provide you both the information and the objective, neutral commentary that you need to make sense of it all – and beat the market.
In this roundup, we take a closer look at the calls in the US to adopt a “Cold War”-stance towards China.
Here EPM explains why this call is out of touch with reality. China is not the Soviet Union. It is much more of a competition, as it can compete with the US not only militarily, but also economically and technologically.
We also explain why the call itself is symptomatic for a Great Power Rivalry that is “Destined for War”, where we note the two things that could avoid this terrible outlook – a Chinese acceptance of continued US dominance and US acceptance of China as a peer – neither of which we deem particularly realistic at this point.
Furthermore, we look at:
The decrease in oil prices following the Iranian attack on Israel; where EPM notes that this development is in line with what we forecasted last week Thursday
The chatter about a takeover of BP
The increased US pressure on The Netherlands and ASML, this time to halt maintenance services for lithography machines sold to China; where EPM also provides an update on China’s efforts to achieve self-sufficiency in semiconductors, which is focusing on removing the country’s reliance on ASML
The trilateral summit in Washington between the United States, the Philippines and Japan, which focused on countering China in the South China Sea, which featured inclusion of the Philippine Coast Guard in the US-Philippines Mutual Defence Treaty [MDT]; where EPM notes that this can be used to justify a US military response to likely future confrontations between China and the Philippines in the South China Sea in the future
German Chancellor Olaf Scholz three-day tour of China, accompanied by representatives of Germany’s main industrial platers; where EPM explains why and how Germany has created major economic risks for itself by not adopting (or not having the ability to adopt…) an independent foreign policy
The continuing deterioration of Ukraine’s frontline positions in its war with Russia
Why the US is worried about Chinese EVs; why there are now calls to comprehensively ban them from the US market; and why the US and EU should instead turn to subsidies for their domestic car manufacturers rather than tariffs or bans on the Chinese; where EPM explains why we believe the “geostrategic perspective” will eventually drive the decision towards tariffs and bans
The Science Based Targets initiative (SBTi) staff revolt over its endorsement of carbon credits
Photo by Venti Views on Unsplash
General Energy News
OIL PRICES DECLINED IN MONDAY MORNING TRADING
Oil prices declined during the course of Monday morning trading, writes the Financial Times. By UK lunchtime, Brent crude had dropped 1 per cent to $89.52 per barrel, while West Texas Intermediate had fallen 1.2 per cent to $84.63 per barrel. Explaining the drop is the increase in the risk premium during the course of last week, when the US on numerous occasions warned Iran was “about to attack”. Now that the attack is over, uncertainty is reduced. Additionally, traders have noted, as EPM wrote separately in our special update on the subject, that the Iran attach was limited and communicated in advance, and this designed not to trigger escalation; while the US has told Israel it will not support an Israeli response. As a result, the risk of further escalation is now assessed as lower than last week.
This is exactly what last week Thursday we at EPM said would happen. At that time foresaw that Iran would respond in the way it now has. We said:
“Iran has communicated with the US via backdoor channels throughout Israel’s War on Gaza, in order to prevent the kinds of escalation in the conflict that would lead to an all-out war between Iran and the US. No doubt, this continues to be the Iranian objective, as such a war would not serve its objectives.”
And consequently we concluded that the market was overemphasizing the risk for escalation:
“We expect the Iranian response to be limited, measured, and aligned with the US. EPM has, therefore, a lower assessment of the risk of a wider Middle East than the market.”
We hope you positioned accordingly and benefited handsomely from this EPM foresight.
BP - TAKEOVER TARGET?
Lots of chatter about a takeover of BP. Reuters writes that ADNOC has been considering a purchase of the company. The reason is obvious: at a valuation of (just) $110 billion, the company is relatively cheap. Reuters also writes that there are other possible suitors for the company, such as Norway’s Equinor or U.S. rival ConocoPhillips. Because the company’s market value is less than 4 times its expected cash flow for the next 12 months, well below European rivals like Shell, Equinor and TotalEnergies. U.S. giants like ExxonMobil, Chevron and ConocoPhillips trade at double BP’s multiple. Antitrust and national security concerns are a daunting deterrent, though, it notes.
Macroeconomics
US DEMANDS OEM CHIP MANUFACTURER TO STOP MAINTENANCE ON CHINESE OWNED CHIP MACHINES
On the subject of semiconductors, the United States is trying to get ASML to halt maintenance on the machines it has sold to China, writes Asia Times. Earlier, the US demanded from the Netherlands that is halts the issuance of export licenses for ASML machines sold to China. ASML was unhappy with this initial US request as it risks being cut off from a very lucrative market. The latest US request is possibly an even bigger worry, as contractually it might be the case that is ASML does not provide maintenance services, its Chinese customer may demand it buys back the machines from them – something ASML would not be able to do.
CHINA CONTINUES TO BUILD SEMICONDUCTOR SELF SUFFICIENCY
Also in Asia Times a report on China’s efforts to achieve self-sufficiency in semiconductors. Naura Technology Group, a Beijing-based, Shenzhen-listed, state-owned enterprise has started research on a multiple-patterning process that can achieve the mass production of 5 nanometer chips. The focus of the research is on lithography systems that use a technique known as self-aligned quadruple patterning (SAQP), which can increase a chip’s density and performance. Technology experts say the SAQP technology is old, but may nevertheless help Huawei and Semiconductor Manufacturing International Corp (SMIC) achieve their goals of making 5nm chips without ASML’s extreme ultraviolet (EUV) lithography machines.
Geopolitics
US AND ASIAN ALLIES STRENGTHEN MARITIME DEFENCE TIES
The trilateral summit in Washington between the leaders of the United States, the Philippines and Japan last week resulted in a number of announcements focused on strengthening maritime defence cooperation in the South China Sea to counter China, writes the South China Morning Post. The joint statement released by PUS President Joe Biden, Philippine President Ferdinand Marcos Jnr and Japanese Prime Minister Fumio Kishida at the of the summit read, “We express our serious concerns about the People’s Republic of China’s dangerous and aggressive behaviour in the South China Sea. We are also concerned by the militarisation of reclaimed features and unlawful maritime claims in the South China Sea.” The statement also expressed “steadfast” opposition to “the dangerous and coercive use of Coast Guard and maritime militia vessels in the South China Sea”, a reference to Beijing’s strategy of using both military and paramilitary maritime forces. A key practical outcome of the summit, in the EPM view, was the inclusion of the Philippine Coast Guard in the US-Philippines Mutual Defence Treaty [MDT]. Earlier, the MDT did not include coastguards. The change is relevant since China – Philippines confrontations in the South China Sea predominantly involve the coastguards. The new understanding of the MDT can be used to justify a US military response if and when such confrontation were to take place again in the future.
EPM sees this development as a step in line with the view that the US should stop efforts to “manage” competition with China and instead pivot to an explicit cold-war stance against it, which was argued by Matthew Pottinger, the top Asia adviser on former president Donald Trump’s National Security Council, and Wisconsin congressman Mike Gallagher, ex-chair of the House select committee on China in a recent Foreign Affairs article. In EPM’s assessment, this is already the trajectory US foreign policy when it comes to China is on.
ITS NOT A COLD WAR - ITS SUPER NATIONAL COMPETITION
The South China Morning Post carries an opinion piece on the subject – in the EPM view a must read. The common analogy that likens China to the Soviet Union during the Cold War is misleading, it says. The Soviet Union was solely a military competitor to the US while 21st century China is a competitor on every level: diplomatically, economically, militarily, politically and technologically. Moreover, the call by Pottinger and Gallagher to only negotiate with China from a “position of strength” is unpractical, as America is no longer able to develop the envisioned position of strength. China today is beyond being in a position where it can be bullied. The Chinese leadership’s decision to limit diplomatic exchanges with the US over recent years indicates this.
In response, EPM notes that we are not surprised by the calls in the US for a more confrontational approach towards China. In the history of Great Power Rivalries, the leading power commonly first tries to coopt the challenging power into the order it has established, to keep it in second place and itself on top; then if this does not work, it will attempt to limit the ability of the challenger to grow in power, via economic blockading; and when this too doesn’t work, the “solution of last resort” is military confrontation. Judged by this historical pattern, the US is now at the end of the second phase, where it realizes that economic blockading doesn’t work (sufficiently), and calls for “firmer” action start to appear. This is why we at EPM believe that on the current trajectory, the US – China competition is “Destined for War”. Only two things could avoid this outcome at this stage, we believe. One is, China back down from its ambition to develop its own sphere of influence where it operates unconstrained by US imposed “international rules”. The other is, the US accepts that China develops into a peer-power, and agrees to share the world with her. Neither of these are likely to happen, EPM believes.
GERMAN CHANCELLOR KICKS OFF THREE DAY CHINA TRIP
Meanwhile, German Chancellor Olaf Scholz kicked off a three-day tour of China on Sunday to shore up ties with Germany's top trade partner and address rifts over issues including Chinese trade practices and its support for Russia, Reuters writes. Scholz is travelling with several German CEOs, and started his trip in the southwestern megacity of Chongqing. He will also go to Shanghai and Beijing where he is set to meet Chinese President Xi Jinping and Premier Li Qiang.
GERMAN CHANCELLOR WON’T HAVE IT EASY IN CHINA
The Financial Times notes how difficult this trip will be for Scholtz. In an interview, Ralf Thomas, chief financial officer of software technology group Siemens, said It will take “decades” for Germany’s manufacturers to reduce their dependence on China. “Global value chains have been building up over the last 50 years. How naive do you need to be to believe that this can be changed within six or 12 months?” he said. “This is about decades.” His comments follow a report from the German Economic Institute that found that the country’s corporations had made little progress in “de-risking” their China exposure and reducing their critical import dependencies since 2022. China is Germany’s single largest trading partner, with goods worth €254bn traded between the two countries in 2023. In the EPM view, this highlights the risks Germany has creating for itself by not adopting (or not having the ability to adopt…) an independent foreign policy. Clearly, the German interests are not aligned with the American interests. Consequently, the country’s political alignment with the US has led to its energy security being severely affected (higher costs of energy supplies following the sanctioning of Russia have left German heavy industry uncompetitive globally), and threatens to upset its relation with its most important trading partner – where then is Germany going to export billions of dollars’ worth, and who will take over the German company’s assets in China at fair market value?
UKRAINE CONTINUES TO STRUGGLE AGAINST RUSSIA
As to the Ukraine War, Ukraine’s top commander warned that his outmanned and outgunned army is struggling to halt a multipronged and intensifying Russian offensive, writes the Financial Times. “The situation on the eastern front has significantly worsened in recent days,” Oleksandr Syrsky wrote on Telegram, as a result of “significant intensification of the enemy’s offensive actions”.
The Electrification of Transport
US LAWMAKER URGES BAN ON CHINESE EVS.
The chair of the Senate Banking Committee, Senator Sherrod Brown, has urged President Joe Biden to ban imports of Chinese-made electric cars to the US, writes the BBC. "We cannot allow China to bring its government-backed cheating to the American auto industry", Senator Brown said. His comments are the strongest yet by any US lawmaker on the issue, while others have called for steep tariffs to keep Chinese electric vehicles (EV) out of the country.
EUROPE AND US SHOULD OFFER INCENTIVES NOT IMPORT TARIFFS
An opinion piece over at Project Syndicate that instead of tariffs (or all out bans) on Chinese EVs, the US and EU should offer subsidies to their own, domestic car manufacturers. Tariffs would raise the price of electric vehicles, and thereby slow the electrification of transport. Subsidies, on the other hand, would accelerate the electrification and give western car manufacturers the opportunity to catch up with the Chinese counterparts. The only tariff that would make socio-economic sense, the article adds, is a tariff on the carbon intensity of vehicle manufacturing. Given the carbon intensity of Chinese manufacturing, such carbon tariffs alone could give a boost to US and especially EU EV manufacturers. In the EPM view, subsidies sound good on paper, but in reality the Chinese are so far ahead in the EV ecosystem (from minerals mining and refining, to batteries, to drivetrains, to software and autonomous driving technology) that these are unlikely to save western automakers. The geostrategic perspective requires these companies to be protected, since their capabilities are critical for defense purposes. For this reason, we believe, what makes “economic sense” is not what will decide. A segregated market is what we are heading toward, West versus East, via tariffs and bans.
BACKGROUND ON EV MARKET
Bloomberg looks at how this current state of affairs came about. As recently as 2016, the US had more EVs on the road than China did, it notes. But now China has clearly raced ahead, despite US-company Tesla’s pioneering role in bringing electrification into the mainstream. Chief executive Elon Musk is on record saying that, absent trade barriers, Chinese manufacturers “will pretty much demolish most other car companies in the world”. It all goes back to 2001, Bloomberg says, when the Chinese government decided to focus on development of electric transportation. It concluded it would not be able to compete in the internal combustion engine, and therefore launched an R&D program to develop batteries, motors and other EV-related technologies. This industrial policy, aided by supportive domestic banks, was matched about a decade later with the rollout of generous subsidies encouraging Chinese drivers to buy EVs. This is what has put China ahead – in the EPM view, a textbook example of an outstanding combination of strategic foresight, strategy and execution. What in this situation is holding America back, effectively preventing it from catching up, Bloomberg says, is the choice the country has made with regards to the cars it likes to drive. The big and heavy SUVs and pickups preferred by the American public, and where America’s car companies make the most money, are hard to electrify.
Other
SBTi STAFF REVOLT OVER CARBON CREDIT ENDORSEMENT
The Science Based Targets initiative (SBTi) has experienced a staff revolt over its endorsement of carbon credits, writes the Financial Times. The policy to allow offsetting was made by the board without the consultation of SBTi’s technical and advisory groups, members of those groups said in a letter sent to trustees on Friday.