Europe desperately needs to diversify its energy supply

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We wrote twice in the last week regarding the energy crisis, first in China and then in India.

Prices for thermal coal have reached record highs, threatening to impact GDP growth due to electricity rationing.

The Financial Times observes that China suffered a triple whammy emission restrictions on power generation, a coal shortage and price caps on electricity which mean demand is unaffected as input costs have increased.

India, which relies heavily on coal for its thermal power plant, faces strained supplies and record prices. Nationally, it only has four days of inventory left.

Energy costs in Europe on the rise

But energy, whether in the form of coal, natural gas or oil, is a global commodity. Europe and the United States face their own challenges, more related to the tight natural gas market and rising global oil prices.

The UK is not alone, but it is perhaps the most heavily exposed to Europe’s dependence on imported natural gas, especially Russia.

US gas contracts for November delivery jumped almost 40% this week to £ 4 per therm (having started 2021 below 50p).

But a surprise announcement by Vladimir Putin yesterday that Russia was ready to increase supplies to stabilize prices caused a sharp drop, pushing the price down to £ 2.87.

Whether it stays there will largely depend on Russia’s ability to honor that commitment in the months to come. Russian state gas supplier Gazprom has come under heavy criticism for deliberately shipping only its minimum contractual obligations this year. The reality is that Russia’s own stock levels are also depleted after a harsh winter.

Related: WTI Oil Price Surpasses $ 80 For First Time Since 2014

It’s probably fair to say that European energy markets are particularly vulnerable to supply disruptions, although they are supposed to be highly integrated.

Many large industrial consumers have complained that the EU’s green deal to make the bloc climate neutral by 2050 would only further increase energy prices. In turn, this could ultimately lead to social unrest. For example, high energy prices led to the protests of French “yellow vests” in 2018-2019.

Inflation, impacts on energy costs

Rising energy prices fueled inflation that was already fueled by rising commodity prices and supply chain issues for much of this year. Rising energy costs and inflation contributed to the fall in German industrial orders in August. Orders fell 7.7%, a much steeper drop than economists expected.

Meanwhile, rising energy costs have led to the shutdown of major energy consumers across Europe, such as ammonia and fertilizer production. Meanwhile, in the United States, oil prices this week hit their highest level in seven years after OPEC + decided to maintain current production levels, which will see an expected increase of just 400,000 barrels per year. day from November.

US administrators have spoken of releasing the strategic oil reserve and even limiting or banning US crude oil exports to limit the rise in domestic oil prices. The average price of gasoline at the pump reached $ 3.19 per gallon, the highest in seven years.

The US economy does not yet appear to be unduly hampered by rising prices. The private sector created 568,000 more jobs than expected in September, the largest increase in three months. However, with the midterm elections next year, high gasoline prices will not be welcomed by voters.

Look ahead

Buyers of European components can expect some price inflation this year and next. The cost increases come not only from metal prices, but also from energy, labor costs and persistent logistical delays in Europe.

Hopefully the continent will come out of it this winter and that cost increases will not derail the recovery. While manufacturers have been riding an unprecedented wave of demand recovery, it should not be confused with an unstoppable one.

A number of factors converge to drive up costs while potentially dampening demand. This makes a toxic mix for a still fragile recovery.

By Stuart Burns via AG Metal Miner

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