Natural gas prices are undergoing a historic surge, and it is bad news for everyone from ceramic makers in China to customers of patisseries in Paris.
The cost of the fuel is already at record seasonal highs in most major markets and looks likely to rise further, threatening to dent the recovery from the COVID-19 pandemic.
The coming winter might give the world a painful lesson in just how pervasive and vital gas has become for the economy. Unaffordable prices could crimp households’ spending and erode their wages through inflation, giving central bankers some difficult policy choices.
Photo: Reuters
Worse still, actual supply shortages could idle swathes of industry, or even trigger blackouts in developing countries, potentially causing social unrest.
“Energy lies at the base of an economy,” said Bruce Robertson, an analyst at the Institute for Energy Economics and Financial Analysis. “High energy prices reverberate through the supply chain” and could dent the nascent recovery, he said.
Energy costs are rising around the world as the recovery in demand from the worst of the COVID-19 lockdowns collides with supply constraints. Oil has already undergone a long rally that started late last year and ended at multiyear highs above US$75 a barrel in July.
Gas began to rise in earnest at the start of summer in the northern hemisphere, when it became increasingly clear that there was not enough supply in Europe to allow the usual refilling of storage sites depleted in winter. The continent’s largest supplier, Russia, has been limiting pipeline exports due for a number of reasons including high domestic demand, output disruptions and an agreement to transit less of the fuel through Ukraine.
“We’ve been running behind the storage delay all summer,” said Alfred Stern, chief executive officer of Austrian oil and gas producer OMV AG. Consumers in Europe are now at the mercy of the weather and the trajectory of prices “will now depend on how cold this winter is.”
In Europe, the price of gas has since surpassed oil, but the problem is not contained within the region.
While the Russian supply constraints do not directly affect consumers in Asia, they must still compete with Europe for seaborne shipments of liquefied natural gas (LNG), forcing them to pay higher prices to secure deliveries.
“High gas prices today are a problem for Europe,” Francesco Starace, the chief executive officer of Italian utility Enel SpA, said in an interview on Bloomberg TV on Friday. “They might be a problem for Asia too.”
The LNG market is what connects Europe, Asia and the US, and high prices there feed through to the domestic US market by stimulating greater exports of the super-chilled fuel. Natural gas futures in New York have risen 80 percent this year to highest since 2018, although they are still far lower than in the other major global markets.
“The European market and the American market are in a similar place heading into the heating season,” said Nina Fahy, a natural gas analyst at Energy Aspects Ltd in New York. “We could potentially have storage adequacy concerns if we have colder-than-normal weather, given how high LNG exports are expected to be.”
DAMAGED INDUSTRIES
Around the world, the economic consequences of the natural gas rally are becoming evident.
Tereos SCA, the biggest sugar producer in France, said last month that the price of the fuel is affecting sugar processing in Europe, increasing production costs “tremendously,” according to a copy of an e-mail sent to clients and seen by Bloomberg News.
High energy prices are creating “inflationary pressure on every other cost” that will end up being passed on to customers, said Pascal Leroy, senior vice president of core ingredients at Roquette Freres SAS, a food processing company based in northern France.
In China, the world’s largest gas importer, ceramic factories have been forced to reduce output due to high prices in Guangdong and Jiangxi provinces, according to local reports.
Surging utility bills have “sabotaged” the business of Mughal Steels in Pakistan, chief operating officer Shakeel Ahmad said.
“We consume the gas first and get a high bill later,” he said. “How can I go back to a client saying that I need to add extra cost to the steel that I sold you?”
JPMorgan Chase & Co said this week that its index of global manufacturing managers fell to a six-month low last month, although it still indicated expansion.
Some poor countries, like Bangladesh, cannot afford to procure enough energy supplies to keep their economies buzzing. Some irrigation systems in the country might only run at night because of potential power rationing, people surveyed by Bloomberg said.
Current LNG prices in Asia are “absolutely not normal,” said Leonid Mikhelson, chief executive officer of Russian LNG producer Novatek PJSC.
“There may well be refusals” from customers that can’t afford it, he said.
US manufacturers have yet to see a big hit from the rising cost of gas, because many energy-intensive industries like steel and petrochemicals have also seen the price at which they sell their products surge, Fahy said.
ECONOMIC RIPPLES
A crisis that is largely playing out in heavy industry in Europe and Asia today could soon spread to the political and macroeconomic arenas.
If households and businesses see their utility bills rising, they might seek to push up wages or the price of the goods they sell, compounding the inflationary pressure already resulting from strained supply chains.
The headline rate of inflation in the euro area has already surged to a decade-high of 3 percent.
European Central Bank officials insist that this post-pandemic spike should prove temporary, but a lasting pickup would complicate their ability to keep supporting the economy through ultra-easy monetary policy.
“The likelihood that the producers pass on the costs is very high,” said Carsten Brzeski, an economist at ING Groep NV in Frankfurt. That means inflation might “not be that transitory.”
A lasting period of rising prices for the cost of essential goods can have social consequences.
“In many emerging market economies, even slight increases in retail fuel or energy prices can lead to economic hardship and public unrest,” Eurasia Group analysts said in a note dated on Tuesday.
In Pakistan, the government has come under fire for purchasing the nation’s priciest LNG shipments since they began importing the fuel in 2015.
The cost of energy could become a “hot potato” in the upcoming German election, Saxo Bank A/S head of commodity strategy Ole Hansen said.
“Public opinion is not yet focused on” rising energy prices, said Julien Hoarau, head of Paris-based consultant Engie EnergyScan. “But at some point, public opinion will react and will start questioning: ‘What is going on here?’”
The US dollar was trading at NT$29.7 at 10am today on the Taipei Foreign Exchange, as the New Taiwan dollar gained NT$1.364 from the previous close last week. The NT dollar continued to rise today, after surging 3.07 percent on Friday. After opening at NT$30.91, the NT dollar gained more than NT$1 in just 15 minutes, briefly passing the NT$30 mark. Before the US Department of the Treasury's semi-annual currency report came out, expectations that the NT dollar would keep rising were already building. The NT dollar on Friday closed at NT$31.064, up by NT$0.953 — a 3.07 percent single-day gain. Today,
‘SHORT TERM’: The local currency would likely remain strong in the near term, driven by anticipated US trade pressure, capital inflows and expectations of a US Fed rate cut The US dollar is expected to fall below NT$30 in the near term, as traders anticipate increased pressure from Washington for Taiwan to allow the New Taiwan dollar to appreciate, Cathay United Bank (國泰世華銀行) chief economist Lin Chi-chao (林啟超) said. Following a sharp drop in the greenback against the NT dollar on Friday, Lin told the Central News Agency that the local currency is likely to remain strong in the short term, driven in part by market psychology surrounding anticipated US policy pressure. On Friday, the US dollar fell NT$0.953, or 3.07 percent, closing at NT$31.064 — its lowest level since Jan.
Hong Kong authorities ramped up sales of the local dollar as the greenback’s slide threatened the foreign-exchange peg. The Hong Kong Monetary Authority (HKMA) sold a record HK$60.5 billion (US$7.8 billion) of the city’s currency, according to an alert sent on its Bloomberg page yesterday in Asia, after it tested the upper end of its trading band. That added to the HK$56.1 billion of sales versus the greenback since Friday. The rapid intervention signals efforts from the city’s authorities to limit the local currency’s moves within its HK$7.75 to HK$7.85 per US dollar trading band. Heavy sales of the local dollar by
The Financial Supervisory Commission (FSC) yesterday met with some of the nation’s largest insurance companies as a skyrocketing New Taiwan dollar piles pressure on their hundreds of billions of dollars in US bond investments. The commission has asked some life insurance firms, among the biggest Asian holders of US debt, to discuss how the rapidly strengthening NT dollar has impacted their operations, people familiar with the matter said. The meeting took place as the NT dollar jumped as much as 5 percent yesterday, its biggest intraday gain in more than three decades. The local currency surged as exporters rushed to
RSS