Lots of gas but no ships to carry

As the world’s energy crunch worsens, a shortage of shipping capacity will limit the role of Liquefied natural gas (LNG) to plug the gap.

This was the warning from Lloyd’s Register (LR) gas guru, Panos Mitrou, who said that LNG shipbuilders are full until well into the second half of the decade, this was reported by Seatrade Maritime News.

Recent contracts have closed at prices around US$250 million, up by about US$60 million on last deals done at the start of the year. Clarkson figures reveal that more LNG carriers were ordered over the first half of the year than in any full year to date.

In an opinion piece on the LR website, Mitrou cites estimates by the classification society that the half dozen specialist builders in South Korea and China have an annual production capacity of 70-80 ships. But liquefaction and transport demand over the second half of the decade could require twice this number of new vessels.

Mitrou notes that the four long-established LNG construction yards – Daewoo, Hyundai and Samsung in South Korea, and Hudong in China – have recently been joined by newcomers, Dalian and Jiangnan, also in China. A seventh yard, Yangzijiang, is also set to join the group.

But some LNG producers, who are ramping up exports, have been caught out by constraints on ship supply. Mitrou believes that the world will lack the LNG shipping capacity to meet transport demand by 2025, possibly before.

Meanwhile, floating gas plants can provide a relatively quick way of boosting energy imports in some power-hungry countries. But conversions of existing ships would take more tonnage out of the transport system, Mitrou noted.

To make matters worse, he cited estimates by the classification society that about 400 existing LNG carriers in the 640-ship fleet are likely to fall into categories ‘D’ or ‘E’ of the IMO’s carbon intensity indicator, therefore requiring remedial action. This is partly because of relatively fuel-inefficient steam turbine and early diesel propulsion, but also a lack of effective boil-off management systems.

Mitrou concludes by warning that a perfect storm is brewing. LNG is the cleanest hydrocarbon energy by far, he declares, and offers significant potential as a transitional source of energy. But we cannot have an energy transition without energy security and there is very little of that in many import-reliant countries right now. 

Get ready for another interest rate hike

Today Reuters has released the news saying that slowing US inflation may have opened the door for the Federal Reserve to temper the pace of interest rate hikes, but policymakers have no doubt that the central banks will continue to tighten monetary policy until price pressures are fully broken. 

If rates are raised around the world, Pakistan can’t remain an exception.

A US Labor Department report on Wednesday indicated that consumer prices didn't rise at all in July as compared to June. The policymakers believe it would be a long process, with a red-hot job market and suddenly buoyant equity prices suggesting the economy needs more of the cooling that would come from higher borrowing costs.

The Fed is far, far away from declaring victory on inflation, Minneapolis Federal Reserve Bank President Neel Kashkari said at the Aspen Ideas Conference, despite the "welcome" news in the CPI report.

Kashkari said he hasn't "seen anything that changes the need to raise the Fed's policy rate to 3.9% by year-end and to 4.4% by the end of 2023. The rate is currently hovering between 2.25% to 2.5% range.

To be sure, Kashkari is the Fed's most hawkish member; most of his 18 colleagues believe a little less policy tightening may be enough to do the trick to bring prices under better control.

San Francisco Fed President Mary Daly, in an interview with the Financial Times, also warned it is far too early for the US central bank to declare victory in its fight against inflation.

However, Daly said that a half-percentage point rate rise was her baseline but did not rule out a third consecutive 0.75% point rate rise at the central bank's next policy meeting in September, according to the report.

Calling inflation unacceptably high, Chicago Fed President Charles Evans said he believes the Fed will likely need to lift its policy rate to 3.25% to 3.5% this year and to 3.75% to 4% by the end of next year, in line with what Fed Chair Jerome Powell signaled after the Fed's latest meeting in July.

Still, he said, the CPI report marks the first positive reading on inflation since the Fed began raising interest rates in March in increasing increments ‑ a quarter of a percentage point to start, then a half a point, and then three quarters of a percentage point in both June and July.

After Wednesday's CPI report, traders of futures tied to the Fed's benchmark interest rate pared bets on a third straight 75-basis-point hike at its September 20-21 policy meeting, and now see a half-point increase as the more likely option.

Equity markets took a similar cue on hopes for a less aggressive central bank, with the S&P 500 rising 2.1%.

Financial markets are currently pricing a top fed funds rate of 3.75% by year-end, with rate cuts to follow next year, presumably as policymakers move to counter economic weakness.

Kashkari called that scenario unrealistic, and said Fed policymakers are united in their determination to bring inflation down to the Fed's 2% target. The risk of recession will not deter me from advocating for what's needed to do so, he said.

The consumer price index rose 8.5% in July from a year earlier, the report showed. While that marked a drop from June's 9.1% rate, prices are still rising at levels not seen since the 1970s and early 1980s. Food prices in July were up 11% from the year before, devastating for lower income families in particular.

For the moment, analysts focus on the fact that after months in which accelerating price pressures pushed Fed policymakers to tighten credit conditions faster than at any time since the 1980s, inflation data finally surprised in the other direction.

"The Fed needs a lot more evidence (of slowing inflation)... but this is a good start," said Karim Basta, Chief Economist with III Capital Management.

Data on August consumer inflation will be released on September 13, the week before the Fed meets, and given recent trends in energy and some other prices the report "should also be friendly to the disinflation path and should make a 50 basis point hike the preferred option."

Still, the Fed's battle with high inflation is far from over.

The core consumer price index - which strips out volatile gas and food prices and is seen as a better predictor of future inflation - rose 0.3% from June and 5.9% from a year earlier. The Fed targets 2% inflation based on a different index that is rising at a lower, but still high, rate of more than 6%.

An alternative measure of consumer prices compiled by the Cleveland Fed, known as the Median Consumer Price Index and considered a good view of the breadth of prices pressures in the economy, rose 6.3% on an annual basis in July, compared to 6% in June.

"Overall, prices remain uncomfortably high," wrote High Frequency Economics' Rubeela Farooqi, who stuck with her call for a 75-basis point rate hike next month. "Coupled with strength in job growth and wages, the data support the case for another aggressive rate hike in September."

Central banks around the world raising interest rates to tame inflation

During the pandemic, central banks in both advanced and emerging market economies took unprecedented measures to ease financial conditions and support the economic recovery, including interest-rate cuts and asset purchases.

With inflation at multi-decade highs in many countries and pressures broadening beyond food and energy prices, policymakers have pivoted toward tighter policy. Central banks in many emerging markets proactively started to hike rates earlier last year, followed by their counterparts in advanced economies in the final months of 2021.

The monetary policy cycle is now increasingly synchronized around the world. Importantly, the pace of tightening is accelerating in several countries, particularly in advanced economies, in terms of both frequency and magnitude of rate hikes. Some central banks have begun to reduce the size of their balance sheets, moving further toward normalization of policy.

Stable prices are a crucial prerequisite for sustained economic growth. With risks to the inflation outlook tilted to the upside, central banks must continue normalizing to prevent inflationary pressures from becoming entrenched. They need to act resolutely to bring inflation back to their target, avoiding a de-anchoring of inflation expectations that would damage credibility built over the past decades.

Monetary policy can’t resolve remaining pandemic-related bottlenecks in global supply chains and disruptions in commodities markets due to the war in Ukraine. It can however slow overall demand to address demand-related inflationary pressures, so a tightening of financial conditions is the goal.

The high uncertainty clouding the economic and inflation outlook hampers the ability of central banks to provide simple guidance about the future path of policy. But clear communication by central banks about the need to further tighten policy and steps required to control inflation is crucial to preserve credibility.

Clear communication is also critical to avoid a sharp, disorderly tightening of financial conditions that could interact with, and amplify, existing financial vulnerabilities, putting economic growth and financial stability at risk down the road.

 

 

German aluminium foundry struggling for survival

Gerd Roeders is reluctantly preparing for the temporary shutdown of his German aluminium foundry to survive Europe's growing gas crunch. He hopes by moving the 200-year-old plant to three weeks of 24-hour shifts followed by a one-week shutdown, he can maintain output while cutting his gas consumption.

His bill has already more than doubled this year from last, he said, fearing it will triple or even quadruple in 2023.

The plan will save the cost of gas needed to fire up the ovens every morning, Roeders calculates, even if it means paying staff at family-owned G.A. Roeders more to work night shifts.

Survival for G.A. Roeders GmbH and Germany's 600 other foundries, most of which are small-to-medium enterprises with less than 250 staff, will mean cost cuts and tough talks with customers.

"We're laying out our prices to customers and telling them they have to pay more," 59-year-old Roeders told Reuters as workers prepared the plant for the first week of rest. "We can't deliver parts if we invest and don't earn anything back."

G.A. Roeders, with plants in Germany and the Czech Republic employing around 500 people, produces more than1,000 parts. It serves auto makers like Volkswagen and Continental, airline manufacturers and medical technology firms, yielding annual revenues of 60 million euros.

While contracts for foundries generally include a clause that allows them to charge more when the cost of metal increases no such clause exists for energy.

Roeders said he has always sought to be frugal on energy - the business' second-largest expenditure after staff - a habit he learnt from his father who would turn off office computers at night and switch off the lights during lunch breaks. But the firm is now facing unprecedented rises.

The price of the front-month Dutch TTF gas contract, the benchmark for Europe, has almost tripled since the start of the year due to the slowdown of Russian gas deliveries through Nord Stream 1 and a tight global market.

And while the firm still has a 30,000-litre oil tank on site, which has not been used for years, to use it again would feel like a backward step, Roeders said.

Germany's energy regulator is pleading for businesses, government and consumers to reduce their gas intake and has asked the biggest firms to submit emergency plans to cut usage further in the winter.

Yet chief executives of German carmakers including Mercedes-Benz and Volkswagen have warned in recent weeks that maintaining output levels under emergency plans will only work if their suppliers can continue to deliver parts.

Producers of the aluminium, steel and glass essential to making cars rely even more heavily on natural gas than the automakers themselves, prompting fears of a ripple effect across their global client base if they are forced to halt production.

German manufacturers of car components sell to more than 3,000 direct customers in the United States, Europe and Japan with their products reaching over 100,000 second-tier customers, supply chain analytics firm Interos estimates.

The energy crisis is the latest in a string of upheavals, from carbon emissions curbs and supply chain bottlenecks to stricter due diligence laws, which small businesses say they will struggle to overcome without more support.

"Converting to electricity-driven units requires massive renovation and is at best conceivable in the medium term," a spokesperson for the German Association of Foundries said.

"No technology other than firing up machines with gas is currently available," the spokesperson added.

Together with an alliance of other aluminium makers and a university, G.A. Roeders has received government funding to design a prototype smelting oven which could operate on a mix of 30%-40% hydrogen and 60%-70% gas. The aim is to eventually run exclusively on hydrogen.

Interest in the project has multiplied since Russia's invasion of Ukraine, Roeders said, but there are still many hurdles before it can become operational - from scaling up the technology to setting up a hydrogen charging network.

"To industrialize something like this usually takes at least five years," he said. "We'll have to dress up warm; we won't have a hydrogen oven yet."

 

US adamant at keeping Iran out of oil market

Having imposed economic sanctions on Iran for more than four decades, especially after signing of nuclear deal with Iran in 2015, United States remains adamant at keeping Iran out of oil market. It may be recalled that when the things were taking some shape, President, Donald Trump withdrew his country from the deal in 2018.

Nuclear negotiators who have gathered in Vienna after a five month-hiatus have indicated that they are optimistic about reviving the 2015 nuclear deal, officially known as the Joint Comprehensive Plan of Action (JCPOA).

“We stand five minutes or five seconds from the finish line,” Russian Ambassador Mikhail Ulyanov told reporters outside Vienna’s Palais Coburg on Sunday, four days into the talks. He said there are “three or four issues” left to be resolved.

“They are sensitive, especially for Iranians and Americans,” Ulyanov said. “I cannot guarantee, but the impression is that we are moving in the right direction.”

Enrique Mora, the European Union’s top negotiator who acts as mediator between Iran and the US, also said he is “absolutely” optimistic about the talks’ progress so far.

“We are advancing and I expect we will close the negotiations soon,” he told Iranian media.

The Wall Street Journal also said negotiations between Iran and the US on reviving the JCPOA are close to completion, Mora said on Sunday evening.

The text of an agreement could be closed in coming hours, said Mora.

According to the Iranian diplomats, experts are focusing on technical issues about Iran’s nuclear program.

Behrouz Kamalvandi, the spokesman for the Atomic Energy Organization of Iran (AEOI), had confirmed on Saturday that the talks were mainly focused on Safeguards issues.

One of Iran’s demands is that the IAEA should stop unsubstantiated allegations regarding PMD that had already been resolved in July 2015, when the nuclear deal was struck.

In a telephone call with UN Secretary General Antonio Guterres on Sunday afternoon, Iran’s Foreign Minister Hossein Amir-Abdollahian said, “We believe that the Agency should completely resolve the remaining issues related to the Safeguards Agreement by distancing itself from irrelevant and non-constructive political issues and through the technical channel.”

He added, “Nuclear weapons have no place in the defense doctrine of the Islamic Republic of Iran and are in contradiction to our policies and beliefs,” referring to a fatwa (religious decree) by Leader of the Islamic Revolution Ayatollah Seyyed Ali Khamenei declaring that the production, stockpile and use of nuclear weapons as forbidden.

"The Leader's fatwa that prohibits the use of nuclear weapons is clear-cut and is the final say for everybody," Iran's Foreign Minister said.

 

Oil prices being manipulated by western media

This morning I picked up this news item from Reuters. It covers some of the usual mantras i.e. deal with Iran, inventory data, supply disruptions. I am forced to infer that ‘media drives oil prices’ and the sponsors are famous seven sisters, who have now reduced to ‘big four’ after the successive mergers. 

They love to keep prices high to maximize their profits. Since many of them are of ‘US Origin’, I have reasons to believe that they enjoy the support of the US administration.

Crude oil prices pulled back slightly on Tuesday on the latest progress in last-ditch talks to revive the 2015 Iran nuclear accord, which would clear the way to boost its crude exports in a tight market.

Brent futures fell 14 cents to US$96.51 a barrel at 0404 GMT, paring a 1.8% gain from the previous session. US West Texas Intermediate (WTI) futures declined 16 cents to US$90.60 a barrel, after climbing 2% in the earlier session.

"The specter of a US-Iran nuclear deal continues to hover over the market," ANZ Research analysts said in a note.

The European Union late on Monday put forward a "final" text to revive the 2015 Iran nuclear deal, awaiting approvals from Washington and Tehran. A senior EU official said a final decision on the proposal was expected within "very, very few weeks".

"While the details around the timing of the resumption of Iran's oil exports remain uncertain even if the accord is revived, there is certainly scope for Iran to increase oil exports relatively quickly," Commonwealth Bank analyst Vivek Dhar said in a note.

He said Iran could boost its oil exports by 1 million to 1.5 million barrels per day, or up to 1.5% of global supply, in six months.

"A revival of the 2015 nuclear accord will likely see oil prices fall sharply given that markets probably don't believe a deal will be reached," Dhar said.

However, signs that demand may not be dented as much as feared are keeping a floor under the market for now, following stronger-than-expected trade data from China on the weekend and the surprising acceleration in US jobs growth in July.

The oil market has remained under pressure recently over global recession fears, with Brent prices suffering their biggest weekly drop last week.

China, the world's largest crude oil importer, brought in 8.79 million barrels per day of crude in July, 9.5% lower from a year earlier but up from June's import volumes, according to China's customs data.

Traders will also be watching out for weekly US oil inventory data, first from the American Petroleum Institute on Tuesday and then the Energy Information Administration on Wednesday.

Five analysts polled by Reuters expect crude stockpiles fell by around 400,000 barrels and gasoline stockpiles declined also by about 400,000 barrels in the week to August 5, while distillate inventories, which include diesel and jet fuel, were unchanged.

Western components found in Russian weapons

A British defense think tank identified 450 unique microelectronic components in Russian military equipment left in Ukraine that appeared to be manufactured by United States, European and East Asian companies.

In partnership with Reuters, the Royal United Services Institute (RUSI) released a report on Monday detailing inspections of 27 Russian weapons systems and pieces of military equipment expended or lost since Russia invaded Ukraine and the group said the majority of the apparent Western components were manufactured by US companies.

“The preponderance of foreign-made components inside these systems reveals that Russia’s war machine is heavily reliant on imports of sophisticated microelectronics to operate effectively,” the group said in its report.

“This is despite persistent efforts by the Russian government to replace imports – in all aspects of its economy, including the military sector – with domestically produced materials in order to withstand international sanctions,” it continued.

Russia has been fighting Ukrainian forces for more than five months after invading the country on February 24. After failing to quickly take the capital city of Kyiv, Moscow refocused its efforts on the country’s industrial heartland in the east, known as the Donbas region, with no end to the conflict in sight.

RUSI said 317 of the 450 identified Western components appear to be from US companies, while components from Japan, Taiwan, Switzerland, the Netherlands, Germany, China, South Korea, the U.K. and Austria were also present.

The think tank cautioned it is possible the components are counterfeits of Western brands but indicated that wasn’t likely.

“Russia’s well-documented historical dependence on Western technology, and the critical role that some of the components play in the effective operation of the systems in which they were found, has led the research team to assume that the components are likely genuine,” the group said.

RUSI’s report states 56 US companies manufactured the “vast majority” of the components, and more than 200 of them appear to have been manufactured by just 10 companies. Texas Instruments was the most frequent US brand, accounting for 51 of the components. 

Of the 450 identified components, RUSI indicated 18% were assigned an Export Control Classification Number (ECCN), which would have required a government license for export to Russia even before Moscow invaded Crimea in 2014.

Others would have fallen under an EAR99 classification, RUSI said, which would not have required a license prior to Russia’s invasion in February.

“The presence of a large number of EAR99 and some ECCN classified items in Russian military equipment suggests that these components were either purchased by military equipment manufacturers from distributors in Russia, that they were procured under fake end-user certificates or that they were diverted for military applications at a later point,” the think tank said in its report.