Energy, Politics & Money - 06 April 2023
Independent, objective, and politically neutral analysis of global developments curated from sources covering the world of energy, geopolitics, and investment.
In this roundup, we take a closer look at the warnings of the World Bank and IMF about the global economy. Both highlight the structural changes which we at EPM have focused, in particular the regionalization of the global economy under the influence of geopolitics. Both financial institutions now warning that this will put the world on a structurally lower growth trajectory going forward. Additionally, the World Bank highlights the effect of Covid lockdowns on education levels, and both warn another banking crisis induced global recession would be devastating – nothing that should surprise our EPM readers.
Furthermore, we look at:
How the sanctions on Russian energy are redrawing the global shipping map, raising the cost of transportation significantly
The decline in the price of diesel, a clear indication the world economy is slowing
A coming decline in bank lending in response to the ongoing banking crisis, which reduces the need for central banks to raise rates further in the fight against inflation
China consideration of restrictions on its exports of rare-earths used in magnet technology in response to the US waged chip war
The busy day in diplomacy yesterday, where in the US Taiwanese president Tsai Ing-wen met US House Speaker Kevin McCarthy, while in China the foreign ministers of Iran and Saudi Arabia met as French president Macron and EU head Von der Leyen meet with Chinese president Xi
General Energy News
World Wide Impacts of Russian Fuel Ban
As a result of the European Union ban on Russian fuel that started on February 5, tankers carrying clean oil products such as gasoline, diesel, jet fuel and naphtha are travelling between 16 and 18 days to bring Russian supplies to Brazil, or US cargoes to Europe. That is up from the four to six days a ship used to travel from Russia to Europe, writes Reuters. These examples explain why since the start of the ban, the Clean Tanker Index published by the Baltic Exchange - measuring average freight rates for shipping fuels like gasoline and diesel on some of the most common global routes - has more than doubled and increased the cost of energy for import dependent countries. Russian cargoes of fuel are now heading to Brazil, Turkey, Nigeria, and Morocco, while Europe is importing more fuels such as diesel from Asia and the Middle East. Asian cargoes, in turn, are being displaced by Russian fuels in Africa and the eastern Mediterranean, and redirected to the blending hub of Singapore for temporary storage. The US is also emerging as a top supplier of heavy naphtha to Europe. Meanwhile, Brazil, traditionally a US naphtha importer, is boosting purchases from Russia at more attractive prices.
Macroeconomics
European Manufacturing Slows
As manufacturers across the Eurozone have reported falling business activity for nine months since June 2022, and US manufacturers have reported falling business activity for the past five months, John kemp of Reuters notices this is beginning to affect the price of diesel – a clear indication the world economy is slowing.
Central Banks - Will Stop Interest Rate Hikes
As to the outlook for the economy, an opinion piece in Bloomberg argues that the central banks will shortly halt their rate rises, as conventional banks will be hitting the breaks on lending in response to the currently ongoing banking crisis. The higher interest-rate costs are already putting potential corporate and private borrowers off, and many are repaying back debt if possible, while banks are weary of adding new loans to their portfolios.
World Bank and IMF - Slowed Growth Warning
The World Bank warns that the global economy is experiencing structural changes which will lower growth rates over the medium term, writes the Financial Times. It says the pandemic created huge uncertainties for companies and lowered investment growth rates in the world to an annual rate of 3.5 per cent, half the level of the past two decades. It also harmed children’s education, which in turn hit workplace skills and led to fewer people working than had been expected, across a large number of countries. Geopolitical tension since 2010 had left global trade barely growing as fast as the world economy, culminating in Russia’s invasion of Ukraine which further increased uncertainties and reduced investment. The resulting slowdown in global growth prospects could be much sharper, if another financial crisis erupts, especially if it is accompanied by another global recession, the bank said.
The IMF’s managing director has also warned that the global economy is facing years of slow growth, with medium-term prospects their weakest in more than 30 years, writes again the Financial Times. The IMF expects the world economy to expand at an average annual rate of around 3 per cent over the next five years, well below the average 3.8 per cent forecast of the past two decades and marks the weakest projection for medium-term growth since 1990. The fund’s managing director said key impediments to growth were increasing economic fragmentation and geopolitical tensions.
Geopolitics
China - Rare Earth Metal Export Restrictions
Yesterday we looked at the current status of the chip war that the US is waging against China, where we noted that, surprisingly, China has not yet retaliated. Well, today is another day, and Nikkei Asia reports China is considering prohibiting exports of certain rare-earths as a response. High performance magnets are used in a wide range of applications, such as motors for electric vehicles. China suspended exports of rare earths used in such magnets to Japan following tensions in 2010 surrounding the Japan-administered Senkaku Islands, which Beijing claims and calls the Diaoyu. Japan specializes in making high-performance magnets from rare earths while the US produces products that use the magnets. That episode led to a heightened sense of alarm in Japan and the US on the economic security front.
US and Taiwan Meet - China Not Pleased
As for Taiwan, Nikkei Asia covers Wednesday’s meeting in California between Tsai Ing-wen, President of Taiwan and Kevin McCarthy, US House Speaker. Earlier the President had met with House Democrat leader Hakeem Jeffries. The meeting with McCarthy took place amid threats of retaliatory action from China, which is against any exchange that can be viewed as showing support for the independence of the self-governing island. In written communiques released after the meeting Taiwan called for closer collaboration in the economy and military realms, and the US touted the “stronger than ever” relations between the two countries and, according to Reuters, stressed the need to accelerate arms deliveries to Taiwan in the face of rising threats from China. Unsurprisingly, this has significantly angered China. It’s Foreign Ministry condemned the meeting in a lengthy statement. It said the US had "obstinately allowed" Tsai's trip and her meeting with McCarthy "in disrespect of the stern representations and repeated warnings lodged by China." It went on to accuse the US of having
… colluded with Taiwan authorities and connived at attempts by separatists seeking 'Taiwan independence' to carry out political activities on the US soil, engage in official interaction between the United States and Taiwan, and elevate the substantive relations between the United States and Taiwan.
Beijing vowed that it would "take resolute and effective measures to safeguard national sovereignty and territorial integrity."
China - Diplomatic Machinations
In China itself, the foreign ministers of Iran and Saudi Arabia met for the first formal meeting of their most senior diplomats in more than seven years, writes Reuters. This meeting takes place as French president Macron and EU head Von der Leyen meet with Chinese president Xi, of course.