MARKET REPORT
SHORT READ PART 4
2023 JANUARY ISSUE
Written by : Andrew Sia
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From the Desk of the Publisher
The subject surrounded are the Covid and energy, but the most important information that we want to bring out is the shifting of the port of call in the U.S. from the West Coast to the East Coast. This has been after the dominance of the Port of Los Angeles since China become the world factory from the 1980s. After this time of the change of supply chain, the Port of New York and New Jersey are regaining their importance.
We can look at it as an alternative or something as a backup going into the future. Once again, this fits into our series under the supply chain with the title known as “Globalization Needs Reinvigorate.”
The piece about the German chemical company, BASF, can be used as a case study for further exploration. We have to admit the resilience of the German industry as there are so many things to learn from them.
Contents:
“Tsunami” of Covid Cases Will Take Place in China
Italian Energy Giant Enel Is Planning A Solar Cell Factory in the U.S.
Supply Chain is Back to Normal
FIFA World Cup Qatar 2022
Europe’s Energy Crisis of This Winter
Nuclear Power Plant, Diablo Canyon in California
China Signed the Biggest Supply Contract of Natural Gas with Qatar
WeWork’s Latest Challenge
Twitter and Elon Musk
Russia is Calling for Release of Ammonia Exports
China Complains the U.S. Chip Sanction at WTO
Hong Kong is Reopened for Visitors
Another Challenge from the Sanction with Russia
China’s Release of the Unplanned Covid Restriction
China Allows U.S. Auditors to do Financial Audits for the US-Listed Chinese Companies
Port of Call (POC) Has Been Shifted
What China Booms Now After the Release from the Authoritarian Lockdown
The Challenges for the Electric Vehicles and Their Independence
BASF’s Business Model in Today’s Turmoil Situation
“Tsunami” of Covid Cases Will Take Place in China – New York Times, December 11, 2022
China, the most populous nation, was also the world’s last holdout of Covid, whereas its government has taken the decision to abandon its zero-Covid policy which proved to be very unpopular and costly. Its policy to lockdown the nation in order to contain the virus proved to be unsuccessful after three years since the Covid-19 started.
It is now trying to step up its vaccination campaign which the resources were diverted to building and enforcing a national mass testing system which is very quickly being put out of commission. It created a chaotic situation as people rushed out for taking tests. There are more than 600 million vaccinated people who have not yet received a booster shot. This is desperately needed with the country who has only the Chinese vaccines which proved to be weaker according to the World Health Organization.
It is already estimated that the Omicron surge can infect 60% of the country’s 1.4 billion population, which is about 840 million people. For most of the Chinese people, this will be their first encounter with Covid.
Its government has announced to double the capacity of critical care beds and to increase the number of doctors and nurses staffing these wards which are converted from the previous temporary facility built for quarantine purpose. We have to know that China has only three registered nurses for every 1,000 people and two practicing physicians for every 1,000 people.
There is also the lack of oxygen ventilators to attend to the patients.
Its earlier developed the assigning color codes denoted risk bases on vaccination status, age, and other health conditions, is removed for any contact tracing and infections. It has told the infected people to stay home and attend to themselves.
You may say that Covid-19 may have just started in China after the three years’ worth of harsh control. And due to the lack of Covid cases, the immune system doesn’t exist at this crucial moment.
As at this writing, there are 653 million cases of Covid in the world, out of this, the U.S. has a little over 101 million cases at this writing. This took the world three years.
The world’s latest on its population is 8 billion, and 653 million cases represented a little over 8%.
The U.S. with its 334 million population and the infection rate is 30% which is already on the high side.
Italian Energy Giant Enel Is Planning A Solar Cell Factory in the U.S. – WSJ, November 18, 2022
It is the first one that will produce 3 gigawatts of solar panels initially, and later double it to 6 gigawatts. The cost will reach $1 billion.
It will produce solar cells, which is the building blocks for solar panels, and it is a component not currently produced in the U.S. In recent years due to the cheap imports have forced the last few manufacturers went out of business.
Enel mentioned the economies of scale to reach the price and quality in order to be able to compete with China. Enel’s plan is going after the U.S.’s announcement for passing legislation offering generous incentives to build a domestic supply chain for renewables.
Enel is based in Rome, is one of the world’s biggest utilities and renewable-power developers with a global portfolio of wind, solar, geothermal and hydropower that reaches 55 gigawatts. More than 8 gigawatts are in the U.S. and Canada. It was announced in 2021 that it hopes to increase that by 75% in 2024.
The Inflation Reduction Act offers tax credits to companies that make renewables in the U.S. and since the law was passed in August last year, it attracted companies to take part in the program. For instance, the solar-panel maker First Solar Inc., and battery maker LG Energy Solution Ltd., who have all announced manufacturing plans.
Supply Chain is Back to Normal – WSJ, November 18, 2022
After two years of disruptions, supply chains are almost back to normal. The Toy Association mentioned that from the supply-chain point of view, it is the opposite of last year. Companies from big-box chains to apparel and luxury goods, even the smaller and specialty retailers said that they expected to be well stocked for the holidays.
Unlike the late 2020 through 2021, virus-related mobility restrictions and fiscal stimulus triggered demands in semiconductors. An overburdened freight systems faced severe back up, shortage of shipping containers and truck drivers made the supply-chain almost paralyzed.
Take the container ships waiting for unload at this time of the year outside Los Angeles, it is only six compared with 109 in January. Not only the freight cost has declined, but also the trucking has come down significantly.
Consumer prices for clothing, appliances, furniture, televisions and toys all fell in October.
Some retailers, like Walmart and Target, are still carrying higher-than-ideal inventory levels. But this can give them the flexibility of offering promotions during the holiday season.
FIFA World Cup Qatar 2022 – New York Times, November 19, 2022
The 2022 FIFA World Cup for men’s football tournament is in its 22nd event and takes place in Qatar from November 20 to December 18, 2022. Qatar, the wealthy Gulf nation spent 12 years in preparing to host the world cup. It has planned the whole nation by building stadiums and hotels, roads and sidewalks and even a brand-new subway system.
It was not until Friday, November 18, that the selling of beer during the tournament was allowed. This lifted the ban of the sales of beer to roughly one million fans at the eight stadiums. The red beer tents used for the Budweiser, a longstanding World Cup sponsor and the official beer for the tournament are made available to the soccer fans. This also means the sponsor of $75 million for the FIFA which earlier on was the disagreeable point with the ruling emir and the royalty that this was nonnegotiable.
There are issues like press freedom, street protests, and the rights of LGBTQ+ visitors were against the intention of the hosting country.
Alcohol is available in Qatar, but sales are strictly controlled. Most visitors are permitted to buy beer and other alcohols in upscale hotel bars and at very high prices. Beers and other drinks are available in stadium luxury suites reserved for FIFA officials and other wealthy guests. This lifting of the ban at the last minute has been the result of the criticism of the Football Supporters’ Association, a football fan advocacy group based in Britain.
Europe’s Energy Crisis of This Winter – New York Times, November 22, 2022
Europe used to depend on cheaper pipeline gas from Russia, Norway and North Africa. But this time it is switching for LNG from the U.S., who traditionally are sending it to China, Japan and South Korea.
At this moment Europe’s gas storage facilities have been full and the price is all dictated by demand. For instance, a shipload of LNG would have sold for $20 million two years ago, and last summer it soared to $200 million, which is now half of it with winter approaching.
Currently, there are around 40 tankers of LNG with billions of dollars sitting off the coast of Europe and Asia waiting for the weather to turn colder and can fetch more money. The bulk of these shipments are coming from the U.S. as shale drilling has become one of the top exporters of LNG, along with Qatar and Australia. Last year Russia supplied up to 40% of the natural gas for Europe, this is taken over the U.S. now. And already the shipments from the U.S. to Europe has been doubled this year.
According to an industry estimate, the largest tanker can hold enough gas to heat a small city of 70,000 homes for a year.
With overall suppliers growing only about 5% this year, Europe’s switching of the supply has driven up process around the world and making it unaffordable for many poorer countries. Although prices have fallen by two-thirds recently, but they remain high by historical standards.
Buying LNG from Cheniere Energy, a large U.S. LNG supplier, has remaining a secretive business, unlike the pricing which is less firm than the standard set by Brent crude in oil trading.
U.S. natural gas is often cheaper than in Europe for a variety of reasons, the shale drilling has grown to become the top global exporter of LNG. This is also a boom time for LNG because most of the large energy companies with the strong finance have invested in building the liquefaction facilities and terminals.
The largest LNG producer is Shell, follow by TotalEnergies, Cheniere and Exxon Mobil. Shell and its integrated oil business earned $10.1 billion this year, which is the double of 2021. This is the all-time boom for LNG.
Nuclear Power Plant, Diablo Canyon in California – New York Times, November 22, 2022
The United States maintains 92 nuclear reactors, although a dozen have closed over the last decade, including a month ago the Palisades Nuclear Generating Station in Michigan, which is about 55 miles southwest of Grand Rapids.
Diablo Canyon, which is on the coast about halfway between San Francisco and Los Angeles, provides about 9% of the state’s electricity. It is a critical source during the extreme climate situation driven by the climate change.
Diablo Canyon is California’s last nuclear power plant to receive a $1.1 billion federal grant which is part of the Bipartisan Infrastructure Bill which provided $6 billion for civil nuclear support at $1.2 billion per year for fiscal years 2022 to 2026.
Critics of extending Diablo Canyon’s operations raised argue that there is not enough information on which to evaluate the need and potential expenses. Regulators continue to evaluate California’s electricity needs for future years and urged the state facilities to add more resources like batteries to aid the electric grid during the periods of high demand. The increase need for electrify appliances, heating and cooling systems and automobiles which lead to the increased need for power. To keep Diablo Canyon in service for the next five to ten years is very necessary. But to give extensive upgrades to ensure safety is absolutely necessary.
To meet the climate goals of President Biden, investments in clean energy including nuclear energy is necessary. Diablo Canyon Power Plant remains a reliable source of power for the people of California.
China Signed the Biggest Supply Contract of Natural Gas with Qatar – FT, November 22, 2022
China’s Sinopec has just signed one of the biggest ever liquified natural gas deals with QatarEnergy which is a 27-year agreement for 4 million tons of gas per year. This agreement is following a shorter 10-year LNG purchasing agreement in 2021 between QatarEnergy with Guangdong Energy Group Natural Gas Company.
This is unlike what the European countries have hesitation over longer-term deals as they have plans to move away from fossil fuels in a shorter timeframe. It is showing China is committed to the use of gas in the long term within their energy mix.
WeWork’s Latest Challenge – WSJ, December 14, 2022
With the recession fears and tech-industry job cuts are weighing on demand for co-working desks, WeWork is squeezed with high interest rate and bear the heavy burden of expensive and long-term leases and more than $3 billion of debts, made it a negative cash flow of around $4.3 billion between July 2020 and September 2022.
With SoftBank, to date, has sunk in more than $10 billion and WeWork has burned through nearly all of it. It still has $500 million in undrawn debt commitments from SoftBank and has said that it expects to end 2022 with $300 million in cash. This is less than one-third of what it had at the end of 2021. But its debt contracts allow it to borrow another $500 million.
Analysts said that the company has made progress in cost cutting and its losses have narrowed. The company may benefit from hybrid work and economic uncertainty if more companies move away from long-term leases to short-term leases co-working arrangement.
WeWork’s bonds which are already rated at one of the lowest junk bond ratings and the company’s share is down by 70% this year. WeWork’s bonds were traded on December 12 for 48 cents on the dollar down from 97 cents in January.
WeWork’s leases can be as long as 15 years and it is already announced that it would close 40 money-losing U.S. locations. WeWork has 72% of its desks being leased in the third quarter of this year, compared with 50% in the summer of 2020, but it is still well below 84% occupancy rate in 2018. But we have to remember that it was before the global pandemic and the lockdowns affected the business environment.
Its U.S. occupancy continues to lag behind Europe and Asia.
In its heydays we have seen its former chief-executive Adam Neumann and SoftBank Masayoshi Son’s irritable investment behavior that led to the destroy of not only WeWork but also Softbank.
Twitter and Elon Musk – New York Times December 14, 2022
This end of the year we have seen the world is going more crazy than ever. To cut cost, he fired 50% of the employees of Twitter, 3,500 of them, and denied the severance payment of those since the takeover of the company. Elon Mush threatened employees with lawsuits if they talk to the media and act not in accordance to his liking.
He has not paid rents for weeks for its San Francisco headquarters or any of its global offices.
Refused to pay for $197,725 for private charter flights during the time of his takeover.
Elon Mush continues to slash expenditures and is bending or breaking Twitter’s previous agreements to his liking. It has been characterized by chaos, reversals of the platform’s previous rules and regulations, and unpredictable decisions that have driven away the advertisers.
This is all in violation of the NDA one has signed when joining the company. I don’t know how you can walk away with all this irresponsible behavior, and describe it as an elephant inside the crystal shop is already too mild perhaps. Definitely this is not what we learn from the business school.
Russia is Calling for Release of Ammonia Exports – FT, December 4, 2022
Ammonia is the ingredient for fertilizer and can be considered as essential for easing the global food crisis. And UN wants the exports of Russian ammonia through a Ukrainian pipeline to be resumed in order to ease the price of the fertilizer. Kyiv and western capitals are unwilling to allow the Russian fertilizer to reap export profit and allow the money to go into the war with Ukraine.
This Russian oligarch, Dmitry Mazepin, is seeking diplomatic help to allow the ammonia to be shipped to African countries. The export would help to push down the global price which is at $1,000 per ton at current price.
China Complains the U.S. Chip Sanction at WTO – FT, December 4, 2022
China is filing a dispute with the World Trade Organization which in this case is escalating the technology war between the two countries. China’s commerce ministry claimed that it was a legal and necessary measure to defend its legitimate rights and interests.
It is already difficult for China to buy or develop advanced semiconductors since early October. This export control was aimed to block China’s ability to use high-end U.S. tech for military applications. This has disable China to produce advanced chips.
China has engaged its domestic tech groups, Alibaba and Tencent, alongside with its state-backed groups such as the Chinese Academy of Science to create semiconductor intellectual property that will bolster its capabilities.
But on the other hand, the U.S. has negotiated with Japan and the Netherlands on an export control deal to stop the companies to sell chipmaking tools for making the Chinese advanced semiconductors.
This is known as decoupling and the Cold War is already on the wall.
Hong Kong is Reopened for Visitors – FT, December 14, 2020
Travelers to Hong Kong are allowed to visit restaurants and bars upon their arrival, while residents are no longer required to scan a contact tracing app to enter pubs, churches, gyms and other public venues. It has followed China’s change of its net-Covid policy.
Despite the easing of restrictions, a daily cases of 14,000+ cases, are still reported.
Wearing mask outdoor is still mandatory and visitors would have to take a test on their arrival and ensure a compulsory five-day isolation if they have a positive result.
Hong Kong’s reputation as a financial center has been shaken by a political crackdown that followed its pro-democracy protest in 2019. Its strict lockdown since January 2022 has created damage to its business scene. Its economy recovery has been hindered by the continued closure with China and its gross domestic product fell 4.5% year on year in the third quarter of 2022.
Another Challenge from the Sanction with Russia – WSJ, November 23, 2022
This time it is the International Paper Company, who has been depending on the Russian pulp. And since the sanction was enforced, companies were filing out of Russia. International Paper Company said that it would explore options, even a sale for its stake in the Ilim Group, which is a pulp and paper giant. It has the government license to log swaths of Siberia and the western taiga that can add up the size of South Caroline.
At this war, western businesses have faced a lot of pressure and cost them billions of dollars.
Ilim is a foreign investment that has been in Russia after Vladimir Putin took over and the business climate was overwhelmed with inefficiency, bureaucracy and corruption. Ilim successfully turned it into a cash cow.
Ilim is selling pulps to China for paper towels and toilet papers. Its main product, container board, the material for folding into boxes where the demand has declined as there are many manufacturers who have converted from making writing paper and newsprints.
China’s Release of the Unplanned Covid Restriction – FT, December 16, 2022
On December 7, Xi Jinping abandoned his zero-Covid strategy of mass testing, quarantines, citywide lockdowns and electronic contact tracing and it has unleashed China’s biggest uncontrolled wave of cases since the pandemic took place in Wuhan three years ago.
Since then, the experts from all over the world have warned China that the death toll during this reopening period would lead to 500 deaths per million. Given the population of China at 1.4 billion, this would mean a scenario of 700,000 deaths due to the Covid.
Take the U.S. for instance, we have already the deaths of 1.1 million with the population of 330 million. But we have already the four dosages of vaccination and antiviral of 85% and 60% respectively. The three years of public health measures and social restrictions have helped to reduce the rate of transmission significantly. We have to admit that the vaccine uptake among the elderly has remained a stark problem.
China has the lack of a nationwide planning for an orderly reopening and a surge of the outbreak of Covid cases that has paralyzed the hospital system. The supply of medication has broken down due to the lack of coordination. All of the sudden, every district government has their own measures.
The country planned for its economy as usual and already the industrial production, which are referring to manufacturing, utilities and mining sectors to grow for 3.6% for the year is now only grew by 2.2%.
The retail sales, a key gauge of consumer spending which has lagged behind due to the Covid, was expected to drop by 3.7% which is now 5.9% year on the year.
The country has been relying largely on the property sector which has slowed down as well. Exports have been contracted because of the global economic climate.
All these were expected because of the Covid restriction in the first place. But now with the sudden release from the closely monitored environment, this would have worsened the situation as with the surge of Covid cases would add another burden on an economy which has been weakened.
China Allows U.S. Auditors to do Financial Audits for the US-Listed Chinese Companies – FT, December 16, 2022
After a long showdown, the U.S. regulators are allowed to inspect the work of auditors in China for the first time, otherwise some 200 Chinese companies could have been expelled from the U.S. stock market. It is a breakthrough after a long stand-off between Beijing and Washington for a series of accounting frauds at the U.S. listed Chinese companies.
Many companies would have been on course to be delisted from 2024 under the U.S. legislation that banned trading in stocks for companies who don’t have their audits inspected by the Public Company Accounting Oversight Board (PCAOB).
Already several state-owned groups, including oil producers PetroChina and Sinopec have abandoned their U.S. listings on the ground of allowing the auditors to have access to the sensitive data for security reasons.
Port of Call (POC) Has Been Shifted – WSJ, December 10, 2022
The hierarchy of the U.S. ports has changed and companies across many industries are rethinking how and where they ship their goods after years relying heavily on the Western U.S. as an entry point. Their reasons ranging from fears of a longshoremen strike and a repeat of the bottlenecks that disrupted the supply chain. And earlier on when the pandemic happened, it had shown the overdependence on Chinese production.
In August of this year, Los Angeles lost its title as the busiest port in the nation to the Port of New York and New Jersey as measured by the number of imported containers they handled.
The share of all the U.S. container cargo handled by Los Angeles together with the neighboring port in Long Beach continued to fell in the first ten months of the year to a combined 25% as measured by weight, down from a height of 33%.
Other ports benefitted from this shift included Savannah in Georgia, Houston and Charleston from North Carolina. This is also followed by railroads and logistic companies and services with new warehouses in the Southeast to cope with the movement of goods when they arrived at the ports.
The ports in California have been the preferred gateway for goods from China and ocean voyages through the Panama Canal up the Atlantic Coast are more time consuming and expensive. But some companies are willing to pay more for the complexity of shipping to different ports in order that their supply chain can become more flexible.
The changes in the flow of trade are affecting the ports and the surround cities involved. For instance, the Port of Los Angeles generates 1.1 million jobs for California, the Port of Long Beach provides 316,000 jobs for Southern California. Collectively, the Port of New York and New Jersey supported 506,000 jobs as of 2019.
We look back to find out the time when the trade was first going through the East Coast and where the first container shipment was originated. The industry started in 1956 when a converted oil tanker, Ideal X, was converted to set sail from Newark carrying 58 boxes of goods bound for Houston. The boxes proved to be so easy to ship and containers were designed to allow goods to transport on land and stacked them onboard the container ships for sailing. This new transportation system lowered the costs of moving goods from our part of the globe to the next and created the boom for the global trade.
With China emerged as the dominant exporter of cheaply made goods for American giant retailer, Walmart, California became the ideal port of entry because of its proximity to that part of the world. From there the network of railroad and highway has been built to more the goods across the country.
In 2003, the ports on the West Coast were already handling 70% of containerized imports from Asia and most of them were routed through the Los Angeles and Long Beach ports.
The container ports on the West Coast are not without any competitions and threats. For instance, the Panama Canal has been widened in 2016 made it easier for large ships to reach different parts of the country.
The trade tensions between Washington and Beijing resulted the new tariffs for a range of Chinese goods. The business executives have diverted their sourcing of products to countries outside China. The ports on the East Coast made more accessible as the point of entry.
The port congestion caused by the pandemic helped the business executives to divert the port of call to the East Coast to reduce the tension. The backup started to develop in 2020 and millions of Americans were stuck at home under the Covid-19 lockdowns. Massive orders for household goods, building materials and tools were ordered. The queue of containerships off the coast of California reached 109 during January 2022. There are more motivations to shift the shipments to the East Coast as part of the contingency plan under the unpredictable situation.
Another port on the East Coast is the Port of Savannah. It is spending more than $1.3 billion over the next few years to double the number of berths that can unload from larger container ships.
At the end of this report, we would like to report the observations the company known as Abercrombie & Fitch, who is also selling clothes under their Hollister brand, and it is related to our industry. They began to have shipments directed to the East Coast. It used to have 90% of its goods coming through the ports on the West Coast, Los Angeles and Long Beach for instance. The shipments was transferred to trucks and trains and hauled to warehouse in New Albany in Ohio. From there the goods would be sent to two fulfillment centers to support more than 500 stores across the country.
During the pandemic, freights were delayed for weeks and sometimes even months. To save its sales of $2.6 billion, Abercrombie & Fitch started to move a large share of goods to the Port of New York and New Jersey. Today the company is receiving 25% of its shipment through the East Coast ports. It will also be the hub especially the company has moved some part of the production away from China to countries like Indonesia and Bangladesh. It has chosen the route to the East Coast via Suez Canal.
What China Booms Now After the Release from the Authoritarian Lockdown – FT, December 14, 2022
Investors are trying now to profit from a sudden coronavirus exit as the world’s most populous loosens pandemic restrictions with immediate effect. This has brought the stocks of Chinese pharmaceutical companies, breweries and funeral services among the companies who are the top performers at the Hong Kong, Shanghai and Shenzhen stock markets.
An unexpected demand for fever medicines and other drugs pushed the stock up by more than 10%. And this abandon of zero-Covid strategy resulted the cancellations of mass testing, compulsory quarantines, citywide lockdowns and the electronic contact tracing system. Overnight these were all disregarded.
This dramatic move of Xi Jinping’s decision has stoked the fears of a rise in deaths and hospitalizations, especially among the tens of millions of elderly Chinese who have not received the three vaccine doses that were meant for full protection.
The Challenges for the Electric Vehicles and Their Independence – FT, December 7, 2022
For decades, Europe has been the heartland of the combustion engine production, but the industry has shifted to electric vehicles and soon China is becoming the major producers for battery that will give it the leading edge.
It is already said that by 2031 Europe will have more production capacity being switched over to the EVs production. In fact, it will become the second largest, and China who has been relatively late to develop a car industry will compete with Europe and the U.S. on the engine technology. The shifting to electric can give China a leading edge for its dominance in the battery manufacturing.
Some 40% of the value of an electric vehicle is in its battery, and China’s dominance position cannot be disregarded, as it is also determining the cost of the vehicle.
By 2031, China will have 322 gigawatt hours of production capacity in Europe, South Korea, the second largest with the capacity of 192 gigawatts, followed by France and Sweden, and the U.S. in the fifth position, Germany and Norway as the sixth and seventh position, and the U.K. with 20 gigawatts at the eighth position.
Chinese brands, BYD, Great Wall and Nio planned their growth plan for the EVs in Europe.
Volkswagen is the foremost European manufacturers in Europe trying to expand its battery capacity and reduce their reliance on external suppliers. It has plans for building five factories in Europe and one in North America. In the meantime it has the supply contract with China’s CATL, the largest battery maker.
China’s growth in the presence in Europe’s car industry is in line with Europe’s decarbonization plans that aim to end the sales of combustion engine vehicles by 2035.
Among the European countries, the debates on the reliance of China and many of them want to reduce their dependence and autonomy on China in this vital sector. In the past years of the Covid and this year’s invasion of Russia in Ukraine have led the European countries to consider its independence on energy and to stay away from countries like Russia and China for the geopolitical reason.
Unlike the U.S. who has the Inflation Reduction Act that prevents cars containing technology from a “foreign entity of concern” from receiving consumer incentives, making the importation more expensive.
BASF’s Business Model in Today’s Turmoil Situation – FT, December 7, 2022
BASF is a chemical company located in Ludwigshafen in Germany, which is a small town and has the world’s largest integrated chemical complex in the world. It has one of Europe’s largest wastewater treatment plants with its own hospital and fire brigade.
For its energy, it is depending on natural gas coming from Russia through the network of gas pipes to power the chemical plants.
At this time it is shutting down its ammonia plant and reducing the production of its acetylene facility because of the soaring price of the natural gas. It has affected the cost so much that by importing ammonia from overseas can be cheaper than manufacturing in its own plants.
BASF is coming to the point to decide the way to transform its business in order to stay competitive. It has to consider to move its production to a location where the cost of energy is cheaper. This is triggering the concern about the future of German industry and the sustainability of the country’s business model especially if it is depending by a cheaper and plentiful supply of energy.
In the case of the German industry on globalization and independence, it has to consider to outsource for its security to the U.S., the export market of China and the energy supply from Russia. The recent situation has shown the vulnerability being caught among great powers for competition and an increasing need to build up its defense system with allies to counterbalance with the adversaries.
It is without question that Germany has become highly dependent on piped natural gas from Russia and it has increasingly intertwined with China which accounts for €12 billion of its annual revenues.
BASF is already building a €10 billion chemical complex in Guangdong which is its largest foreign investment in its company history. But on the other hand, China is 50% of the global chemical market, and with the presence in China would make their situation most secure.
Germany has to come to realize that the dependence of low energy costs, an abundance of skilled workers, and open markets for Germany’s high-tech products have to change now due to the facts that many of the core elements have changed. Meanwhile other industries are also struggling because the rising cost of the gas. For instance the German glass and ceramics manufacturers are suffering and found that it is hard to absorb the rising cost.
But Germany has Europe’s largest chemical industry by far and it is almost entirely reliant on imported energy and raw materials. BASF is Europe’s largest industrial consumer of gas and most of it is coming from Russia. It had to pay €2.2 billion more for gas between January and September compared what it did the same time last year. It ended up making a €130 million loss in its third quarter. The company is set for a cost saving over the next two years.
In the longer term, the German manufacturing has to move one in four Mittelstand companies, the small to medium size companies that form the backbone of the German economy, to overseas in according to a poll taken in the summer by the BDI, which is Germany’s main business lobby.
But this is not the only cause, as in fact the business environment in Germany, and also Europe on the whole has deteriorated as the EU regulation has been creating a lot of uncertainties. EU’s industrial emissions directive, its chemicals strategy for sustainability and the ban of the most harmful chemicals in consumer products. This is a very heavy burden for those midsize enterprises with 100-200 workers.
The U.S. with its Biden administration’s Inflation reduction Act, the $369 billion subsidies for green technologies has the potential of attracting the German businesses to move their production to the U.S. and this is the step to take to become multinational for the German companies.
When we talk about the German industry, we can remember its enormous value chains, high productivity and product quality, and many German companies are global leaders in their fields. Its success has been built on long-term investments, deep knowhow and high degree automation. It has also been in this way for decades.
It is also in the process of reforming its immigration to allow more skilled workers into Germany. In this respect, I recalled that when it was forty years ago I visited a knitting factory in Stuttgart for specialty fabrics to find them to have workers from Turkey already in those days.
In order to have its independence for its energy, we have already seen the Germans building import terminals for liquified natural gas, restarting its coal-fired power stations and extending the life of its nuclear reactors. For the renewable energy, they are speeding up the rollout of wind and solar power with the aim of deriving 80% of its electricity to renewables by 2030, up from its 50% now.
In the area of the renewables, BASF said that it is progressing too slow as if they will have to meet the 2030 goal and Germany must put up 6 wind turbines per day to meet its goal.
They pointed out that Germany needs to turn into an advance industrial country than risks from becoming an industrial museum. This is so true.