Full episode transcript

Andrea Hotter: Welcome to Fast Forward, a podcast by Fastmarkets. I’m Andrea Hotter, special correspondent at Fastmarkets. And if you’ve been listening to the series, you’ll know that my colleagues and I are taking a look at some of the main issues impacting the critical minerals essential for the world’s energy transition. If you missed the first two episodes, it’s not too late to go back and listen to them. You can find them on Apple Podcasts, Spotify, and wherever you get your podcasts.

This week, we’re going to take a look at the influence of geopolitics on the energy transition. Many of the important questions in commodities nowadays are about geopolitics. Where does that commodity come from? Is it important for national security? And how do we know it has a secure supply chain? But it obviously also relates to foreign policy and international relations. It’s a very big topic and we’re going to handle it with Jeremy Weir, CEO of Trafigura, a major commodity trading house and one of the world’s largest suppliers of minerals, metals and energy. Jeremy, welcome to the podcast.

Jeremy Weir: Pleasure to be here. Thank you, Andrea.

Andrea Hotter: So Jeremy, you’re a geologist turned derivatives trader. You worked on the commercial side at mining and metals companies in your home country of Australia. And then you joined Rothschild Bank in 1992, before moving to Trafigura in 2001, where you went on to become the CEO in 2014. So, you’ve seen a few commodity cycles and running a large group like Trafigura, which is active in 156 countries, you have to navigate global geopolitics on a daily basis. With all of this in mind, I’d like to take a step back at the very beginning and talk about the role of a commodities trader.

Commodities traders are shrouded in a kind of legendary mystery. Many believe they operate in the shadows, they’re highly secretive, they trade as if they’re gambling in a casino. And there’s a view that commodities are highly speculative and far riskier than other asset classes. So, I wondered, can you demystify things a little bit and perhaps bust some myths along the way for us. So, to begin with, what exactly does Trafigura do and why do you think it’s helpful to the commodities world?

Jeremy Weir: I think one of the things is if you talk about dark histories, et cetera, that’s not our business. Our business is actually about supply chain management. And you have to be able to do that regardless of the environment that you’re operating within. And so, if you wind the clock back to pre-Covid areas, there were open markets everywhere. Everyone was focusing on price and efficiencies and one of the clock forward to where we are now, we’ve been through Covid, we’ve got geopolitical issues and we’ve got highly fragmented supply chains. And our function and our role really is to buy the commodity, move it to the location where the consumer needs it in a highly complex environment.

And yes, you do see a lot of price volatility and you see a lot of freight price volatility. We have to navigate that. And you can’t do that if you’re a speculator, you can’t do that on a consistent basis and a profitable basis long -term, to me it just doesn’t work. And so therefore our company has been in existence for over 30 years. We’ve been able to do this for over 30 years. So therefore actually our business is about risk mitigation in a highly complex and volatile marketplace. So really what we do across the entire spectrum of commodities we trade, so it’s the oil barrel, it’s the molecule of gas and LNG, it’s the electron, it’s non-ferrous minerals and metals and bulk commodities. We have to move those commodities logistically from source to end consumer in a transparent and appropriate manner, in a manner which ensures price competitiveness because it is a highly price competitive environment.

Andrea Hotter: Yeah, I remember you telling me previously that first and foremost Trafigura is a commercial trading company and that is the engine room of the business. Trafigura had revenues of over 244 billion last year. In a marketplace where the participants range from little fish to big fish, commodities traders that leverage both the physical and paper side of the market, such as Trafigura, are very successful big fish. So, what does really influence the price? Is it the large trading houses like Trafigura? Do trading houses such as yourselves want to be money-making solution providers, as you just described, or kingmakers?

Jeremy Weir: We’re not sitting there actually having necessary a price direction and a view on price direction of what we do. We’re effectively looking to mitigate the risk. Yes, we have over $240 billion turnover last year. But if you look at the margins around the business we trade and the volatility of the underlying market, actually those margins are quite small in terms of being able to navigate that.

And so therefore in our business, higher or lower prices don’t really benefit since we buy and we sell. We typically expose the commodity price. We have to manage that. There’s other people which have directional views on prices and markets, but that’s not, if you like, our competency. I would say, given that we cover a lot of different markets, we do have very strong analysis. We do understand the dynamics of marketplaces.

And therefore, we’re able to communicate those with our customers and we have our views and we’re able to orient our business, if you like, around that. But at the end of the day, we’re trying to manage price risk, manage basis risk, which is the variability to underline index prices. And that’s what we have to do efficiently, effectively. I think what is important in today’s world is there seems to be a lot more correlation across various commodities.

There is interlinkage. And I think having not only the global footprint that they have, as you mentioned, we did business in over 150 countries last year. But the fact that we’re involved in multiple commodity streams really help us understand the global dynamics of marketplaces. And that’s why we’re starting to see some of the smaller independent traders find it more difficult in today’s environment because it’s just very difficult to survive if you’re a regional and specific commodity.

Andrea Hotter: Yeah. So sometimes bigger is better. Where does Trafigura really care about being dominant in the markets and where do you want to be involved?

Jeremy Weir: I think dominance is not really the right word. We are service providers. Really, at the end of the day, if I move back to Covid, we had a lot of customers which were locked down at home, didn’t really understand what the current dynamics of the markets were. We had a lot of uncertainty. We were able through our market positioning, when I say market positioning, our overall coverage of markets across various commodities, really able to help them navigate through that. So we’re there to provide a service to customers.

And it’s moving just not into the underlying commodity price. Now it’s moving to the carbon markets and other areas, emissions trading, emissions reporting. So these types of things are the things that we really, really want to try and do to assist our customer base as the best we possibly can.

Andrea Hotter: Yeah, I’m glad you brought up customers here because I’d like to talk about what we’re here to talk about today. Obviously, geopolitics. Do you think there’s been a lasting change on behalf of your customers, the producers, the consumers that you work with to more proactively manage the commodity risks in their businesses because of the changing geopolitical backdrop?

Jeremy Weir: We just have a much more challenging marketplace ahead of us in many different aspects. If you look at the mining business, there’s been a lot of talk in terms of managing permitting, managing indigenous issues, local communities, the challenge that exists in the inflationary aspects of new mining.

So therefore, that’s more complex. Then you look at the overall supply chain in minerals and metals as well in terms of there’s historically been a focus on mining, but now there’s also a focus on processing, the concentration risk about processing.

And then you’ve got the emissions footprints that really weren’t something was discussed a lot five years ago. Now it’s very much at the forefront of people’s minds. Then we’d look at AI and other issues. I think it’s a far more complex supply chain than we’ve ever seen. I don’t see a reversion of that, at least in the next five to 10 years. And so therefore customers around the world, both on the producer and the consuming sectors and processing sectors actually have to try and adapt to these challenging environments.

And quite frankly, organizations such as ours should be there to help them.

Andrea Hotter: Yeah. And transparency obviously is important here. Technologically driven advances have really helped transparency, whether that’s the information flow that you’re talking about, the insight into payments, logistics, traceability through the supply chain, all of those things. Do you think that that transparency hinders or helps commodity trade houses? Or maybe it’s a combination of both.

Jeremy Weir: Look, there’s market transparency, but also as a corporation, you have to make decisions. And from our perspective, we’re a large organization. I think I’ve often been found to say, I think it’s important you’ve got an obligation to society and part of that obligation to society and stakeholders that you need to be best in class and people want to know what you do, how you do things.

That’s why even as a private company, we do publish our annual results. We have for a number of years and also our sustainability report and that is a ‘warts and all’ report. And I think it’s important that people understand who you are, the challenges you face and how you operate.

And that’s helped us actually increase our stakeholder base. For example, we’re dealing a lot more with governments and not only just from helping them understand the complexity of supply chains that exist around the world, but also across the various commodity streams, but also from a regulatory point of view, to help them understand some of the challenges that exist.

Andrea Hotter: And those are all things I want to talk about with you today as well. Trafigura, just whilst we finish the little bit about the role of the trader. Trafigura has adapted its portfolio to focus on the energy transition areas, such as renewables, carbon markets, which you’ve also mentioned. Do those that don’t adapt fall by the wayside and become obsolete? I mean, do oil traders, coal traders still have a role going forward?

Jeremy Weir: Oil is still very much a part of the energy mix today. And so therefore what we are is transitioning. I think we’ve seen probably a recognition that that transition will go in fits and starts because it depends on the availability of raw materials, the technology, and the capital availability that exists. And I think that’s where we will see changes.

But from our point of view, we have our own views on life and we direct our business in a certain way. And really, it’s just reflective of what society demands up. As we transition, we’ve got a platform which has capital availability, knows about logistics, can manage risk. And so therefore, what we just do is transition the business as society demands and stakeholders demands. And so therefore what we are doing is preparing ourselves for the future, whatever pace is dictated by the marketplace.

And I think we’re going to be well positioned for that. And so therefore that’s the way we look at the energy transition. But I think it’s important to recognize, I think there is going to be a quite a long tail for hydrocarbon usage because we just literally have many different demands on energy requirements, development of economies in the global South.

And so therefore we have to recognize those and try and find that difficult medium.

Andrea Hotter: They don’t call it an energy transition for nothing. Let’s move on to geopolitics, which has obviously made the world a lot more complicated. One of the ultimate representation of the worst of geopolitics perhaps is physical conflict in the form of war. And clearly the commodity sector has been significantly affected by Russia’s invasion of Ukraine. Similarly, we’ve seen a conflict in the Middle East between Israel and Palestine.

Let’s start with what this has done to logistics and the production as well as transportation of commodities. I’m thinking here about the Black Sea and the Red Sea shipping lanes. Lengthy journeys presumably means higher costs and increased maritime emissions?

Jeremy Weir: Exactly. What we have seen is, particularly in the tanker market, you’ve seen the evolution of the Grey Fleet, which is less known holders or owners of those vessels. And that’s something in the region of about 13 to 14%, I believe, of the tanker fleet. So it’s very significant.

We’re obviously seeing much longer journeys as a result of the conflict and due to sanctions, they’re all barrel traveling to certain locations and not to others. So therefore, it’s creating a problem. We’re forecasting something around about a thousand barrel a day increase just in the bunkering market, just because of the increased shipping journey. So yes, it’s causing problems. We’re also seeing very high rates in terms of the tanker market. And if you look at the shipbuilding market as well, we’re seeing yards full. Be it on tanker markets or LNG carriers, et cetera, in Korea and other locations simply because of the demand.

Andrea Hotter: And you mentioned sanctions there. You know, obviously sanctions or high trade tariffs have been imposed against Russia in a bid to stifle out its economy. When you hear sanctions are imposed, what happens at a company like Traffic Europe? What’s on the checklist as you work to show you’re compliant? Talk me through what happens.

Jeremy Weir: Well, basically we’ve got a very active and attentive compliance team because you have to be in today’s world. Obviously have relationships with the various regulators, but they keep us extremely well informed of any changes. And as soon as there’s a change to some sort of sanctions list or be it the SDN list or whatever, we’re very much aware of exactly what they are. It’s reported and advised to the company globally and particularly the commercial teams and managers advise of what impact it has, how to behave, what the challenges are, et cetera. And we’ve got all the checks and balances there as well. It is extremely complex because you’ve got different regulatory environments and therefore you have to be aware as a multinational company with employees holding different passports that you have to be cognizant of that and making sure you’ve got the right procedures in place to ensure you comply and protect the organization and your employees as well.

Andrea Hotter: Yeah, that’s one of those complexities you mentioned there, the differences between the regions. We’ve seen that play out with metals and the London Metal Exchange warehouse stocks. Much of the material held in LME warehouses now is Russian, which is particularly important for aluminium, nickel and also copper. We saw that play out in the US when COMEX prices soared and companies struggled to make deliveries. And the LME is obviously following sanctions imposed by the UK government, but you talked about complexities. Talk me through what you feel about those complexities when they add these differences between the regions?

Jeremy Weir: Well, often it can be very complex. For example, as you said with the LME and the recent reporting, we’ve had requirements around that, and particularly with respect to deliveries, and the UK government made some further changes and further clarification. So we’re able to understand those better, but there was a period of time where it was a bit difficult to understand and people weren’t exactly sure. So the proper thing is engagement at all times to really understand what are the regulators trying to achieve and how they best been interpreted. And our compliance team work with our legal teams to try and understand.

I think one thing which is also important to recognize in today’s world is that from a compliance perspective, for compliance to be effective within an organization, they can’t be seen as a policeman. This is one thing which has taken some time, but I’m actually very pleased that the compliance division and how they work with the commercial teams has progressed over the last five plus years. They’re really seen as a business partner. When there’s issues where people are uncertain, people rather than just, okay, go on the fly and do a trade, they actually go straight to the compliance people. In meetings when I’m talking about businesses we’re not quite sure of, as I said, nine times out of 10 or more, there’s always been interaction with the compliance department. So I think it’s very important to have that culture in an organization such as ours. Otherwise in today’s world, it’s going to be very, very difficult to comply.

Andrea Hotter: Yeah. And it probably makes a difference for the compliance team to feel valued in a company. Usually they’re the ones everyone’s running a mile from, but no, it’s good to hear. I’m just curious your view. Some people are comparing the current geopolitical backdrop for commodities to the eighties when there were sanctions against Iran, Cold War sanctions against the Soviet Union. I know that predates your professional career a little bit, but what do you think?

Jeremy Weir: I think we’ve got a very fragmented world. We do engage with governments around the world. You can start to see how policy is starting to get defined and what the objectives might be regardless of what side of the house you’re on. And we’re starting to see some definite lines being drawn. And I think it’s going to take quite a bit to turn that around. So I do see we’ve got a very challenged environment. I’d like to think that levels of communication and technology and the fact that people travel a lot more and awareness would start to address some of these issues, at least from a social perspective and as a result, business perspective. But all that being said, I think we have got a very, very challenging environment ahead of us.

And I just hope that we don’t go into a more extended period of conflict or an expanded geographical conflict.

Andrea Hotter: We’ve obviously also seen not just physical conflict, we’ve seen trade wars escalate over the years, most notably between the US and China. We saw the Section 232 tariffs heat up on aluminium and steel. Now we’ve got Section 301 tariffs. We’ve seen 100 % tariff on imports of Chinese electric vehicles to the US, tariffs on more than two dozen critical minerals, including graphite, tantalum, tungsten. There are tariffs on semi conductors and advanced batteries. And it’s not just one way. China also has imposed export controls on gallium and germanium and banned the export technology to process rare earths. It’s going on everywhere. How do you navigate all of this as a commodity trade house?

Jeremy Weir: Well, I think at the end of the day, it’s up to the government to determine what they do. It’s not up to us. And what we have to do is effectively abide by the rules and the regulations within which we operate.

So all it really means is that we have to ensure that we’re really up to date in terms of what tariffs are being imposed or what regulations are being imposed and just ensure you’re at the sharp end of that and comply. That’s it. There’s no alternative to that. But I think at the end of the day, we still are a company which has to provide services and commodities to a global customer base. And we will continue to do that while we can. One thing I think is important is open market, open trade has developed certain supply chains in certain regions to rewire that is going to take a significant amount of time and effort and capital. And I just think the regulators and the governments probably need to appreciate how intertwined some markets are. And it’s not like a Silicon Valley company where you just do something very quickly and you’ve got a new app or whatever it might be. These are large industrial complexes and complex supply chains, which if you want further diversification, it’s going to take time, a lot of time.

Andrea Hotter: Yeah, with that regulatory backdrop, the US inflation reduction now, the EU’s Critical Raw Materials Act, many initiatives, the implications to climate, trade security, foreign policy, they’re potentially enormous in terms of the subsidies, the tax policies and so on. We’re also seeing some of the key commodities that Trafigura deals with being deemed critical, whilst others, we talked about coal and oil being viewed on the way out, even if it is a transition.

It’s not just in the West, China is calling for Made in China 2025, the Belt and Road Initiative. How is all of this changing the nature of commodities trade? You alluded to it there, but is it creating new areas where you say, I’m just not going to get involved in this anymore because it’s not worth it?

Jeremy Weir: Well, there’s some business you just can’t do and some counterparties you just can’t deal with. So you don’t quite simply pass your KYC standards, whatever it might be.

But ultimately, we do have to deal in challenging environments. We have to move materials from sub -Saharan Africa, which can be very difficult to international marketplaces, and we’ll continue to do that. Now, what it just does mean is that the fragmentation that we see in certain marketplaces is inflationary because the costs of moving the material is becoming more expensive because it’s not as streamlined as it used to be. But we will continue to do business in the commodities we operate within and the markets within which you operate in according to international regulatory requirements to the best of our ability. And we may see some of these changes over a period of time simply because costs are too much or commodities are no longer required. But while the commodity still moves and we still are able to do so, we will do it.

Andrea Hotter: I’m curious as to what you think is the new oil in geopolitics? I mean, is it nickel? Is it copper? Is it lithium? How is Trafigura looking at the markets? It seems every few months there’s a new flavor of the month, but I’m interested to hear your view of this.

Jeremy Weir: I think we’re fixated on oil history. If you even think about the oil market, if what we’ve seen over the last six months that happened pre the new oil production coming out of the US and different technology, you would have seen oil prices probably with a three digit number. You didn’t because you had diversification of supply. So therefore, if you’re looking at what is a new oil? I don’t necessarily sort of look at it that way. I look at what are the specifics of the underlying commodities? What are the demand signals? What are the supply signals? And historically, you might have groups, for example, non-ferrous metals together. It’s not the case anymore. Nickel, quite frankly, with what we’re seeing in Indonesia, is in abundance. Now, while some governments might say that it’s a critical mineral, maybe it’s protecting some industries. But, you know, if you look at copper, for example, it’s fundamental for moving the electron.

And the electron is going to be a very important part of the energy stack on a forward looking basis. And therefore, while we’re redoing the grids, if we’re looking at AI and other things, we’ve got a real deficit of copper going forward. I think that’s been well voiced by many market participants. And we have to work out a way to meet that demand signal. But I’m calling it new oil. I think the energy stack is far more diversified. There are different forms of storage of energy as well.

We’ve got 900 carbon falls, so it’s just a much more complex mix on a forward-looking basis.

Andrea Hotter: You know, that division, critical minerals are good and fossil fuels are less good. Trafigura has obviously gone into renewables as a new pillar for the group. Was that inspired by the energy transition, so to speak?

Jeremy Weir: I think what we’re trying to do is if you look at the energy mix on a forward-looking basis, it’s going to be a combination of hydrocarbon fuels and non-hydrocarbon fuels and the electrons. Given the core competency that we as a company in terms of logistics, moving, in terms of supplying commodities, goods, energy, what’s the future of our company? What’s the future of our company product mix on a forward-looking basis? And the thing is you just can’t switch these things on and off. You’ve got to understand how do I move ammonia? How do I manage hydrogen? Given the volatility on renewable energy, how do we provide power and electricity to companies? So those sorts of things, we need to understand them. And those skill sets have to be built up over a period of time. So our view is quite simply, let’s ensure that we have a view on where we think the energy market and the energy transition is taking us. Where does Trafigura fit into that new world, can I say?

And how can we develop the competency to ensure that we’re able to provide those services to a customer base? But also let’s build that competency over time. So when the society demands, we’re really in a very, very strong position to provide those services. So therefore the platform of the company just pivots. It pivots as we move, as we go through that transition, but you can’t just turn the switch on and off. It’s five years plus of building core competencies in underlying markets. So then you’re able to provide the services competitively.

Andrea Hotter: So that diversification is interesting because we all like to talk about globalization and free trade, but there’s a huge amount of polarization underway. When Western governments talk about friendly nations and working with them, they’re typically really talking about diversifying buying away from a reliance on China. They’re all talking about the desire to create resilient supply chains, but aren’t we adding to their volatility by moving away from China? The point I’m trying to make here is, don’t we just need to get over this east -west divide? What would happen if we brought down the barriers instead of raising them?

Jeremy Weir: Well, I think obviously we’ve seen China has through three decades of industrialization and developing its economy, which has been extremely successful. It’s become quite resource hungry, but it’s also built an incredible competency in certain market sectors, particularly in metal processing. Now, they’re quite light on resources. Okay, they’ve got very little copper, little bit of zinc and lead, obviously a lot of coal, but they need the minerals and metals to process it for the development of the economy. They’ve done that very well. And if you look at who have built the most smelters in the last three decades, probably 80 % plus has been built in China. So they’ve developed that. And I think up until recently, the West has been pretty comfortable with that. But as we look forward, and even if you look at what happened with Ukraine and the European energy, there’s a parallel there by saying over -reliance on one particular sector is not necessarily a good thing or not strategically a good thing. So therefore there’s a resetting going on. So we just have to, I think, have a balance between what is required, what is a sensible strategy globally going forward to provide a diversified supply chain rather than a concentrated supply chain. That’s what the world is starting to grapple with at the moment. And it’s going to be very interesting to see how that plays out. But I just think that’s the trajectory. And quite frankly, it seems to be a relatively sensible one.

Andrea Hotter: Do you think the West can ever really achieve that goal, decoupling its incredibly integrated supply chains from China, given the dominant position that the country has in processing, manufacturing, and as a consumer of commodities?

Jeremy Weir: Well, historically you’ve seen processing around the world. And the thing is, what is the economic dynamics of that at the moment? We’re seeing incredible challenges. If you look at the smelting industries of copper and zinc and lead at the moment, quite frankly you question the viability of these occurring outside of China. But I’d like to think that’s a cyclical thing and that will change. But look, you can argue, is it better to build where the energy source is there or where the resource is? So there may be different dynamics at play here, which can justify being built in Mexico, being built in South Korea, being built in Sub -Saharan Africa, being built in other consuming areas. So I do think it’s appropriate that they can be built outside of China. And I think it’s just a further diversification.

I think the other flip side is obviously China is a big exporter of finished product. And so therefore they need those international markets as well. It’s not just the domestic market, which is satisfying the requirements of the production.

Andrea Hotter: Right, exactly. And that comes to an interesting point. Obviously, mineral wealth is fixed geographically. You’ve either got it or you haven’t got it. So if you’re not a resource rich country, you’re going to need to work with partners that are, right?

Jeremy Weir: Correct. And look, you’re starting to see that with alliances being built at the moment.

There’s a different mix of player in today’s world. You’ve obviously got government players, government institutions from the Middle East coming into the mix now, rather than private enterprise and where historically it’s been Chinese backed enterprises been quite adventurous from an expansion point of view, particularly in a higher risk area. So the dynamics are changing very rapidly.

Andrea Hotter: With those partners, that change obviously brings a change to the financing backdrop you’ve mentioned.The sovereign wealth funds, new players coming in. I mean, how is that changing competition? Because I assume the drivers are very different for those types of investors.

Jeremy Weir: There’s two parts to it. One is from, if you like, people seeing the energy transition and how can they play and how can they diversify. Maybe, for example, if you looked at the Kingdom of Saudi Arabia, how they diversify in their investment portfolio, how they’re saying, well, we can possibly be a processing hub, then develop a mining industry. I think they’ve got some long -term planning in place and now they’re looking at how they further expand a field through that process. Obviously, you see investments from the UAE as well. You’ll see investments in certain sectors like in Zambia. But I think the other areas is not just from a long-term positioning with respect to the supply of raw materials, but also actually the demand side where we’re seeing governments recognizing of what critical minerals is. If you spoke to certain governments 10 years ago about critical minerals, they would have been looking as though you’re coming from another country or out of space. It’s something which is quite new and they recognize the importance of minerals and metals to the energy transition. So therefore we’re starting to see government starts of European credit agencies and other import export agencies providing finance. And we as a company, for example, are accessing that form of finance and providing those commodity flows, be it LNG into Germany, into Europe, into Italy, into metals, into Europe, into South Korea, into the other governments. And so it’s not just the equity side of the business, but also in terms of securing flows for future demand on a long-term basis, which is interesting.

Andrea Hotter: Yeah, for sure. And I’m really curious to hear a little bit more about the partnership that you have with the US government in the Lubito corridor of Angola. We had Helena Matza, the State Department on the podcast.

And she was talking about the import -export trade route that you’re creating between the African Copper Belt and the Atlantic coast of Angola. Can you tell me a little bit more about this from a Trafigura perspective?

Jeremy Weir: Interestingly enough, it was the old Zaire railway line, which was destroyed during the Angolan Civil War. And since then it was being rebuilt. And what we have done is basically there was an open tender held by the Angolan government, which we together with partners were successful in that tender. And effectively it’s a 30 year concession where we are operating that railway line. There’s a significant capital investment to upgrade the railway line on the Angolan side, but also refurbishment on the DRC side. And that has a massive impact. It’s going to initially, post ramp up, have a 1 .5 million ton capacity. And what that means is that you will basically take copper out of the DRC, out of the copper belt to the coastline in roughly say five working days, give or take. Currently it takes five weeks by trucks and you’ve got massive congestion obviously has a huge impact on emissions footprint, on society, on road degradation and security of supply because there’s often a lot of robberies, quite frankly, which take place. So really it has a massive impact and that will, I think, drive a lot of inward investment into the region. It’ll also increase trade through Angola and have a huge impact of opening up the whole Angola railway line. So it’s a new economic artery for the region. It really has a positive impact.

So we, together with partners, we’re working with the DFC on a financing. It’s been a very constructive process and very pleased as to the progress. And I think we’re hopefully at the final stage of finalizing that. I think it’s going to be a very, very successful partnership.

Andrea Hotter: Great. I look forward to seeing how that develops. I’d like to turn now to the carbon markets, which I think have been a really important development influenced heavily by climate targets set through international agreements like the 2015 Paris Agreement. We’re seeing the introduction of the carbon border adjustment mechanism by the EU, the emissions trading scheme too. We’re seeing geopolitical battle lines being drawn between countries over climate targets and critical minerals. I wonder whether the creation of a global carbon market, which is what we all seem to want, is actually being held back because it requires coordination across borders to prevent the so-called carbon leakage that we hear about.

Jeremy Weir: I don’t know how many emission trading schemes we’ve got around the world, but it’s a lot and they’re really moving very quickly. And I think the main thing is that it is fragmented and we haven’t got a consistent carbon price around the world. And quite frankly, I think it’s going to be very, very difficult to get there. But what we are seeing is, for example, with the carbon border adjustment mechanism, people concerned about fiscal leakage. And so therefore new schemes have been established pretty quickly. By developing a carbon price, I think that’s a good thing. So therefore we can start to understand what the cost of emissions is and we can start to price that accordingly. We’re very much involved in the market in terms of we have a joint venture with Palantir for Scope 3 emissions tracking. So we can start to understand what the emissions footprint is on basically when you acquire a ton of copper in a certain location or a barrel of oil, whatever it might be, you have a high degree of granularity of what the emissions footprint is around that. Other industry members are saying, let’s get the data. Let’s try and first of all, understand what the emissions footprint is.

Once it’s understood, then we can start to deal with it. Then we can start to say, how can we reduce it? What’s the technology around reducing it? And then more importantly, what are the other mitigants? And so therefore we’re spending quite a lot of time on nature-based removals. We’ve got a carbon trading team, which is very active in the marketplace, providing services to the industry, but also looking at nature-based removals, which are Article 6 compliant to just see how these can be developed and how can these be applied. And we are seeing a lot of interest from some industries around the world.

Andrea Hotter: Yeah, fascinating. And it all plays into the role of environmental, social and governance standards or ESG and how they’re being impacted by geopolitics. I find this a really interesting topic because auto OEMs on the one hand are expressing concerns, let’s say about the standards at some nickel production facilities in Indonesia, which also have a major Chinese shareholder base. While at the same time, they’re also moving to invest in Indonesia themselves.

And as far as I can tell, no one stopped buying Indonesian nickel on mass. So which is it? Is geopolitics driving momentum and sustainability or is it just not there?

Jeremy Weir: You’ve got many different vested interests on this one. I think what we’re seeing is huge technological advancements in nickel production. There are some environmental concerns, not just on the process in some of the technology, but also from the mining perspective. That’s been highlighted for those which you could argue are higher cost and disenfranchised in that process. But I think one of the issues we do have, and I think it’s a common concern, is that we don’t have standard ESG standards. So what standards do we have and how do we actually comply with these standards and how can we benchmark against these standards? So therefore we can then start to really address the problem.

But coming back to your particular question, I do think we are having different standards across different regions. I do think things like carbon tax on nickel, people looking at carbon pricing and saying, well, why aren’t we pricing differently? Should we have a green premium on certain minerals and metals? Until we have a carbon price, which is acceptable, even if it’s under different emission trading schemes in different regions, we’re not going to get any green premiums until we have actually a defined carbon price.

Andrea Hotter: Also, that obviously really depends an awful lot on tracking and tracing. I mean, there’s a regulatory drive to monitor the origin of materials, which is also being in part driven by this geopolitical backdrop, which means we need to have a much better handle on the traceability of supply chains. There are some decent steps being taken, but there’s a long way to go. As we improve, as we know more where things come from and how they’re made, do you think where the line people draw to not do business become firmer and more solid? That fragmentation becomes more structural as it were?

Jeremy Weir: I think you’ll have a differentiator. It does come back to economics initially. Okay. I do think you’ve got to get a carbon price.

But even if you look at carbon or if you look at other ESG standards, responsible sourcing, all these sorts of issues, I think some people will say, no, I’m not prepared to buy that. Even in our own process of responsible sourcing, we do our own KYC analysis of our counterparties. Some people we won’t buy from, quite simply. So therefore there are those standards that companies have. And once you have transparency around that, it’ll make life a little bit easier. But quite frankly, the trend is inevitable. We’re in a certain path and trajectory. And I think it’s important that we continue that.

Andrea Hotter: Jeremy, I could dive into all of these topics much more deeply, but I know we’ve only got a limited amount of time. So I do want to ask you something we’re going to ask all of our guests, which is what one thing we should be looking for, but we might be ignoring. Where might we have the blinkers on at the moment?

Jeremy Weir: I think one of the issues is the power markets. First of all, the capital investment in renewable energy is huge. But the efficiency is still not great. If you look at the solar side of things, even in China, we’re probably looking at high teens efficiency. If you’re looking at tracking solar panels, maybe in India, I’m hearing mid 30%, which is very, very high wind, et cetera. So therefore, installed capacity doesn’t mean that’s the available power. And at the same time, we’re trying to decarbonize. So we’ve got huge amounts of pressure on the existing systems. We’ve got out of date grids which haven’t got the capacity to deal with the huge amounts of future power requirements, even in developed markets. And that’s before we start talking about emerging markets. So volatility in surges of power, that’s a problem. And then you’ve got the AI side of things, data centers and that. So we look at what the usage of industrial power is now, but then we’ve got a whole lot of other usages and demands, which are going to be extraordinary. So therefore we’re not only trying to deal with an energy transition, we’re actually trying to deal with massive increased capacity or power requirements on a forward-looking basis globally.

So how do we deal with power generation? How do we deal with movement of the electron and how do we do with energy storage, particularly when we have volatile, renewable sources of energy? So that to me is the big question which you have to try and solve. And I think people just waking up to it, if you look at forward power prices in the US at about two years, I think there’s a big wake up call there.

Andrea Hotter: Yeah. And obviously you’re going to take a lot of critical minerals to get there too. So, good news for the commodities world. And if we had to fast forward a decade, what will the landscape for critical minerals look like given current geopolitical trends? Obviously, we don’t know where we’ll be exactly with geopolitics in a decade, but if you had to guess, where would you say?

Jeremy Weir: I think we’re going to see higher price environments for a start. I think we’re going to see more diversified supply, particularly in the process inside you. You can’t change your geology so the resources are where they are. You may see development in new areas.

I really hope we’re going to see a great mining ecosystem developed in sub-Saharan Africa, which will be highly positive for those countries. And I’d really like to see that, but we’re going to see, I think, higher prices. People are going to get used to the fact that commodities aren’t going to be higher priced. We’re going to see probably a bit of inflationary results, but we shouldn’t necessarily be too scared of it because if you see the copper price at $15,000 or even higher, I don’t think that’s going to have a huge increase on component prices on a forward-looking basis. But the biggest issue is actually have we got the supply to meet the forward demand? That’s going to be the critical issue. And are there any other technologies which can displace some of the existing materials or the way we do things? That’s going to be the challenge.

Andrea Hotter: Yeah, fascinating. And now, let’s take a quick break from the interview to hear from one of our in-house experts here at Fastmarkets.

Lasse Sinikallas: Thank you, Andrea. And my name is Lasse Sinikallas. I’m the director of macroeconomics here at Fastmarkets. I wanted to take a look at the global economic growth and the energy transition on discussion and how oil price and the fossil hydrocarbons prices like natural gas, they used to be the inflation driver in most of the advanced economies, most of the global economies as well. So basically oil price defined the level of inflation when Russia attacked Ukraine. There was a big push in inflation and energy with the energy in a flow from Russia to Europe being stopped gradually and now being more or less close to zero.

Now that Russia is out of the game, so the hydrocarbon based energy has to come from somewhere. It has come from both the USA and from the Middle East, the traditional hydrocarbon hub of the world. Now with the latest war in Gaza, so that means that everybody was expecting the oil prices to push higher again, but that hasn’t happened. And that’s partly because of the major transition of US oil production becoming the largest in the world. And at the same time, Europe, which is one of the key areas in the world that consumes oil, which is imported, Europe is very much already moving on with the energy transition.

We’ve seen a huge amount of renewables added to the European energy market. There’s a lot of CO2 neutral power becoming online. We have some nuclear, but we have a huge amount of solar and wind energy. And those are a big game changer in the sense that the energy driven inflation, which used to be very important for those industries, which are connected to the commodity supply chain, say forest products, metals, even agriculture products. All those supply chains were very much seeing those impacts from the energy price changes.

Now, with the electrical power and with sources of that power being solar, nuclear, wind power, they are almost inflation neutral. The inflation for those comes from the price of those raw materials going to solar panels or wind turbines. It comes from labor market. It’s not that much of a geopolitically connected thing. And that to some degree immunizes those countries now moving into the sustainable or renewable or zero CO2 energy sources. And at the same time, it changes the game the industries are playing because slower producer price inflation due to energy will mean more stability, more ability to build the business on those energies.

Andrea Hotter: And now, back to the interview.

So Jeremy, it’s that time for the segment in the podcast now where we’re going to throw some audience questions at you, which I sourced recently by social media. So first question we had was, we’re seeing a lot of geopolitical tensions impacting Europe and the Middle East energy supply chain. So what strategies can mitigate these disruptions?

Jeremy Weir: Good question. I don’t know how you resolve the current geopolitical issues at the moment. We have got problems, obviously. We talked about long shipping routes, disrupted supply chains. These are due to sanctions and other issues. Until we have a resolution of certain conflicts, quite frankly, I don’t see how we’re going to address these problems in the very short term. And we’re going to have to have some fundamental changes with the current conflict dynamics and geopolitical dynamics to address on a sustainable basis.

Andrea Hotter Yeah, fair enough. The next question goes back to the idea of price purification and the move away from global pricing as geopolitics pushes countries to sort of split off into trading blocks.

How does the potential rise of bilateral trade, especially between the BRICS nations, impact Trafigura’s plans for the next couple of years?

Jeremy Weir: It doesn’t really. I mean, we source from multiple jurisdictions and we sell in multiple jurisdictions. And while we have disrupted supply routes and as we talked about, we have sanctions where we can’t trade in certain things or trade with certain companies. We just comply. But at the end of the day, the molecule, the tunnel will be sourced and supplied within them most economic parameters. Whatever is thrown at us, we have to adapt to that. We’ve got to function and then we have to continue to provide that function to society.

Andrea Hotter: And then the last question we had was around energy supply and its impact on commodities. So higher prices, energy supply, obviously they’ve been a big factor in forcing the closure of commodity smelting and processing capacity in Europe. We’re waiting to see whether Ukraine and Russia renew their transit agreement to continue to send Russian natural gas by overline pipelines to the EU after the share. Is Europe at risk of losing its processing industry?

Jeremy Weir: Look, high energy prices are a problem. We have a zinc industry and we had to try and manage that industry when we had very high energy prices. But I think coming back in particular to gas, the consensus view appears that Ukraine will not renew the agreement and that has largely been priced into the gas market. It also should be recognized it’s less than 10% of what Russia used to supply to Europe. So there’s alternative forms of energy.

And really higher energy prices in Europe compared to, for example, the US is definitely a big issue for domestic processing. And as I mentioned before, that was a problem for us within Neostar, a zinc smelting business, but we’ve been able to manage that. And I think that’s what we start to see. There’s a little bit of industry coming back at the moment. So we seem to be bodied out and hopefully that’s going to be the case. But energy prices now at current levels are something which we can manage.

Andrea Hotter: Well, Jeremy, it’s a complicated world, but thank you for taking us through it. And thank you so much for being in the hot seat today. We really appreciate your time and answers. I personally have really enjoyed our chat.

Jeremy Weir: A pleasure, Andrea. It’s been a pleasure for me as well.

Andrea Hotter: Thank you very much. And thanks also to the audience for joining us today. In order not to miss any more episodes, make sure you subscribe to Fast Forward on Spotify, Apple Podcasts, Amazon Music or wherever you get your podcasts. And don’t forget to leave us a review.

The post Interview with Jeremy Weir, CEO of Trafigura | Fast Forward podcast episode 3 transcript appeared first on Fastmarkets.

The global macroeconomic keyword for 2024 is, in general terms, “slowness”. While we do not expect a recessionary year for most global economies, it’s unlikely to be a year of solid growth either.

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1. Consumer demand and economic growth

General macroeconomic slowness is something that is not commonly associated with a year ending with a US presidential election, particularly one in which the incumbent president is running for a second term. While “this time is different” is a common phrase used to mock economic prophets pronouncing a breakpoint in the economic laws due to a new era starting, this year might actually be different.

Unsurprisingly, US economic growth is likely to beat European growth, but due to the era of high inflation and the still elevated levels we’ve recently seen along with the rapid rise in interest rates, the economy is still moving ahead in slow motion. A lack of investment is one major cause.

The European economy is likely to suffer from high inflation even more as it has gotten used to extremely low interest rates during the previous decade and now the ECB remains, at least rhetorically, persistently more hawkish in its rate policy than its US counterpart.

Consumer demand makes or breaks the US and European economies. It has helped these economies so far and it is the top factor to analyze this year. The focus should be on consumer spending instead of consumer sentiment due to the reported disparity between reality and feeling indicators.

The economic outlook for China is connected to both of the above-mentioned economies, as China is the key provider of many goods consumed globally, and lower consumption can reduce Chinese growth as well. For China, the key factor determining its economic surprise potential is still its domestic consumer demand and investment. If Chinese consumers start spending, the economy should gain support, which could create positive momentum and investment, depending on the strength of demand.

2. Renewable energy and the unexpected risk factor

Why should one expect the unexpected? Because the global macroeconomic state is also prone to some significant risks – some positive but unfortunately most of them negative – and the negative risks are not only macroeconomic risks.

As evident from any news outlet, geopolitics have climbed to the top of the agenda, and they pose significant risks to the global economic performance. Escalation of tensions in the Middle East and Russia’s continued warfare and belligerence, just to mention the obvious, have the potential to impact regional and global economies negatively. And once one crisis is (somewhat) settled, or at least supply chains are reorganized to cope with the impact, another is fully primed and waiting around the corner. Every emerging crisis has the potential to stall the already slow performance.

That takes us to the positive risks, which unfortunately are not connected to the de-escalation of the current crises. One of the key levers for economic performance in both the US and Europe – and, of course, in China as well – is consumer spending. With interest rates still relatively elevated, consumer spending has been somewhat subdued, but any drop in rates could alleviate this economic pain and also have a knock-on effect on the economy. It’s worth noting that while economic growth is relatively slow, and consumer sentiment, in particular, is poor, employment numbers are solid, so consumer demand has been the one-factor keeping growth positive or at least flat. Anything that could change consumer behavior would be one of the “unexpected.”

3. India’s global expansion

This could also be the year that India, the world’s most populous nation, expands its role in the global economy. There are indications that India might start to take a stand in the maritime transport threat seen in the Arabian Sea. If so, this could be a step toward gaining a larger economic role as well. With high growth rates and a very large population, the economic growth potential of India is significant, and while it all comes down to domestic political decisions, there is a chance that India could become a large source of global economic growth from 2024 onward.

In conclusion, three things to watch in 2024

In this analysis, we’ve explored the macroeconomic outlook for commodity markets in 2024, identifying three areas to pay close attention to this year.

Consumer demand remains a crucial factor in the US and European economies, with a focus on spending rather than sentiment. The role of renewable energy and electric transportation could be pivotal in the global economy by 2024. Despite tensions in the Middle East, global benchmark oil prices have remained stable, indicating the potential impact of renewables. India’s growth also holds significance in shaping the global macro economy in 2024 and beyond.

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The post Three macro factors to impact purchasing decisions | 2024 preview appeared first on Fastmarkets.

In this article, we will analyze the strength of China’s economic recovery so far using domestic demand as our indicator and evaluate what we could expect from one of the biggest driving forces in commodity markets in 2023.

China focuses on domestic consumption for economic growth

There were some expectations of a strong consumer market recovery in post-Covid China after the reopening in December 2022, but that long-expected “revenge consumption” has not yet appeared. Retail sales grew 3.5% year over year in January-February this year and travelling during the Chinese New Year showed only a mild recovery.

One of the reasons the recovery has not been more vigorous is that the growth in household income stagnated in the past year. Consumers have generally reduced their expenditures and increased their precautionary savings for uncertainties. It will take some time to boost consumer confidence and release pent-up demand.

The Central Economic Work Conference at the end of 2022 pointed out that “consumption such as housing improvement, new energy vehicles, and elderly care services should be prioritized”. This suggests that the government wants local consumption to be the main engine driving China’s economic growth in 2023.

Automobiles, home appliances, catering and home furnishings account for about 25% of total consumer retail sales. Within this group, automobiles accounted for 10% of total consumer retail sales, or 15% when including fuel consumption.

The Chinese Ministry of Commerce has published their agenda for this year: Stabilizing new car consumption, supporting electric vehicle (EV) consumption, expanding the circulation of second-hand cars and improving car recycling.

The provincial governments have also proposed various policies to stimulate the consumer market:

• Shanghai: Continue to subsidize the replacement of vehicles with EVs.
• Zhejiang: Provide subsidies for license plates and parking fees for EVs.
• In terms of catering and tourism, all provinces have proposed agendas based on their comparative advantages.
• Shanghai: Promote red tourism, ancient town tourism, industrial tourism and health tourism.
• Hainan: Hold brand exhibitions such as the Third Consumer Expo, create a landmark project of an international tourism consumption center and promote duty-free shops.
• Guangdong: Improve the three-level logistics system in counties and villages; 1,530 provincial key construction projects with annual planned investment of RMB 1 trillion.

Housing market has fewer restrictions, but no stimulus

The real estate sector has significant importance to China’s economy, as the whole industry chain accounts for close to 25% of China’s total GDP.

After three years of controls on the housing market, including limiting the financing channels for developers, setting the price ceiling on new/second-hand house transactions and controlling speculation, there are some signs of easing of the restrictions. However, the government’s intent is to provide some stability to the market while not giving up its efforts to reduce overexuberance in the market.

Policymakers insisted during the Central Economic Work Conference that real estate should not be used as a short-term means to stimulate the economy, but as a way to improve housing demand for new citizens and young people.

For real estate, we believe that the government’s goal in easing its policy is not to provide a strong stimulus on the demand side, but to moderately adjust the previous restrictive policies to release effective demand.

On the supply side, we believe the government wants to promote industry restructuring and mergers and acquisitions, effectively prevent and resolve the risks of high-quality leading property development enterprises and improve their balance sheets.

The real estate sector in Tier 1 and some strong Tier 2 cities could benefit more from this round of policy easing with turnover rates rebounding and mild price increases. Tier 3 and below cities will still suffer from oversupply and population outflow.

Chinese exports still weak in Q1 but may accelerate in the second half of 2023

China benefited from booming exports in late 2020 and 2021 due to the pandemic. But shipments slowed over the course of 2022 as global economies reopened, consumers shifted spending from goods to services and supply chain issues hurt manufacturing.

Early this year, stacks of empty containers at ports triggered concerns of plummeting exports, but these were actually caused by the timing of the Chinese New Year holiday and an abundant supply of new containers – three times more than in average years; for the past two years, China’s Container Throughput Index has still been significantly higher than overseas countries.

We believe that exports will gradually start to turn higher later this year, in conjunctions with improvements in the global economy. The concerns that may affect Chinese exports and hold back growth largely relate to trade tensions with the US and how long inflation lingers.

The trade war with US that began in 2018 caused China’s trade share to the US to drop 6 percentage points from 22% to 16%. Now, ongoing tensions around key technologies and efforts to diversify supply chains could dampen future growth. US sanctions may prevent China from accessing some key materials/parts and affect manufacturing and final goods delivery.

But considering the stickiness of the export orders with potential difficulties in switching suppliers due to quality concerns, finding qualified labor and logistics, we expect this shift to be gradual with China still having many advantages.

China’s economic recovery will gradually build momentum in second half of 2023

Overall, China’s economy has passed the darkest moment and it is on a gradual recovery, although it still faces many headwinds.

The government has issued various policies to boost consumer confidence and improve corporate investment. Exports, which now are no longer the driver of the economy that they were in recent years, should at least become more supportive in the second half of the year, and the property market will serve more as a stabilizer of the economy instead of a booster.

Our forecast assumes that economic improvement will start gradually in the second quarter and build momentum over the second half of the year.

The post China’s economic recovery: an analysis on Chinese domestic demand appeared first on Fastmarkets.

Director of macroeconomics Lasse Sinikallas believes inflation is likely to stick around for some considerable period of time. Find out why and get his latest analysis of the four key drivers of inflation – energy costs, supply chain disruptions, record-low levels of unemployment and government fiscal policy. Read it here.

The post European inflation outlook 2022 appeared first on Fastmarkets.

What are the four key drivers of inflation?

1. Rising energy costs
2. Weak links in the supply chain
3. In-demand workers demand more
4. Fiscal policy and the cost of Covid-19

1. Rising energy costs

Energy markets are particularly sensitive to geopolitical events, and there has been no shortage of those in the past two years. In March 2022, the price of a barrel of oil crossed the USD$100 threshold for the first time since 2015 as a result of the compounded effect of Covid-19 and Russia’s invasion of Ukraine.

Two years earlier, Covid-19 and the disruption it caused to workforces and supply chains put a lid on US oil production. The US is a major consumer and producer of oil, contributing almost 400 million barrels of oil in late 2019, which amounts to 19% of global production pre-Covid in 2019, and making up 20% of global demand.

If US producers can avoid further disruption and return to growth this year, they’ll be able to cover some of the gap that resulted from sanctions against Russian supply. Until then, energy prices will continue to climb.

The European producer price index shows the impact of energy costs on the costs incurred by manufacturers, who’ve seen an average 20% increase in production costs since the start of 2022. This is largely due to the rising cost of energy. Wages have yet to increase in line with inflation, but when they inevitably do, that will push up production costs, too.

What makes this period of rising energy costs different from others for manufacturers; for example, when oil prices hit USD$111 in 2011? This time it’s not just energy – there are other factors at play too, adding to the overall stickiness of inflation.

2. Weak links in the supply chain

Systemic supply chain weakness goes beyond the usual bottlenecks. Covid-19 stress-tested the established just-in-time practice to its limits, and it failed. The global supply chain is now going through a period of transformation as buyers and sellers strengthen weak links and shorten their supply chains to reduce their exposure to global events. At the same time, while the West seems to have moved on from Covid-19, waves of infection continue to disrupt production and supply in Asia and Australasia, where lockdown measures are more severe.

3. In-demand workers demand more

The labor market is influencing inflation in three ways.

First, high demand for skilled workers and a lack of overall supply is creating upwards pressure on wages. Unemployment figures in the euro area and the EU 27 are at their lowest levels in nearly 25 years. And in the US, with the exception of January-February 2020 and September 2019, lowest since late 1969.

Second, the European workforce is at its biggest since measurement began in 2009.

Third, consumers, particularly in Europe, have become unused to periods of inflation. Falling purchasing power will see consumers pressure their employers to increase wages. And they are in an advantaged position to do so, given the lack of supply of skilled workers to replace them.

4. Fiscal policy and the cost of Covid-19

The euro, which has been around for about 20 years, has never seen true inflation. In the past, before the single currency, governments managed inflation by devaluing local currencies – in essence, printing more money. Today, the European Central Bank has to make policy for a group of 19 countries, each with a unique labor market, energy policy and balance of exports and imports.

While a devalued euro could stimulate demand for exported goods, benefiting net exporters such as Germany and Ireland, it would also increase the relative cost of energy and, therefore, the cost of production.

Interest rates also have a part to play. They’ve been flat and on the floor for almost 15 years. If major European central banks were to raise interest rates by a point or so, we’d expect producer price inflation to fall in tandem with a fall in the cost of energy, raw materials and other inputs. However, an increase in interest rates would put pressure on European governments that are highly indebted to central banks – for this reason, governments are unlikely to support the move.

Covid-19 stimulus packages are a major factor in governments’ indebtedness to central banks. Until the recovery from Covid-19 is perceived to be complete, governments are likely to resist any moves that would restrain their fiscal spending – such as an increase in interest rates.

If 2010’s Greek debt crisis was the first major test of the ECB’s ability to find policy alignment across the euro zone, this could be the second.

What’s the growth outlook for Europe in 2022?

Europe, and the euro area in particular, experienced a steep fall in 2020, followed by a period of weaker-than-expected growth in 2021. We’re forecasting another slow year in 2022 at 3.7%.

The war in Ukraine is a significant risk to the outlook. Any conflict can create significant economic upside, in the form of government spending in industry and defense that trickles down through the economy, and downside, in the form of production and logistics disruptions. So far, this conflict has been only the latter – but the former case often only comes in later stages of more drawn-out, resource-intensive wars. The economic impact of this conflict will depend on its duration, which we all hope is brief.

We started to forecast inflation back in September 2021, even before the Ukraine crisis, which has only added to Europe’s economic woes. As things stand today, we expect inflation to stick around for some time.

The post Why inflation is here to stay appeared first on Fastmarkets.

The advance estimate of the gross domestic product (GDP) figures from the third quarter of 2021, released at the end of October by the Bureau of Economic Analysis (BEA), showed annualized growth of 2.0%.

The third quarter figure is significantly lower than the 6.7% in the second quarter and shows that the US economy slowed significantly down in the third quarter. While the third-quarter figure is lower than the previous four quarters, it is in line with the 1.9% for the final quarter of 2019, and thus indicative of economic growth similar to more “normal” economic conditions than those of the immediate post-pandemic period.

Increasing inflation and high level of job openings, on the other hand, indicate a period of high growth – showing lingering economic effects of Covid-19.

Looking ahead to 2022, we’re seeing signs of stubbornly high inflation rates, slowing retail growth and other indicators of slow growth. Read on for our analysis of five indicators of economic performance in 2022 – inflation, earnings growth, house sales, retail sales and job openings.

Inflation stickier going into 2022

At the peak of the Covid-19 pandemic in early 2020, oil prices crashed, consumer demand plummeted and inflation fell to almost zero.

Inflation figures were promising during autumn 2020, with a slight slowdown later on, but 2021 has moved at different pace. The headline consumer price index (CPI), which measures average month-over-month changes in prices paid for consumer goods and services, was 0.5% in July, 0.3% in August, 0.4% in September and 0.9% in October, respectively. This translates to year-over-year inflation of 5.3%, 5.2%, 5.4%, and 6.2% for those months, pointing to continued significant inflationary pressure.

Inflation became “stickier” in 2021 as Covid-19-related changes to the economy, such as labor shortages and supply chain disruptions, took hold and reshaped the economy more permanently. We expect inflation to wane at a slower pace in 2022 than it did in 2020.

Due to the pace and stickiness of inflation, current expectations are that the Fed would increase rates as soon as the first half of 2022, possibly even sooner; this will be incorporated into our forthcoming forecast revision. The inflation data is being viewed by the financial markets very carefully.

Earnings continue to grow

Average earnings in the US increased month over month by $0.11 per hour in July, by $0.12 per hour in August, by $0.12 per hour in September and by $0.11 per hour in October. The July-October changes correspond to 4.0%, 4.1%, 4.6%, and 4.9% year-over-year growth respectively. The increasing earnings figures in this four-month period indicate real inflationary pressure, which is something to keep a close eye on.

Retail sales growth is slowing

In the third quarter, a significant change from the previous quarter was the loss of goods consumption as a driver of GDP growth. The consumption of goods contributed -2.11 percentage points of the GDP growth, a significant decrease from 2.99 percentage points in the previous quarter and 5.69 percentage points in the first quarter. Consumption of services contributed to 3.29 percentage points, which is also less than the 4.93 percentage points in the previous quarter.

Job growth elevated but slower than earlier in 2021

We are now facing the symptoms typical of an overheating economy, such as high job openings and increasing inflation. The employment situation deteriorated significantly due to the Covid-19 lockdowns and recession. By calculating the sum of the monthly net changes in 2020 and the first 10 months of 2021, the number of jobs lost remains at 3.6 million, according to the latest data.

The job market, which appeared to be accelerating during the summer season, cooled significantly in September and October. The market added 1,091,000 jobs in July, but only 483,000 in August, 312,000 in September and 531,000 in October. Given that the US civilian labor force in February 2020 was approximately 164 million, the 3.6 million lost jobs represented 2.2% of the total.

However, the size of the labor force has reduced significantly and in October was estimated at 161.5 million, down 2.5 million. In the household survey, unemployment this year was at 5.9% in June, 5.4% in July, 5.2% in August, 4.8% in September and 4.6% in October. In the growth period after the 2008/09 financial crisis, the unemployment level finally retreated to 5.2% in February 2017.

It is important to note that while unemployment has improved significantly, the labor force participation rate still remained low in June, July, August, September and October at 61.6%, 61.7%, 61.7%, 61.6% and 61.6%, respectively. The October level is 1.7 percentage points below the figure posted in February 2020.

Existing and new house sales improve

Sales of existing homes for September 2021 increased to 6.29 million (SAAR) from 5.88 million (SAAR) in August, showing a 7.0% month-over-month increase but a 2.3% year-over-year decrease. New home sales for September were at 800,000, a 14.0% increase from the revised 702,000 in August, but 17.6% below September 2020. The existing inventory was at just 2.4 months of supply in September, 0.2 months lower than in August and 11.1% lower than the 2.7 months recorded a year ago.

Strong demand and a lack of inventory continued to support the upward trend in home prices. Housing supply is seen to be the key driver for the relatively low existing home sales. According to the National Association of Realtors, the median existing home price increased by 13.3% in September from a year ago, marking the 115th consecutive month of year-over-year growth.

The housing sector regained traction earlier this year, although the lack of supply and earlier movements in mortgage rates have had an impact. Housing construction has the potential to improve further once the economy gets fully back on its feet and shows significant promise for becoming a supportive growth generator for the US economy once it has properly recovered from the pandemic-induced economic tremors.

Our outlook for 2022

The preliminary figures of our upcoming economic outlook projects the US economy will grow by 5.6% in 2021 and by 3.8% in 2022. The forecast will continue to be adjusted based on the most recent data and news and remains somewhat cautious with the downward update from earlier due to slightly overestimated growth in third quarter.

We remain somewhat restrained due to the remaining high level of uncertainty, although the current outlook for the US economy is certainly positive despite the clouds of inflation and overheating hanging around. Government packages are expected to support the economy. Higher growth is projected for the final quarter of the year, and that effect should then carry over to some degree into 2022.

With the economy remaining fragile due to an evolving crisis, it is important to remember that the risks related to this forecast are high because new data coming in may change the outlook substantially. Likewise, the measures taken during such times can also rapidly change the economic outlook considerably.

Judging by the real indicators, the US economy continues moving ahead out of a short but very deep recession back to normal speed via a growth surge and the pace has now slowed down from that.

The post The US economic outlook for 2022 in five charts appeared first on Fastmarkets.

Global economic outlook 2022: growth to slow, China will set the pace
We updated our forecast of gross domestic product (GDP) growth, which is a fundamental driver of demand, in September. And we’ve analyzed purchasing power to produce a view of global growth.

We see the world economy growing by 5.7% through the end of 2021. We expect growth to slow to 4.6% in 2022. The big unknown in the forecast is China – as a region, it’s the biggest driver of economic growth, accounting for about 30% of global economic growth in 2021. If the Chinese economy slows, the global economy will slow significantly too unless other key regions massively outperform forecasts.

Could inflation turn to stagflation?

The rising cost of living is a hot topic around the globe in the final quarter of 2021. Is inflation a temporary effect of the Covid-19 rebound or something longer-lasting? We think it’s both; it depends on the sector.

Some sectors will see temporary price increases caused by supply chain challenges and other bottlenecks. When operations return to normal, prices will normalize too. But factors such as the cost of energy and the availability of truck drivers will have a longer-term effect on some sectors such as the energy-intensive steel industry and the logistics-dependent retail sector. Sustained high costs will inevitably be passed onto consumers.

The energy transition could also drive up prices in the long term. Carbon taxes and the cost of complying with new regulations will increase the cost of supply, and, again, it is consumers who will pay.

Producer price indices in Europe, the US and China all reflect rising costs in the short and long terms and are all trending high compared with the past 15 years, suggesting the start of a period of sustained high prices.

When inflation crosses the red line in the chart above, it’s often associated with a memorable event such as the energy crisis in the 1970s. Could Covid-19 be the catalyst for unusually high inflation in 2022?

If inflation continues while growth slows and wages stagnate, we may enter a period of stagflation or recession-inflation not seen since the time of the 1970s energy crisis. If central banks intervene on inflation by reducing economic stimulus and perhaps increasing interest rates, this would increase the cost of capital and dampen growth. (The ECB, the Fed and the Bank of Japan are already showing signs of cutting back on Covid-19-era spending.) Similarly, rising interest rates could pose a threat to governments that have accumulated unprecedented Covid-era debts. There’s no quick fix for a stagflation-like scenario.

US economic outlook 2022: not yet the ‘normal’ year many hope for
We expect to see 6.3% growth for the US this year while its economy recovers from Covid-19 – the growth rate in 2020 was 3.4%. Still, growth looks set to slow in 2022 to 4%.

In the US, consumption is roughly 70% of GDP. The US economy is driven by consumption of goods and services, with services making up nearly two-thirds of total consumption. The consumption of services fell during Covid-19 because of lockdowns and other restrictions. It has yet to recover to 2019 levels. Slow recovery in the service sector is dampening growth and represents a downside risk to the US economy.

We also looked at the US labor market, which has a bearing on consumption levels. In the third quarter of 2021, there are around 5.3 million open jobs – a classic good news/bad news metric. While open jobs are a positive indicator of economic growth, high levels of unemployment could constrain spending. We’ll be watching to see how quickly those open roles are filled – a mismatch between employer requirements and the skills of the workforce is a downside risk that can take several years to resolve.

Manufacturing recovers but not yet ‘back to normal’
The US purchasing managers’ index (PMI), a measure of the health of the manufacturing industry, and industrial production levels have both recovered well from vertiginous falls in 2020. But production levels have not yet returned to 2019 levels.

Housing stock shortage looms
The housing market came roaring back in late summer 2020 after a brief period of stagnation when Covid-19 lockdowns were at their peak. If you’ve been following the volatile lumber market in 2021, you’ll be familiar with the way in which the housing market has driven growth this year.

In 2022, supply of housing stock rather than demand is the area of concern. Low housing stock levels threaten to push home prices higher, which will slow home sales, in turn shrinking demand for housing-related products and services.

Europe economic outlook 2022: recovery loses steam
Europe’s economy continues to struggle. We forecast growth of just 3.1% through to the end of 2021. In 2022, we expect to see a growth rate closer to 4.8%, lagging behind the US.

In the euro area, 2.3% of jobs are vacant. It has only reached that height once before – in 2019 – in the past eight years. Just like the US, the degree to which skills in the workforce match the skills in demand will determine how long high rates of underemployment persist.

Consumer and business confidence levels have had a bumpy ride, following the ups and downs of the Covid-19 pandemic. Right now, growth is on a downward trend. Overall, the recovery isn’t going as well as it should be. Europe’s post-Covid momentum is fading fast, which is bad news for the US because of the close relationship between the two trading blocs.

China economic outlook 2022: China has an outsized role to play
China is the big question mark looming over 2022. We still forecast 8.5% growth for this year and 5.6% for next year. This is on the optimistic side; signs indicate that the pace of growth could slow rapidly in 2023. Falling retail sales of consumer goods suggests hard times to come.

China represents roughly 20% of the global economy in 2021 but more than 30% of total global economic growth – in other words, it’s picking up the slack from Europe and other slow-recovery regions. If Chinese growth slows, global growth will follow. All eyes are on China in 2022.

Latin America economic outlook 2022: struggling to recover from a lost decade of economic progress
After a decade of GDP stagnation, growth is looking up through the end of 2021 but is set to slow again in 2022. In Latin America, higher public spending in 2020 due to Covid-19 and higher global commodity prices in 2021 are driving up prices while unemployment levels remain high and purchasing power stagnates. With that, unfortunately, the risk of underperformance is high.

2022 and beyond – a bumpy road ahead?
In 2022, growth in all four major regions is expected to slow as reality sets in after an initial post-Covid boost. National debt levels are high, supply-side and logistics issues persist in everything from microchips to US housing stock and inflation is rising. In the next few months, we’ll be watching central banks closely to see whether and how they’ll intervene. Of course, we’ll be watching China’s economic indicators most keenly – any deviation from forecast there will have a ripple effect through the entire global economy.

Lasse regularly updates the macroeconomic outlook – visit Fastmarkets.com or follow Lasse on LinkedIn to get the latest from Lasse and his team. Lasse first presented this macroeconomic outlook at the Fastmarkets North America Forest Products Conference in September 2021. If you’re interested in the forest products market, join Lasse and his colleagues at the 23rd annual Virtual European Conference over March 8-10, 2022.

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