Energy, Politics & Money - 2023.08.03
Providing independent, objective, & neutral analysis of global developments curated from sources covering the world of energy, geopolitics, & investment.
In this roundup, we look at developments in the area of sustainability and climate change reporting. The EU has adopted new rules in this regard, which include mandatory carbon disclosures for about 50,000 companies operating in the bloc starting 2024. The U.S. is also set to adopt specific rules later this year. And at the same time, a new global audit standard from IAASB is in the making for auditing and providing assurance for the soon-to-be mandatory disclosures. In EPM’s view, this “boring subject” of disclosure requirements and audit standards has the potential to significantly push the energy transition forward, with all the implications that would have for the global energy industry. A proper set of mandatory disclosure rules coupled with mandatory audits, similar to what is commonplace for financial disclosures, would shut the doors on green washing (and/or green hushing) and thereby force companies to really act in order to reduce the emissions of their operations. But, EPM notes, there are already doubts that the EU mandatory disclosure rules are tight enough.
Furthermore, we look at:
The Biden administration decision to NOT follow through on its offer to buy 6 million barrels of to refill the Strategic Petroleum Reserve
The warnings from the world’s leading global firms of slowing earnings in China
The downgrade of the US credit rating by Fitch, regarding which history suggests that the impact on financial markets may be short-lived
Apple’s aim to move at least 20% of iPhone production to India, as it accelerates its move away from China, and the challenges it faces to achieve this
The Guardian’s confirmation of EPM’s earlier assessment of the Saudi initiative on Ukraine, which is that it is designed not to bring peace, but to unite the developing world behind America
The challenges the world's two biggest rare earths companies outside of China are facing
The experiments in the US Shale patch to mine lithium from wastewater produced in the fracking process
The EU’s foreign policy regarding the Philippines, which in the EPM view is foolish as it clearly communicates a “choosing of sides” by the EU in the US – China Cold War, which cannot but hurt the EU’s important relations with China
General Energy News
Last month, Russia’s flagship Urals crude breached the price cap for the first time. Now, several of Russia’s refined oil products are trading above the price cap imposed by Group of Seven nations, writes Bloomberg. Since February, there have been two caps on the sale of Russian refined fuels, one for higher value products at $100 a barrel and another for lower ones at $45. Naphtha and fuel oil are trading above the lower cap, while diesel is trading above the higher one. Gasoil and gasoline are both approaching that ceiling.
The Biden administration has pulled an offer to buy 6 million barrels of oil for the Strategic Petroleum Reserve, as oil prices are expected to keep rising after a output cut from Saudi Arabia, writes Reuters.
Macroeconomics
From consumer goods giant Unilever to automaker Nissan and machinery maker Caterpillar, global firms have warned of slowing earnings in China as the world's second-largest economy loses its post-pandemic bounce, writes Reuters. "What we're seeing is a very cautious consumer in China, a declining property market and reduced export demand," Unilever finance chief Graeme Pitkethly told an April-June earnings call last week.
The US was stripped of its top-tier sovereign credit rating by Fitch Ratings on August 1. Only the second time in history a rating agency “dared” to pull off a move like that – the first was more than a decade ago by S&P Global Ratings. Both markdowns were spurred by bitter standoffs over the nation’s borrowing. But, Bloomberg writes, history suggests that the impact on financial markets may be short-lived, though the move could provide fodder for more political battles.
On the topic of the “regionalization of the global economy”, which as you know EPM sees as one of the main outcomes that will result from the new era in geopolitics, Apple aims to move at least 20% of iPhone production to India as it accelerates its move away from China, writes Nikkei Asia. China has accounted for more than 95% of global iPhone production since the handset was launched in 2007. The era of exclusive dependence on China, however, is ending. Earlier in 2023, Apple informed suppliers they had to prepare to build at least 20% of total iPhone annual production in India in the coming years. This is a massive strategic undertaking for Apple, not to mention for the hundreds of companies that make parts for Apple iPhones. Many are expected to relocate on Apple's whims. Apple wants to broaden and deepen production in India, where it is currently weighted more toward routine tasks like assembly. Rather than snapping together already finished components in India, Apple plans to make more intermediate parts, such as metal casings, in the country. Most important of all, Apple wants to bring crucial new iPhone product development resources to India from China. That involves thousands of engineers and the establishment of numerous new laboratories. Negotiations between Apple and its suppliers have been prolonged and not always pleasant, according to Nikkei interviews with multiple executives. Apple has asked suppliers to keep prices of components made in India the same as those made in China, despite additional logistics and tariff costs. There is also the massive challenge of setting up plants in an unfamiliar environment.
Geopolitics
The Guardian has confirmed EPM’s assessment of the Saudi initiative on Ukraine. On Monday we said regarding this initiative that it is not designed as a peace initiative. For after all, Russia is not even invited. Rather, we said, it is an initiative to ensure the most important countries in the developing world – India, Brazil, Indonesia and others – take the side of America in the Ukraine war, with the Saudi’s leadership being the result of a visit from the US national Security Advisor Jake Sullivan, who will also attend the summit in Jeddah later this month. The key takeaway from this is, Saudi Arabia and the United States remain very close allies. And not only that, but in the internal arena of geopolitics, the Saudi’s are very much led by America and support America. This should be remembered when analyzing events such as the warming up between Saudi and China, and especially when reflecting on the possibility of the Saudi’s dropping the US dollar for oil deals.
Over in Asia, Nikkei Asia notes that the Philippines is a fulcrum of the geopolitical rivalry between the United States and China, with its maritime territory encompassing part of the South China Sea, a strategic and resource-rich waterway over which China also claims sovereignty. Considering this reality, one would expect the EU, which has very important relationships with both the US and China, to formulate an independent foreign policy for the Philippines that prevents the continent from being dragged in to the developing Cold War between the world’s two major superpowers. Alas, EPM notes, nothing of the sort. European Commission President Ursula von der Leyen declared, after a meeting with Philippine President Ferdinand Marcos Jr. in Manila, that the EU is ready to strengthen cooperation with the Philippines in the area of maritime security. This is a narrative that comes squarely out of the US playbook, and no doubt China will notice this too! This can not but hurt the EU’s important relations with China.
Energy Transition & Technology News
The world's two biggest rare earths companies outside of China are facing challenges turning rock from their mines into the building blocks for magnets used across the global economy, writes Reuters. The recent struggles by MP, Lynas and also other companies to refine their own rare earths, highlights the difficult task the world faces in breaking China's stranglehold on the key group of 17 metals needed for the clean energy transition. Technical complexities, partnership strains, and pollution concerns are hampering companies' ability to wrest market share away from China, which according to the International Energy Agency controls 87% of global rare earths refining capacity.
While ExxonMobil plans to drill specifically for lithium brine, Pioneer Natural Resources, one of the largest US shale drillers, is experimenting with mining lithium from wastewater produced in the fracking process, writes Bloomberg.
Other
The EU has made carbon disclosures mandatory for about 50,000 companies operating in the bloc from next year, while new U.S. rules should come this year as governments look to replace a patchwork of private sector norms with binding regulations. The idea being that this will make it easier to crack down on green washing (exaggerated climate-friendly claims made by companies) and green hushing (where companies decide to to report on sustainability, climate change, and ESG issues). However, Reuters believes these mandatory climate disclosures rules will not fundamentally improve transparency. Most companies today utliize the Greenhouse Gas Protocol (GHGP) Corporate Standard for reporting. Half a dozen investors interviewed by Reuters said while the GHGP has been crucial in shining a light on corporate emissions, it can be hard to compare companies given the potential for differences in disclosures. In addition to differences when defining what should be counted under existing GHGP guidelines, companies may use different calculation processes or present data in different ways. This will remain the case to some extent even with new mandatory norms, Reuters says. EFRAG, the EU body that drafted the bloc's disclosure standards, acknowledges this was likely to be the case, but said the priority was to make disclosures mandatory before improving the quality, and that they are just one piece of the puzzle.
At the same time that the world is moving to mandatory disclosures around sustainability and GHG emissions, the International Auditing and Assurance Standards Board (IAASB) is working on a new global audit standard for sustainability reporting, writes Bloomberg. The proposals cover both reasonable and limited assurances. A reasonable assurance engagement for sustainability information is equivalent to an audit of financial statements, the IAASB said. A limited assurance engagement provides less confidence that the reporting is correct.