Energy, (Geo)Politics & Money - 5 March 2024
Non-partisan, objective & neutral analysis where global developments in energy, business & geopolitics intersect & curated from leading global sources & resources.
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.
Today was a slow news day in the world of energy, but not in the interconnected worlds of macroeconomics, geopolitics, policy and technology. In this roundup, we therefore look at:
Global factory activity, pointing to recession in Europe and Japan, expansion in developing Asia, growth in South Korea, while China’s numbers are wholly doubtful
China’s economic target for 2024, reflecting uncertainties facing the Chinese economy, and how it plans to achieve it
Germany’s assessment of how exposed its economy is to the tariffs proposed by US presidential candidate Donald Trump; EPM explains it would be utterly naïve for Germany to think it is only exposed to a Trump presidency; it will be affected by the trend of fundamental reset in the global political-economy even without a Trump presidency
The major expansion of China's annual defense budget
Sunfire’s – a German green hydrogen company - recent receipt of Euro 500 million investment
Daniel Yergin’s view energy security deserves to be higher on the priority list of all governments
The EU plan to tax the fossil fuel industry to fund the climate change action in poorer countries
The EU’s position on support for its struggling solar panel manufacturers - who are simply unable to compete with Chinese competitors - which rules out sanctions but keeps the door open for subsidies
Chinese EV manufacturer BYD strategy to vertically integrate backward, adding a total of 7 car carrying ships to its portfolio, in order to optimize flexibility and independence in its operations; and
EPM explains Chinese strategic thinking, how it differs from what has become the norm in the West, and tells you why this will serve the Chinese well in a world characterized by geopolitical competition
Photo by Lenny Kuhne on Unsplashgraph
Macroeconomics
GLOBAL MANUFACTURING ACTIVITY
Across the euro zone, manufacturing activity continued to contract in February amid weak demand, writes Reuters. The manufacturing downturn in Europe's largest economy, Germany, deepened in February as output and new orders declined at a faster rate. In Italy, the sector contracted for an 11th straight month, although it did show some signs of improvement, and the downturn in France eased. Britain, outside the European Union, marked a year of falling output. There were conflicting signals out of China with the government's official Purchasing Managers' Index (PMI) showing factory activity continuing to fall, in contrast to a slight pickup seen in the private-sector Caixin PMI. Recent data suggests the weakness seen in Japan in the second half of last year has continued. But there were some signs conditions were improving in other parts of Asia. South Korean export growth exceeded forecasts in February and India's PMI showed manufacturing activity expanded at its fastest pace in five months. That followed data on Thursday showing India's economy grew at its fastest pace in one-and-half years in the final three months of 2023. Southeast Asia's key factory economies mostly saw growth with PMIs in Vietnam, Indonesia and the Philippines all pointing to expansion in activity although Malaysian and Thai PMIs both showed continued activity declines.
CHINA SETS GDP GROWTH TARGET OF 5% FOR 2024
China on Tuesday set a gross domestic product growth target of "around 5%" for 2024, matching last year's goal even as economic challenges mount, writes Nikkei Asia. Premier Li Qiang revealed the target in a speech to the National People's Congress (NPC), China's annual legislative meeting in Beijing. China's economy grew 5.2% on the year in 2023. The addition of the word “around” to the 2024 targets is a reflection of the uncertainties facing the Chinese economy. "The foundation for China's sustained economic recovery and growth is not solid enough," Li acknowledged. Li said that the target of around 5% would be achieved by creating 12 million new jobs and boosting incomes while preventing risks. More support will be extended to sectors with a "large capacity" for creating jobs. To address funding shortages in major projects, Li said that new "ultra-long" special treasury bonds will be issued. 1 trillion yuan ($141 billion) worth of such bonds will be issued in 2024. The issuance of special-purpose bonds for local governments is set at 3.9 trillion yuan, up by 100 billion yuan from last year. In addition to the bonds, over 10.2 trillion yuan will be transferred to local governments from the central government, representing a 4.1% hike. China plans to run a budget deficit of 3% of economic output, down from a revised 3.8% last year, Reuters added.
GERMANY ECONOMY TO CONTRACT UNDER NEW US PRESIDENT
Germany's economy would contract by at least 1.2% by 2028 should former U.S. President Donald Trump regain office and hike import tariffs as much as he has proposed, the German Economic Institute (IW) calculated, according to Reuters. The IW is financed by prominent German business associations and carries weight among Berlin policymakers. Trump has proposed slapping a 10% tariff on all imports and hiking those on Chinese imports by 40 percentage points to 60%. In the EPM view, Germany will make a big mistake if it believes that its economy is exposed only to a Trump presidency. As we’ve mentioned many times before, with or without Trump, the global economy is in a process of fundamental change. Driven by the geopolitical competition between the US and China, it will result in (among other things) regionalization, through tariffs and other trade barriers; and a return of active supply chain management by nations, through industrial policy, against supported by tariffs, but also subsidies. It would be utterly naïve for Germany to think that it will not be affected by this underlying trend without a Trump presidency!
Geopolitics
CHINA’S DEFENSE BUDGET SET AT 5%
China's annual defense budget will expand by 7.2% this year, well above the country's economic growth target of around 5%, Nikkei Asia writes. The increase will bring the budget for 2024 to nearly 1.67 trillion yuan ($232 billion). It is the third year in a row of military expansion above 7%, even as the economy continues to slow down. The details of the defense budget expansion were not available, but the focus is understood to be on catching up with the U.S. while filling the gap in nuclear capabilities by enhancing other conventional weaponry.
Energy Transition & Technology News
German green hydrogen company Sunfire offers two kinds of electrolyzers: older technology in pressurized alkaline model and newer technology in high-temperature solid oxide electrolysis. Bloomberg writes, the company has secured over €500 million in new investment in order to further development of its technologies, and bring green hydrogen costs down. The funding includes €215 million ($233 million) of new equity –brought in from new investors including a division of the Liechtenstein royal family’s LGT Group and Singaporean sovereign-wealth fund GIC as well as existing investors such as Amazon and Planet First Partners – along with a €100 million loan from the European Investment Bank and a grant of €200 million. Bloomberg says Sunfire’s solid-oxide technology operates at high temperatures, which allows it to consume less electrical energy, enabling it to compete on price with fossil fuels in the coming years.
Climate Politics
YERGIN OPINES ON GLOBAL ENERGY SECURITY NEEDS
The current realities in the world of geopolitics have brought the subject of energy security back to the forefront, writes Daniel Yergin of S&P Global. Attaining energy security means ensuring access to commercial energy and electricity at affordable prices. It is a basic prerequisite for making progress in the fight against poverty. And, he adds, the energy transition can only proceed steadily and at scale if energy security is first assured. Otherwise there will be a public backlash against “green policies”.
EU TO TAX FOSSIL FUEL INDUSTRY TO PAY FOR CLIMATE CHANGE ACTION
The European Union is set to call for the fossil fuel industry to help pay for fighting climate change in poorer countries under a United Nations target, a draft document shows according to Reuters. "Recognising that public finance alone cannot provide the quantum necessary for the new goal, additional, new and innovative sources of finance from a wide variety of sources, including from the fossil fuel sector, should be identified and utilised," the draft document states. The draft document also said the EU will continue to demand that large emerging economies and those with high CO2 emissions and per-capita wealth - like China and Middle Eastern states - should pay towards the new U.N. climate finance goal. EU climate policy chief Wopke Hoekstra has said he will try to rally support for international fossil fuel taxes. But, EPM notes, that is an almost impossible-to-achieve objective, considering the large amount of stakeholders (all with differing interests and objectives) that would need to agree.
EU SOLAR PANEL MAKERS UNABLE TO COMPETE WITH CHINA
Meanwhile, as factory closures among Europe's few solar panel makers have prompted the industry to seek emergency support from Brussels – potentially including trade restrictions on cheap Chinese imports that European companies have struggled to compete with – the EU has come out saying that while it should support the struggling companies, it cannot close its borders to imports of such products, writes Reuters. "There are different proposals how we can support our industry, but clearly we cannot close our borders because we need solar panels," EU energy policy chief Kadri Simson said.
The Electrification of Transport
BYD’s - CHINESE EV MANUFACTURER - PLANS AND STRATEGY
A fascinating development in the electrification of transport. In typical Chinese fashion, BYD is looking at vertically integrating backward. It plans to increase its fleet of car carriers to eight within in two years to boost its export capacity, writes Nikkei Asia. In January, a ship carrying BYD's EVs and other NEVs set off for Europe from Xiaomo International Logistics Port in Shenzhen. BYD Explorer No. 1, a roll-on/roll-off (RORO) ship, was manufactured by CIMC Raffles, a shipbuilding affiliate of China International Marine Containers. The vessel has a 7,000-vehicle capacity and was ordered by London-based shipping company Zodiac Maritime. It is the first car carrier built in a Chinese shipyard exclusively for the export of domestically produced vehicles. CSSC Offshore & Marine Engineering, a subsidiary of China State Shipping Corporation, also plans to build two ships capable of carrying 7,000 BYD vehicles. Construction of the two ships has already begun in Guangzhou.
EPM notes Chinese strategic thinking is longer term than what has become common in the West under the influence of the “finance mindset”. It is also more focused on resilience, through strategic independence, and less on the shorter-term profit maximization that leads to the fragility and dependency that comes with “outsourcing”; they take into account ‘capacity’ as an important co-objective to financial return. It is EPM’s view, that in a world characterized by geopolitical conflict, this style of strategy will certainly benefit the Chinese companies more so than their Global competitors.