Energy, Politics & Money - 26 July 2023
Providing independent, objective, & neutral analysis of global developments curated from sources covering the world of energy, geopolitics, & investment.
In this roundup, we look at:
The upward trajectory of crude oil prices, which has inspired Goldman Sachs to bring back the bull case it has been pushing for over a year now
The contrarian view regarding the economic outlook in China, which says that the current economic challenges are fundamentally because the country is in transition from real estate led growth to new drivers for development
The pushback within Japanese foreign policy circles against Tokyo’s uncritically following of the US
The pain China is starting to feel as a result of the semiconductor embargo on the country organized by the US
China’s naval base in Cambodia
The view that even with IRA subsidies, a solar manufacturing sector is unlikely to take off in America
Why Japan is wrong to focus is energy transition on the adoption of hydrogen and ammonia
The growing lead of BYD over Volkswagen in the Chinese EV market – which in light of BYD’s ambition to enter the European EV market, spells bad news for the European car industry in our EPM view
Indonesia’s efforts to become South-east Asia’s EV manufacturing hub
The projected increase of China’s natural gas consumption in 2023
General Energy News
Oil prices continued their upward trend this week, driven by a positive sentiment on the world’s trading floors based on signs of tighter supply / demand balances and pledges by Chinese authorities to shore up the world's second-biggest economy, Reuters writes. On Wednesday the pause button was finally hit, after industry data showed an expected rise in U.S. crude stockpiles. Brent is now at $83.32 a barrel, while WTI is at $79.35. Both benchmarks are now at their highest since April.
In response to the upward trajectory of crude oil prices, Goldman Sachs has dusted off its “bull case” again, arguing that record demand in oil markets will drive crude prices even higher in the near term, writes CNBC. “We expect pretty sizable deficits in the second half with deficits of almost 2 million barrels per day in the third quarter as demand reaches an all-time high,” Goldman’s head of oil research Daan Struyven said. He added that the bank forecasts Brent crude to rise to $86 per barrel by year-end.
Macroeconomics
Yesterday EPM discussed the view that says the stimulus measures by Beijing are underwhelming. A contrarian view regarding the economic outlook in China today in Nikkei Asia, which argues that this stimulus could well be sufficient. As China engaged in much more muted demand stimulus than Western countries during the pandemic, and provided policy support mostly in the form of targeted relief, the immediate growth post COVID boost should have been expected to be limited, it says. It recognizes that the issues in China’s real estate sector are a significant drag on GDP growth, but says this should not be overestimated. Despite this drag, overall manufacturing output is already back above pre-pandemic trend levels, it says. Going forward, digitization, supply chain upgrades and the clean energy transition will be the drivers behind China's industrial expansion, it argues. The main aim of economic policy should now be to facilitate these new drivers with reforms to unleash their growth potential, and targeted measures rolled out to ease pains that appear. A broad demand stimulus is not the answer.
The yuan was used in 49% of China's cross-border transactions last quarter, topping the dollar for the first time, a Nikkei Asia analysis shows, mainly due to a more open capital market and more yuan-based trade with Russia.
Geopolitics
The Nikkei Asia reports that a group of Japanese experts on international relations recent are concerned that Japanese foreign policy has focused excessively on the U.S. and overstates the threat of China. The group is recommending Tokyo craft a more realistic approach to relations with China. Instead of uncritically following Washington, Japan should form a regionwide coalition of so-called middle powers to help mitigate the competition between the U.S. and China through constructive diplomacy, thus reducing the danger of war between great powers in the region, the group argues in a new report entitled, "Asia's Future at a Crossroads: A Japanese Strategy for Peace and Sustainable Prosperity."
China's Ministry of Commerce hosted a meeting last week with key domestic semiconductor companies to discuss the impact of the restrictive measures imposed by the U.S. and its allies, writes Nikkei Asia. The participating firms called on the government to take more effective measures to deal with the situation. The U.S.’ semiconductor export controls on China affect the entire supply chain - from design, manufacturing and equipment to materials - with a number of firms pointing out during the meeting with the Ministry of Commerce these measures have resulted in significant uncertainty and harm to various stages of the supply chain.
China has made significant progress building a naval base in Cambodia and is close to completing a pier that could berth an aircraft carrier, writes Nikkei Asia. The Pentagon believes China is building a facility in Cambodia to boost its ability to project naval power. China and Cambodia have denied that the People's Liberation Army will have access to the base. China has a bigger navy than the U.S. and lacks the extensive international network of bases and logistics facilities needed to operate as a blue-water navy that can sail around the world. Access to a base on the Gulf of Thailand would also a strategic advantage to China. Dennis Wilder, a former top CIA expert on the Chinese military, said the Ream base would have its
greatest strategic value were tensions in the South China Sea to boil over into a military confrontation… [It] would also extend and enhance China's naval operating capabilities towards the strategic shipping lanes of the Malacca Strait -- a vital choke point in any conflict with the U.S. and its regional allies
Energy Transition & Technology News
Despite the generous tax breaks they are receiving from the Biden administration, many US companies planning to build solar factories can expect to suffer severely or fail altogether, according to an analysis by Bloomberg. Solar companies have announced almost 50 gigawatts of annual module assembly capacity in the U.S. with 14 gigawatts of cells, 15 gigawatts of wafers and about six gigawatts of poly silicon. The Inflation Reduction Act gives US manufacturers an “uncannily equal” subsidy to the cost of Chinese products, but limited availability of cheaper materials from Southeast Asia will pressure American companies, some to the point that their plants won’t get built, Bloomberg says.
The cheapest way for Japan to meet its 2030 emissions reduction and mid-century net zero goals is to deploy mature, clean technologies like wind and solar generation, and electric vehicles, writes Bloomberg. The analysis stands in contrast to the transition pathway the country has elected, which focuses on hydrogen and ammonia. In the transition scenario mapped by out Bloomberg, Japan needs $489.3 billion in grid investment between 2022 and 2050 to fully integrate enough wind, solar and batteries to decarbonize its power generation sector. The current government’s estimate for interregional transmission grid investment is estimated at between $27 billion and $40.5 billion through mid-century.
The Electrification of Transport
BYD has widened its lead over Volkswagen as China’s top-selling automaker as local buyers continue to flock to its wide range of electric vehicles, writes Bloomberg. After dethroning the German giant for the first time earlier this year, BYD notched up 595,300 sales in the three months ended June 30, increasing its market share to 11.2%. VW sold 544,000 vehicles, to fall around 1 percentage point behind. EPM notes that if this is a harbor of things to come, then the entry of China’s EV manufacturers into Europe’s car market will have devastating effects for the German, French and Italian car industries.
Indonesia is finalising a new set of incentives to attract investment from manufacturers of electric vehicles (EVs), writes Reuters, adding the government is still in talks with major companies like Tesla and BYD to establish manufacturing facilities in the country. EPM notes that fundamentally, Jakarta aims to leverage its unique position in the minerals value chain, in particular nickel, to build out its manufacturing base.
The Global Energy Crisis
S&P Global writes that China's annual natural gas consumption is estimated to reach 385 Bcm to 390 Bcm in 2023, a 5.5%-7% year-on-year increase, reversing a 1.2% decline in 2022, according to the China Natural Gas Development Report 2023 published by the National Energy Administration. The EPM perspective is that this will place significant pressure on Europe, as this coming winter it will again need to find alternatives for Russian pipeline gas.