No easy job
The question of the future economic development in Europe, the USA and China remains a difficult subject. It is quite obvious that the markets for commodities, foreign exchange and equities remain firmly tied to the interest rate decisions of the central banks, especially to their timetables. Above all, the focus is on the United States of America after the European Central Bank (ECB) has already lowered interest rates by 0.25%. However, the US Federal Reserve, or Fed in short, is increasingly hesitant as the US economy has shown itself to be quite robust in the first half of the year.
Therefore, market observers continue to expect that interest rate cuts are not very probable in 2024 in the USA, with the exception of perhaps one, in view of the still good economy and stable labour market. The equation remains that quick and more significant interest rate cuts could encourage the economy and investors to make appropriate investments and increase demand, which is regularly accompanied by higher prices and rates. And furthermore interest rate cuts in the USA would not only lead to a US-dollar weakening against the Euro but also against other currencies because of a reduction in the considerable interest rate level and differential which has been reached in the meantime in the fight against inflation.
This has resulted in the nickel price on the London Metal Exchange (LME) losing quite a large part of the gains made already in 2024, in line with a renewed drop in expectations of interest rate cuts. After a level of USD 21,000.00/mt in the middle of May it fell rapidly. The USD 17,000.00/mt level could just about still be held. This is a drop of almost 20% within a few weeks and certainly deserved to be labelled “volatile”. The chances of an interest rate cut have risen somewhat again in the last few days. In the USA the manufacturing sector is now also looking weaker. And the Federal Reserve Chairman Powell has also recently spoken in such a manner as to suggest that a sure start of an interest rate cut cycle could come about this year after all. At the moment nickel is trading somewhat firmer on the LME at USD 17,400.00/mt.
Also China is not really showing many signs of improvement, where the crisis-hit real estate sector is not able to note any worthwhile increase in demand. And in addition, according to a survey, growth in the service sector has also started to slow down significantly. Confidence in the private sector even reached a four year low in June. Unfortunately there are no better news in Europe. The attention of analysts here was, therefore, firmly on the Central Bank conference of the ECB held in Sintra, Portugal, about 60 kilometres west of Lisbon. Signals regarding the future interest rate policy of the ECB were expected. However, there were unfortunately no clear lines or direction shown here. On the contrary, Madame Lagarde summed up the situation using a quote from the former football manager and player Sir Alex Ferguson: “Sometimes you are not sure. Sometimes you may have doubts. Sometimes you have to guess. But sometimes you do know”. Readers must ask themselves the question of whether the head of the Central Bank has given the markets any direction.
On the whole it can be doubted if the continuing back and forth regarding interest rate cuts which has been ongoing for months has had any benefit at all. Hopes for support in the economy are awakened and then destroyed again just soon after. What the government and politics cannot achieve with regard to perspective is reflected more or less one to one by the central banks. The central bankers seem paralysed between weak economic data on the one hand and demographically robust labour markets on the other, with slowly diminishing inflation. They do not want to react in the wrong again (or too late as it was at the time) with regard to fighting inflation and pursuing a stimulating monetary policy.
But how can business and investors make important decisions in such a non-transparent and unsure environment? Of course they cannot. Unfortunately a wait and see approach is still the order of the day. Therefore, while at least over the summer the outlook for the development in demand in industry and the manufacturing sector remains gloomy, it is not expected to see any upwards breakout in metal prices. We hope that one of the leaders may soon show courage and take bold action. Otherwise it means weakness for longer, not only for poets and thinkers.
Freight in difficult seas
2024 was a turbulent year for global sea freight. Last week the Drewry World Container Index (WCI) rose by a further 4% to USD 5,318 after almost 7% in the previous week. This corresponds to a change of more than 200% over the previous year. An explanation for this is the meeting of geopolitical and natural factors which have an effect on the global freight market and lead to bottle necks and higher costs.
The attacks by the Houthi rebels on ships which cross the Red Sea have more or less closed the Suez Canal shipping route for trade between Europe and Asia. Ships which sail between the two regions now have to make a diversion around the tip of Africa – a must longer journey. As a result, insurance costs have also risen.
Typical transit journeys from Rotterdam to Singapore through the Suez Canal measure 8,500 nautical miles or 26 days, while a voyage around the tip of Africa measures 11,800 nautical miles, equivalent to a journey time of 36 days. The additional distance and the extra days lead to higher fuel and operating costs, which are, ultimately, passed on to the customers. Another impact of these altered trade flows is the congestion in ports, especially seen in the Asian and Mediterranean regions.
On top of the detour away from the Suez Canal there are more disruptions. Lower water levels in the Panama Canal are reducing capacity causing congestion, which leads to a scenario in which two important trading routes are disrupted – an unusual dilemma for the freight industry.
Strikes and software malfunctions in US ports were made worse by the tragic bridge accident in Baltimore. Almost unnoticed by mass media were the strikes which took place between the 17th and 18th June in the important German ports of Hamburg, Bremen, Bremerhaven, Brake and Emden. According to the data analyst and market research company Russell Group, the German strikes disrupted trade to the value of 6 billion US dollars, and the ongoing negotiations could have an impact again in the future.
Ultimately consumers will have to bear the brunt of the heavily increased transport costs, since the costs for trade with raw materials and end products increase, which could also lead to a rise in inflation again. This could in turn make interest rate cuts less likely (see above for the problems of the central banks).
A catalyst to improve the situation would be, on the other hand, a peace treaty between Israel and Hamas, if this would also result in the Houthis stopping their attacks in the Red Sea, which would then lead to a resumption of normal traffic through the Suez Canal. This would mean that the transit times between Asia and Europe could normalise again – a scenario which would ease pressure on the sea freight prices. In the short term, however, this seems unlikely, since the conflict between Israel and Hezbollah has also escalated.
Sustainability of electric vehicles is raising more and more questions
The Indonesian nickel industry is coming more to the forefront of attention, once again being confronted with criticism about the lack of worker safety, the effects on the environment and sustainability concerns. In recent reports in the Financial Times and also by Bloomberg, it was highlighted how the nickel boom had fuelled the development of the Indonesian economy and is being pushed on by the transition to electro-mobility. Net zero ambitions and the move to electric vehicles have led to a massive increase in nickel demand, which has so far been essential in improvement of energy density and the cost of batteries. In short, it is about the rise of Indonesia and its nickel dominance.
Indonesia, which has the largest nickel reserves in the world, strategically forbid the export of unrefined nickel ore in 2014 in order to force domestic production and therefore boost the economy with higher added value. This successful strategy led to extensive investments in the country’s nickel industry, above all by Chinese companies in order to cover their growing demand for the mineral. This paid off with the first nickel processing plant for batteries starting operations in May 2021.
The comparative cost advantage of Indonesia unsettled the global nickel market and made production for competitors uneconomical and, therefore, enabled the country to accumulate a 55% global market share. By lowering production costs for nickel, Indonesia also became a favoured supplier for the EV industry. Despite the economic success of the nickel industry, the Indonesian government and producers, and also consumers of Indonesian nickel, are now being more and more criticised for ignoring environmental impacts and the sustainability of the industry. Also, the suspicion of some greenwashing of electro-mobility cannot quite be dispelled.
Concerns about the Indonesian nickel industry
Asia Today recently reported about two explosions in an Indonesian nickel smelting plant in the last six months. In December 2023 51 were injured and even two deaths reported. Despite criticism and the assurances that safety problems would be solved, there were again two injuries in the same plant in June 2024. A Bloomberg documentary (link: https://www.bloomberg.com/news/videos/2024-06-17/the-dirty-secret-behind-electric-cars ) shows that there were considerable safety deficiencies in several production facilities which highlight that worker safety is not an isolated problem in a plant, but rather it seems to be widespread throughout the whole sector.
The criticism is, however, not just confined to worker safety. The impacts of mining, as well as the deforestation of the Indonesian rain forest, water and air pollution are part of other complaints. Since the nickel ore mined in Indonesia only contains about 1.7% nickel, huge land masses have to be processed. In order to extract highly concentrated nickel from Indonesian mined nickel ore, a process named high-pressure acid leaching (HPAL) has to be used. HPAL is, in short, a very energy intense process whereby large quantities of acidic waste are produced.
As the HPAL process requires a lot of energy, Indonesian producers use (cheap) coal above all to power their production and to keep costs for the nickel low. Since the mines are located in remote areas and huge capital outlays for alternative energy sources would be necessary, production with regenerative cleaner energy does probably not come into question in the short term if running costs are to be held low. Such a transition is (fortunately) indeed being planned but involves the comparative cost advantage of Indonesian nickel being significantly reduced. And just a plan does not already mean realisation, except if pressure from outside continues to climb, especially from interested parties and buyers of electric vehicles. Usually their goals are in the interest of the environment.
According to Nizhar Marizi, Director for energy, minerals and mining resources in the Indonesian Ministry for National Development Planning, Indonesian producers release on average 58.6 tonnes of carbon dioxide per tonne nickel – ten tonnes more than competitors. Data of the International Energy Agency (IEA), however, suggest that the production of battery-grade nickel from Indonesian laterite ore emits two to six times more CO2 than the production of battery-grade nickel from sulphide deposits in other countries.
Looking to the future
The present situation and challenges in Indonesia raise questions about the actual sustainability of electric vehicles at current production standards. If electric vehicle manufacturers continue to turn a blind eye to Indonesian and other non-sustainable nickel producers, what is the genuine advantage then of buying an electric vehicle over one with a combustion engine?
In order to find the best way to go forward, it is important to assess and evaluate the actual viability of electric cars and the respective origin and related carbon footprint of the battery nickel. In view of factors such as transport, possibly just low mileage before scrapping and the present insufficient and costly recycling methods for electric vehicles, a reassessment of the ecological and social sustainability of electric vehicles is expedient and, therefore, urgently recommended. This assessment should also not take place behind closed doors, but belongs in the public domain. Greenwashing is from yesteryear.
Apart from some criticism, it is worth mentioning that the Indonesian government has committed itself to improve the sustainability of its nickel industry. For example, in view of recent reports which indicate that nickel reserves in Indonesia could be exhausted by 2029 at the present production rate, the granting of production licences has become much more restrictive.
There is certainly potential. It is a matter of taking full advantage, even if the costs for Indonesian nickel will of course rise. Without real sustainability this is not possible. The consumers and regulators would not accept this. And it would be bad for the climate, people and the environment if the status quo remains.
Energy guzzler artificial intelligence
Artificial Intelligence (AI) needs computing power. Computing power needs energy. The World Economic Forum (WEF) estimates that the computing power necessary to further develop AI is presently doubling every 100 days. The International Energy Agency reckons that the total energy requirements of conventional computing centres, crypto-currencies and special AI computer centres will increase to around 800 terawatt hours (TWh) by 2026. This is almost double than that of 2022. In order to make this clearer: 800 TWh are 800 billion kilowatt hours – and about as much as the total German annual gas consumption: according to the Federal Network Agency in 2022 this was 847 TWh or 847 billion kilowatt hours.
In this context it is not surprising that Microsoft, in its recently published sustainability report for 2023, had to report an almost 30% rise in its entire greenhouse gas emissions compared to 2020: according to the corporate group, the challenges are unique in Microsoft’s role as leading cloud provider which is extending its data centres. The very significant increase in greenhouse gas emissions originate in the supply chain which is directly connected to the expansion of the infrastructure necessary for the development of AI. In short: the computer power which is needed is a true energy guzzler. According to press reports, the group now stipulates that parts of its supply chain should be replaced by 100% carbon free energy by 2030.
Therefore, while nearly all companies and industry are busy decarbonising, “our” most modern companies world-wide are exactly doing the opposite. They are increasing emissions and are competing with companies from the real economy, including those in developing countries, which urgently need the limited available electricity for their business activities. Would these corporations, taking a complete overall view, even get funds from the capital markets or a positive sustainability rating?
96% of Microsoft’s total greenhouse gas emissions stem from the supply chain, the so-called “indirect” source, or “Scope 3” in technical language. Their own direct emissions and their own electricity consumption make up the remaining 4%. This has already been offset by investments in external carbon removal programmes such as reforestation operations in the Amazon in Brazil. Not discussed much and not very well known.
The answer from the AI companies about the doubts of sustainability can already be guessed: AI ensures a more efficient decarbonisation in all areas. For example, the Pope in a white ski anorak in the mountains or other artificially generated images on the basis of “borrowed” property and image rights? Just as the steel lobby in its beginnings argued that decarbonisation via wind turbines can only function with steel and, therefore, steel from blast furnaces is a green product. But let us leave that here. Of course, the public and the authors are only too happy to be convinced of the opposite and will then ruefully admit that they were wrong in their initial assessment.
The prevailing opinion today in the whole steel sector is that green steel production can only be done by maximising scrap utilisation and with renewable energy. It is not without reason that Mercedes-Benz has just concluded a declaration of intent with TSR Recycling on “urban mining” with a focus on steel, aluminium, plastics, copper and glass. Together with this circular economy partner, Mercedes-Benz wants to increase the share of recycled raw materials in its vehicles and reduce the use of primary resources in the vehicle fleet by 40 per cent by 2030.
LME (London Metal Exchange)
LME Official Close (3 month) | ||||
July 8, 2024 | ||||
Nickel (Ni) | Copper (Cu) | Aluminium (Al) | ||
Official Close 3 Mon. Ask |
17,380.00 USD/mt | 9,971.50 USD/mt | 2,532.00 USD/mt |
LME stocks in mt | ||||
May 28, 2024 | July 8, 2024 | Delta in mt | Delta in % | |
Nickel (Ni) | 83,780 | 97,470 | + 13,690 | + 16.34 |
Copper (Cu) | 114,750 | 191,475 | + 76,725 | + 66.86 |
Aluminium (Al) | 1,121,500 | 994,175 | – 127,325 | – 11.35 |