Energy, Politics & Money - 21 June 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 Summit for a New Global Financing Pact, which is taking place in Paris. Officially, it is about making the funds for GHG emissions reduction promised by the developed world to the developing world flow properly. In other words, it is to solve the issue of the “missing $100 billion”. EPM notes that originally, the developing world joined the climate change agenda although it realized the development challenges that would be caused by a parallel focus on GHG emissions reduction. But, it was coaxed into going along with the climate change agenda by the promise of $100 billion in aid. The last few years the developed world has tried to re-frame the conversation, however. Away from support through aid, toward support in the form of commercial, especially private sector loans. The topics for discussion at the Paris Summit all clearly have this objective in mind, and as such will not offer the developing world the support it – in the EPM view – deserves. The interests of the developing world are not supported by a focus on emissions reduction. Their focus should be development for the improvement of the socioeconomic circumstances of their populations. And they are not morally obliged to reduce emissions, because today they emit just a fraction of what the developed world emits, and because a very large majority of the GHG in the atmosphere today were not emitted by them but by the developed world.
And,
US president Biden’s name-calling of China’s president Xi, just a day after US the US foreign secretary Blinken completed his diplomatic trip to China, which was undiplomatic and terribly timed; and with no effort at damage control by the US side, EPM believes it might well have been intentional, or at a minimum not in conflict with US policy regarding China, in which case it would be further evidence the US is consciously on a escalatory trajectory with China
Furthermore, we look at:
The battle brewing inside OPEC+, with the African member-states not happy about the most recent production quota cuts
The growth in US refining capacity this year, after almost 5 years of steady declines
ADNOC’s takeover bid to German chemical producer Covestro
The inverted yield curve in the US treasury market, something which has preceded every recession in the past five decades
The ASML view that decoupling the global semiconductor supply chain is extremely difficult and expensive, if not impossible; which provides insight into its supply chain management, manufacturing and R&D strategies
The clear intent by Europe’s corporate giants to no decouple from China, as evidenced by the signing of multiple agreements by the giants with China on Wednesday in Berlin
How the US housing market is responding to the higher interest rates
Tesla’s ambition to open manufacturing in India, and India’s ambition to bring Tesla over
Lithium iron phosphate’s gaining of traction to become the EV battery material of choice
Nissan’s unique approach to EV battery recycling
The likely closure of the natural gas pipeline through Ukraine, which transfers around 5 per cent of Europe’s total gas imports
General Energy News
Africa's OPEC members were strong-armed into accepting lower quotas when the bloc and its allies last convened in Vienna, writes S&P Global, and say they are prepared to fight for their market share within the Saudi-dominated group. They plan to come better prepared for future talks with pre-agreed strategies and a unified front -- taking a page from their Middle East counterparts, who typically align their positions before contentious negotiations through pre-meeting consultations. OPEC's sub-Saharan African members -- Nigeria, Angola, Gabon, Equatorial Guinea and the Republic of Congo -- have seen their influence in the bloc shrink in recent years as crude production has slipped well below their quotas, and now find themselves crowded out by the Saudi-Russia axis of power, following the creation of the OPEC+ coalition in 2019.
U.S. crude oil refining capacity has reversed two years of declines and climbed by more than 100,000 barrels, to 18.1 million barrels per day (bpd), writes Reuters. During the first two years of the COVID-19 pandemic, processing capacity to produce gasoline, diesel and jet fuel fell 5.4% as lockdowns and work-from-home policies crushed motor fuel demand. When gasoline and diesel demand rebounded last year, diminished capacity resulted in sky-high fuel prices and record profits for the industry. This year's 18.1 million bpd capacity remains below the 18.98 million bpd peak in 2019. But the current total does not yet include a recent 250,000 bpd increase at ExxonMobil's Beaumont, Texas refinery.
ADNOC has made a preliminary takeover approach for German chemical producer Covestro, writes Bloomberg. ADNOC discussed a potential offer in the mid-€50s per Covestro share, implying a premium of nearly 40% to its last close and potentially valuing the company at almost €11 billion ($12 billion).
Macroeconomics
Investors in the Treasury bond market are betting that the Federal Reserve’s interest rate hikes will drive the US economy into recession, writes the Financial Times. Short-term US government borrowing costs exceeded their long-term equivalents by the widest margin in three months on Wednesday, and the gap is fast approaching the 42-year record hit during the regional banking crisis in March, it says. This situation, known as an inverted yield curve — most commonly measured as the difference between two- and 10-year Treasury yields — has preceded every recession in the past five decades. “Bad things happen when the yield curve is inverted,” said Mike Cudzil, a portfolio manager at Pimco. “With very inverted yield curves, you tend to see a slowdown in credit creation. This is one reason why a shallow recession by the end of this year, or beginning of next year, is our base case scenario.”
Decoupling the global semiconductor supply chain is "extremely difficult and expensive" if not impossible, a senior executive at ASML, the world's most valuable chip equipment maker, told Nikkei Asia. Christophe Fouquet, ASML's executive vice president and chief business officer, said the secret to ASML's success is its longtime collaboration with critical global suppliers such as Zeiss and Cymer and the support from its top chipmaking customers, Taiwan Semiconductor Manufacturing Co. and Intel.
Zeiss of Germany is ASML's only supplier of precision mirror systems, one of the most critical optical parts for the EUV machine, while San Diego-based Cymer, which ASML acquired in 2013, is the sole provider of the EUV light source. Fouquet says ASML has very consciously chosen to establish its global supply chain:
The big difference [in strategy] is Canon and Nikon were trying to do a lot of things by themselves.
ASML also believes that for some of the most sophisticated components it is best to have only one supplier:
The investment in Zeiss to get EUV optics is huge. If you make it in two to three places, the cost doesn't work out anymore. ... When it comes to unique technology, we develop partnerships with our suppliers. When it comes to less advanced technology, then we will look at multiple suppliers.
Another strategic choice made by ASML is to keep core manufacturing at home, in The Netherlands:
It's very important for us to keep R&D and manufacturing together."
China’s state planner this week signed letters of intent in Berlin on cooperation with European corporate heavyweights in areas ranging from aviation and chemicals to automobiles, as the world’s second-largest economy seek to lobby for stronger ties with Europe, writes Euractiv. European companies including Airbus, BASF, Siemens, Mercedez-Benz, BMW and Volkswagen were among those that signed agreements with China, according to statements from China’s National Development and Reform Commission.
Bloomberg looks at how the higher interest rates are affecting the US housing market. EPM’s perspective is higher rates will first lower demand, as people’s mortgage rates will go up significantly if they sell their current home to buy a new home. This, in turn, limits the ability of housing prices to rise further, but does not necessarily lead to a strong decline. That decline would result if and when people become forced to sell their home, and this can happen when mortgages are short-term and thus refinanced at the new rates, or when the economy declines and people lose their homes. According to Bloomberg, the first impact is indeed happening in the US. Many homeowners are opting to stay put as moving means giving up a cheaper mortgage. But, it says, the low number of houses on sale is pushing up prices.
Geopolitics
A further update on the Blinken visit to Chins. Chinese President Xi rebuffed US calls to resume military dialogue, writes Nikkei Asia, which in the EPM view makes sense at China should push the US to make the first move in this area by removing the Chinese minister of defense from its sanctions list. In addition, president Xi used all kinds of “tricks” to project power and independence, Nikkei Asia says. The meeting at the Great Hall of the People took place at an unusual U-shaped table, with Xi alone at the head and U.S. and Chinese officials lined up on each side -- including Blinken, who sat to his right. Xi's last meeting in Beijing with an American secretary of state -- Mike Pompeo, in June 2018 -- put the two on more typically even footing, seated side by side with a table between them. Even Xi's meeting on Friday with Microsoft co-founder Bill Gates used a similar arrangement, underscoring the decision regarding Blinken's seating was a conscious choice by the Chinese.
At EPM, we were already “less than impressed” by official announcements following the Blinken visit to China earlier this week. But whatever little goodwill was established by the trip was thoroughly blown out of the water by US president Biden calling Chinese president Xi a “dictator” the day after Blinken completed his visit to China. According to Reuters, at a fundraiser Biden first re-opened the balloon subject, which Blinked had agreed with the Chinese should be closed and left behind. But then on top of that, Biden said:
The reason why Xi Jinping got very upset in terms of when I shot that balloon down with two box cars full of spy equipment in it was he didn't know it was there. That's a great embarrassment for dictators. When they didn't know what happened. That wasn't supposed to be going where it was. It was blown off course.
In EPM’s view, if this was an honest mistake, it was a terrible one, and combined with the timing, it is even worse. As was to be expected, they deeply angered China. The Chinese foreign ministry spokesperson called the remarks "extremely absurd" and "irresponsible" and said they seriously violated facts, diplomatic protocol and China's political dignity, and represent an “open political provocation”. EPM notes that no one from the Biden administration has offered an apology, or said anything else that could be construed as an effort to limit Chinese offense. As such, Biden’s undiplomatic, confrontational language might well have been intentional, or at least not conflicting with the general direction US policy wants to go with China – that is escalation.
Climate Politics
The Summit for a New Global Financing Pact is taking place in Paris, to solve the issue of the “missing $100 billion”. That is, the money promised by the developed world to the developing in the fight against climate change, but never delivered. According to Semafor, It marks the first time the U.S. and other rich, high-emissions countries will be under pressure by the developing world to deliver. The ideas being floated include allowing developing countries to suspend payments on their sovereign debts in the wake of natural disasters; creating a new agency within the World Bank to insure private-sector investments in clean energy projects against fluctuations in the local currency exchange rate; and rewriting the lending protocols for development banks so that they are less risk-averse and prioritize projects with the greatest potential to cut emissions or blunt climate impacts. EPM notes that all these ideas are connected to “commercial lending” rather than aid. As such, the summit seems to support the agenda of the developed world, rather than the developing world. The developing world joined the climate change agenda although it realized the development challenges that would be caused by a parallel focus on GHG emissions reduction, but was coaxed into going along with it by the promise of $100 billion in aid. The last few years the developed world has tried to reframe the conversation, away from aid toward support in the form of commercial, especially private sector loans.
The Electrification of Transport
Tesla CEO Elon Musk has said that he expects his electric vehicle company will soon invest in India, a fast-growing auto market. "I am confident that Tesla will be in India, and will do so as soon as humanly possible," writes Nikkei Asia. Tesla has been demanding reduced import tariffs on EVs exported to the South Asian country. India is meanwhile keen for Musk's company to produce domestically, and both sides appear to be negotiating.
Lithium iron phosphate is gaining traction as the EV battery material of choice, writes Reuters. The popularity of the chemical compound known as LFP is due partly to environmental and geopolitical concerns. But technological advances have also reduced the performance gap with more widely used materials such as nickel and cobalt, it says. LFP was embraced by Tesla two years ago. The addition of manganese, a staple ingredient in rival nickel cobalt manganese (NCM) battery cells, has enabled lithium iron phosphate cells to hold more energy than previously, providing EVs with more range — up to 450 miles (724 km) on a single charge, Toyota said recently.
Early models of Nissan all-electric Leaf, which first went on sale almost 13 years ago, have started to reach the end of their life spans, writes Bloomberg, forcing the company to think through recycling of the batteries. Instead of grinding them down to collect the materials they were made from, Nissan has chosen to reuse or repurpose the batteries. In what Bloomberg describes as a very costly process, the Leaf’s batteries are manually prepared to be used as second-hand batteries for EVs, or as home electricity storage batteries.
The Global Energy Crisis
One of the last arteries carrying Russian gas to Europe could be shut off by the end of next year when Ukraine’s supply contract with Gazprom expires, the Ukrainian energy minister has said, according to the Financial Times. The route through Ukraine accounts for almost 5 per cent of Europe’s total gas imports. German Galushchenko said that the chances of Kyiv and Moscow agreeing the renewal of the five-year transit contract first signed in 2019 were slim. EPM has mentioned before that in our view, the EU is walking a tightrope when it comes to energy. Everything needs to go right for the EU energy balance not to break. As such, a supply line carrying 5% might not sound like much, but Europe is already struggling to find sufficient supplies of gas.
German energy prices are so high that some companies are considering leaving the country altogether, according to Siegfried Russwurm, head of the German Industry Federation (BDI), writes CNBC. “A lot of family-owned companies ... have very operational plans to relocate,” Russwurm said, adding that the current business conditions in Germany had created a “cocktail” of obstacles for companies. “Many Germany-headquartered businesses are doing well globally, but they are struggling with operations in their own country,” he added, listing red tape and slow administration as additional pressures faced by companies in the current climate.