MARKET REPORT
SHORT READ PART 4
2022 OCTOBER QUARTERLY ISSUE
Written by : Andrew Sia
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Contents:
Historical Heatwaves and Flooding
This Summer in Europe is in the Era of Extreme Heat
Hot Cities in China
Electricity in India
Europe is in the Midst of a Summer Drought
Droughts Are Threatening the World Economy
Inflation Situation in the UK
Japan is Restoring its Nuclear Power Plants
Demand for LNG Tankers
Australia is Readjusting its LNG Export
The Price of Electricity in Europe is Soaring
Historic Heatwaves and Flooding – The Week, August 19, 2022
We have noticed that the historic heatwave and flooding have taken place this summer. In July alone, nearly 6,000 temperature records were broken in the U.S. Take for instance, we can refer to the following:
Severe heatwaves ravaged the Pacific Northwest, the southern Plains and the South, and the northeast.
Floods battered St. Louis with “two months’ worth of rain all in the space of six hours”, and the 1,000-year rainstorms hit Illinois and eastern Kentucky that killed 37 lives in the massive floods.
Droughts took place in Western states with the depleted Colorado River and wildfires raged in California.
In Europe, their situations are equally devastating.
Temperatures of over 34 degrees Celsius (100-degree Fahrenheit) killed more than 2,000 people in Spain and Portugal, with another 1,000 in the U.K.
We have noticed that fierce heat, prolonged droughts and extreme storms and floods are having a brutal effect on our daily life, it also affects our human health, our daily work, and they have cause economy losses to our daily lives. This kind of natural calamity kills the elderly, disabled and poor.
This is due to the greenhouse emissions that the nature is taking its revenge on us. The climate change is here now and we haven’t reacted fast enough.
This Summer in Europe is in the Era of Extreme Heat
In July, temperatures in the U.K. exceeded 40 degrees Celsius for the first time ever. It sparked wildfires and brought the public transportation down. In other parts of Western Europe, France, Portugal, Spain and Greece were also ablaze as the temperature climbed to their new records. It is recognized that this kind of heatwaves are likely to become more frequent and more intense. This is posting more threats to our economy and the public health system and we have to address to this “urban heat stress” and to turn our situation around.
In Greece “chief heat officers”, have been created to try to tackle this new era of extreme heat. In fact, seven cities across the four continents have appointed the “chief heat officer” to advise officials on how to mitigate against heat risks. The C40 network of mayors of around 100 cities are sharing data and best practices on how to cool urban centers and make them more resilient. By the way, there are roughly 297 million people, less than 5% of the Earth’s total population, live in the 40 charter-member C40 cities.
The planning for more resilient infrastructure to introduce early warning systems to help the public to understand the dangers that can be associated with the heat.
We can begin with Athens and from the ancient Greek’s time they already engineered a range of innovations to cool their houses during the summer. They were known to plant trees to provide natural shade and designed buildings to stay away from the full blast of the sun’s rays. Today, Athens is one of the hottest cities in Europe and this Greek capital is densely built with its urban sprawling. It has lack of green space so to speak, and very much different to what their forefathers had taught them.
In the U.K., the unprecedented hot month of July, brought them transport chaos as the nation’s train tracks were not built for hot weather. They were overheated and deformed. Same for the runway at London’s Luton airport where flights were cancelled as the runway was rolled up. To retrofit the infrastructure and to rip up tens of thousands of miles of rail tracks would cost billions with the heat resistant rails.
Britain has also the oldest housing in Europe with one in five built in 1919. They have poor insulation and limited airflow, making them hard both for heating and cooling. Its Climate Change Committee already advised the ministers to retrofit buildings with proper insulation and can be more temperature and energy efficient in the long run. They would be cheaper and greener to run but can be very costly initially.
The use of air conditioning is rare in residential buildings but more common in southern Europe, but it is not affordable to most of the people.
Many of the roads are built of tars and concrete. They absorb and retain heat from sun’s rays. Innovation materials would need to be introduced. City planners have to find ways to create more shade, such as widening pavements and planting trees. But they will need to consider the parking space and widening the street to allow ambulances and fire trucks to rush around the cities. Smart design, such as shutters on the outside of windows, can reduce heat from entering into the buildings. Using trees, canopies and other designs can used to cool down the streets. Water and fountains can cool down the city environment.
Lastly, heatwave categorization and warning system ought to be initiated by the United Nations Human Settlements Program. This will allow the public to communicate the risks associated with heatwaves. Some education can also be necessary.
Hot Cities in China
Since its complete record for temperature had been established from 1961, China has recorded this year their hottest and most severe climate. Hundreds of Chinese cities have recorded temperature of above 40° Celsius. There are sixty-six rivers and their arteries being dried up, Yangtze River where the water level is at 40% and is at its lowest level.
In China, water plays an important energy supply as it is used for the hydropower plants. Water available for the Three Gorge reservoir is already at its half average levels.
Cities like Shanghai, has been told to dim the lights to conserve electricity
The power crisis had led to the shutting down of operations with companies like Toyota, Foxconn and the Chinese battery manufacturer, Contemporary Amperex Technology.
According to the international meteorologist bureau, this situation can perhaps be the most serious in the human history, as it is so extensive, so long the duration and so scorching hot, that have never been seen and experienced.
This has caused the drought and the crops to be in a shortage situation. It is predicted by 2030, the world will be in 25% shortage of agricultural products. Take for instance, that the different parts of the world are depending large on the followings:
Latin America is relying on 20% of the total harvest of corn;
Middle East and North Africa for 13% of the grain, and,
Asian countries are largely for the rice.
If this situation is going to continue, this is going to affect those low-income countries.
Electricity in India – The Economist, May 7, 2022
Two-third of the households in India have complained that they are facing regular power shortage, and the situation is most crucial in its northern states. It is also threatening its capital, Delhi, where these shortages seldom reach there.
We can take this to the blame of the scorching heat and the past two months have been hotter than usual in South Asia. The average temperatures in March and April were the highest since records began 122 years ago. But this time the temperature started to rise so early, unlike from mid-May onward, and the rising demand for everything after the easing of Covid-19 restrictions and the return of the economic activities. These have all increased the demand for electricity.
But India is not lack of power capacity at all, and over the past decades it has built more coal-fired power plants which generate about 70% of the country’s power. But lately, the coal power plants are not receiving enough coal for operation due to the problem with the supply chain. At one point, 173 thermal plants suffered from critically low stocks and that threatened the electricity supply to hospitals and even its metro system.
The dysfunctional electricity distribution would challenge India’s way to grow its GDP. Climate change is also a threat.
The country is into the renewables, but it is not happening fast enough.
The International Energy Agency is predicting for India’s demand for electricity, which will need to increase its installation of capacity of the current 400 gigawatts by adding another 950 gigawatts, which is roughly the size of the whole EU’s power market.
Europe is in the Midst of a Summer Drought – FT, August 6, 2022
It is so hot and dry, mountain streams in the Alpine countries are drying up. The government has called for military helicopters to haul huge containers of water up to the pastures from the lakes below to save the herds from dying of thirst. This is Switzerland where it is considered as the water supply of Europe with glaciers in the Alps which keeps Europe in balance.
This time the water shortages are becoming part of the severe drought sweeping the continent from Portugal to eastern Europe and southern England to Italy. It was the combination of an unusual dry winter followed by an equally dry spring and the scorching summer. You can point this to the trend of the climate change.
Take France as an example, it has been suffered by a third heatwave this summer. This is affecting households, industry, transport, tourism, farming and agriculture. The dried-up ground provides ideal condition for wildfires that have ravaged France, Portugal and other countries. It is not just the soil, but deep down it is extremely dry.
The grass has long since withered because of the heat and months with very little rain. Trees in the forest are changing their colors and losing their leaves. Corns are not growing and this is causing problem for the animal feed.
Scientists begin to believe that the summer droughts would become the norm in western Europe. Already four of the five past summers have been extremely dry. Previously, there was one extremely hot summer that would happen in every ten years. We can point this to the trend of the climate change again.
The surface soil moisture across France was at its lowest on record, and July’s rainfall was at 9.7 millimeters and it was only 85% below the seasonal norm. Western France was particularly hot, temperature reached 42.6° Celsius last month.
In other neighboring countries, situations were not better. The Netherlands declared a national water shortage. Poland introduced restrictions on rivers. Vistula, the country’s longest river where the water level was at its lowest level. The ferry service at Warsaw was suspended for one week because of the low level of the water.
It is said that if water level on the Rhine fall by another 7 centimeters, it would be unnavigable for freight traffic. Rhine is one of the long stretch of one of Europe’s most important industrial highways.
Lake Constance, western Europe’s second-largest fresh water lake, has been as low as this twice in its history, once in 1876 and then 1949.
Some of the French nuclear plants have to reduce their output as the environmental rules impose for extremely hot waste water temperature to be discharged back to the rivers. Europe’s hydroelectric power generations have been reduced, include those in the Alps.
Brussels estimated last year that drought-related damage would cost the EU about €9 billion each year. It will go up to €940 billion if global warming continues.
The situation is not looking good.
Droughts Are Threatening the World Economy – WSJ, August 22, 2022
Severe droughts are affecting the Northern Hemisphere—from the farms of California to waterways in Europe and China—are further adding pressure on supply chain, driving food and energy prices up, and adding disruptions to the global trade system.
We have seen a great part of China has been caught up with the longest sustained heatwave since their record-keeping came in place in 1961. Manufacturing has been shut down because of the lack of hydropower.
The drought also affected France, Spain, Italy and Portugal. It has been the worst in 500 years.
Researchers compare droughts by measuring the growth of annual tree rings that reflect rainfall and temperature from year to year in their specific areas. Climate scientists said that this year’s dry season is due partly to the La Niña, a cyclical pattern of cooler water in the eastern Pacific Ocean that pushes the atmospheric jet stream northward, leaving parts of Europe, the U.S. and Asia with less rain. The typical La Niña would typically last for nine to twelve months, but this one is already in its second year and will probably last until February 2023.
The United Nations said the number of droughts worldwide has risen by 29% since 2000 due to the land degradation and climate change.
For the world’s biggest economies, this summer’s droughts are hurting industries including electricity generation, agricultural, manufacturing and tourism. This is compounding the existing challenges that we already have, such as the supply chain disruption caused by the pandemic, war from Ukraine that brings constrain to the food and energy’s supply and prices.
In the U.S., the lack of snow in the Sierra Nevada mountains of California have sharply reduced water supply in the region and caused about a third of the 600,000 farmland acres being unplanted this year.
The Colorado River has fallen so much and it is the second consecutive shortage that has forced the mandatory water cuts to Arizona, Nevada and Mexico.
In China, the government announced a drought in six provincial-level jurisdictions which accounts for a fourth of China’s grain output last year.
The southwestern province of Sichuan’s electricity is heavily relied on hydropower but it has to give way for the residential consumption rather than for production. This has resulted many factories either to scale back or to shut down their production. This has affected those global manufacturers such as Apple Inc., Volkswagen AG, Toyota Motor Corp. and Tesla Inc. because of the power restrictions.
In Europe, rivers that serve as arteries for trade are cutting back because of the falling of the river levels. This affect also to the shipment of the natural gas as Russia has threatened to shut down their supply.
France is lowering its production from its nuclear plants because of the shortage of water.
Germany has to turn to coal for energy.
This summer has not been easy for many of us.
Inflation Situation in the UK – New York Times, August 18, 2022
Rising food prices pushed the annual inflation rate into double digits to 10.1% in July for the first time in four decades. In fact, food alone rose 2.3% from June to July, with noticeable increases among staples like bread, cereal, milk, cheese and eggs. The annual rate of inflation was 9.4% in June.
Rising prices have become an intense global problem for households and central banks from Australia to the United States, and this has brought huge challenges for lawmakers. This is especially critical for the U.K. as its inflation rate is the highest among many countries: the U.S. and Eurozone at 8.5%; Germany at 8.5%; Italy at 8.4% and France at 6.8%.
Energy prices have been a major drive for inflation, and the rising of the food prices are causing the problem as well.
This time the contestants, Liz Truss and Rishi Sunak, are jockeying for the next Prime Minister in the U.K. as Boris Johnson has left the country in a leadership vacuum. It will have to wait until September 5 when the result will be known and the responses of policy for going forward can be crystalized.
Another factor is the labor market which has been getting tight in supply. Offers in higher wages and increasing bonus resulting inflation as well.
Restaurant and hotel prices rose by 9% in July, the fastest annual increase in 30 years.
But wait until autumn when inflation will peak when the British turn on their heating. At that point, the economy will enter into a long recession as high energy prices will lead to the drop of consumer’s spending. The central bank is expected to raise the interest rate when the inflation will increase despite the warning of recession.
Already the households are warned that average energy bill will climb to £3,500 (or $4,240) a year in October which is triple of what it was a year ago.
The winner of the Prime Minister will make new commitments for the country and hopefully that this can ease the burden of the households.
The train operators and railway staff across the country had entered into a strike over pay and working conditions. This will join by dock workers at some of the largest ports and also the postal workers to demand for pay which can be more closely aligned to inflation. Although wages across the country are growing twice as fast as they did on average in the decade before pandemic, they still can’t keep up with inflation. The situation doesn’t look good for the U.K. consumers.
Japan is Restoring Its Nuclear Power Plants – FT, August 25, 2022
Japan’s Prime Minister Fumio Kishida restored the nuclear power plants for the first time since the Fukushima crisis in 2011. This is due to the result of Russia’s invasion of Ukraine to control the soaring energy costs for the households and businesses. This plan will activate 17 out of the 33 operable reactors by the summer of next year.
Japan imports most of its energy, and it is also being hit the most by the prices of the imported coal, oil and gas. It depends on Russia for about 9% of its liquified-natural gas.
Japan is already paying more for energy than most other Group of Seven countries and its industrial competitiveness is an issue already.
Before the incident of Fukushima, Japan was depending about a third of its electricity from its nuclear reactors. Now only six reactors are operating.
The news for the revival of nuclear power plants have sent shares of Tokyo Electric Co., Mitsubishi Heavy Industries and Japan Steel Works up.
Demand for LNG Tankers – WSJ, August 23, 2022
The energy crisis in Europe has caused a shortage of LNG tankers and the boosting of the fuel’s record prices. To deal with the threat from Russia’s cutting back of the liquified-natural gas, the European countries have increased their purchase from the U.S., Qatar and other sources but have faced the supply from a limited number of vessels.
Before the war, Russia was covering 40% of the EU’s need for the gas supplies, mostly through a network of pipelines. Russia has cut the supply and also announced to temporary switch-off a major pipeline for unexpected maintenance has further threatened their supply.
The unexpected drought has caused severe weather and many countries hydropower plants have reduced their power generation. The agreement to reduce carbon emissions from coal has created further distress to the energy market.
It is no surprise the demand for the LNG has increased but the lack of natural-gas tankers have caused further panic. It has brought the surge of costs for transporting the gas. The daily chartered rate has risen from $47,000 a year ago to $64,000 now. Between mid-September to mid-November it will become $105,250 a day for vessels heading from the U.S. to Europe.
Currently, 257 specialized vessels, each at the length of three football fields, are on the order books that is worth $24.1 billion. But for South Korea, the world’s largest LNG builder, to take on any new orders will have to wait until 2027.
Australia is Readjusting Its LNG Export – WSJ, August 19, 2022
Australia is one of the world’s largest exporters of natural gas after the country had invested a multibillion investment a decade ago. It accounted for one-fifth of the global liquified-natural gas exports last year, and most of its supply is committed to the Asian countries.
Lately the business leaders have warned Australia that a gas shortage of its own could backfire if they don’t block some exports for their shortage at home. There is an output shortage from those aging gas fields, and this has intersected with recent setbacks such as flooding in coal-mining area that led Australian power plants to use significantly more gas instead. This led to the energy wholesale prices tripled in the three months through June.
The Price of Electricity in Europe is Soaring – New York Times, August 26, 2022
Electricity prices have been extremely volatile. In Britain, the wholesale price of a megawatt hour of electricity—enough to supply about 2,000 homes for an hour—hit a record of about £500, or $590, roughly five times the level of a year ago. The British electricity regulator will reset an energy price cap that has been expected to almost double the price that an average household will pay in the coming months for electricity and gas to about £3,500 a year.
Natural gas is the main driver of the European electricity price, although there are several ways to generate electricity—such as coal, nuclear, hydroelectric, wind and solar—the price of natural gas is largely used as the benchmark. This makes Europe more vulnerable to Russian’s threat as Europe tends to import the bulk of its gas, with Russia traditionally supply around one-third of their need.
This resulted countries like the Netherlands and Germany are rushing out to fill their gas storage facilities as a buffer to face a possible cutoff of Russian gas in this winter. Furthermore, the governments have turned to the United States and Qatar for more supply of the liquified-natural gas. Britain and other countries are providing financial aid to consumers to compensate the huge increased costs to ease the household pressure.
This stockpiling of gas has driven the price up which is difficult to say now if this will help the energy crisis when the winter will arrive. The only thing we can say is that this a really messy situation and there is no judgement to be made until the time will come. It will also depend how Russia will behave during the crucial situation.