“Ignorance first, expertise second”

Good news a scarcity
These days, looking at the global economic environment, good news is really thin on the ground. It feels like a microscope is needed to find any. Unfortunately bad news is there in abundance and promises challenges for the coming quarters. Therefore, at this point, we do not wish to repeat the topics which are already known from media and other sources of information, but deliberately also make a compilation of the positive aspects. The overall economic situation and its prospects are indeed serious and fraught with uncertainties, but are by far not hopeless.

The problems and areas for action, to a considerable extent, have already been recognised by the relevant political and administrative bodies, and worldwide, with the possible exception of Russia, short, medium and long term measures are being worked on in order to improve the situation. There will be no capitulation just because a “chess player” and military commander energetically takes hostages. The invasion of the Ukraine was also in the truest sense an intolerable border transgression. Perhaps it was not so clever after all to take on so many (still financially potent) adversaries at the same time. This has gone wrong so many times before, and in the end does not lead to anything, or even less than nothing, for the aggressor and its people.

The Western states will not endure their society and economies be permanently damaged because a gas supplier wilfully turns off the tap. Special times do require special solutions indeed, and also sacrifices, but the Western collectives, which are to a high degree built on every aspect of freedom, have already proven in the past that difficult situations can be dealt with. Knowledge based rather than primarily raw material based societies have a clear advantage in regard to competence and culture where problem solving is concerned. Looking at the present political performance in Germany, this may seem difficult to believe, but besides politics, there are also other important driving forces and executors in the individual countries.

What will, unfortunately, definitely not improve is the prosperity of the wider population in Russia, which has sadly already had to look on in previous decades at how far too little was done by the ruling class with the existing positive basic conditions (rich raw material deposits and basically a good level of education). Today, in the once hyped BRICS states, no one talks about the R anymore. And this summer, only just a few selected Russians were able to enjoy the beaches of the South of France, Greece and Croatia, to name just a few of the popular holiday destinations.

More than hope comes from China
But now for the good news: the resolute monetary countermeasures of the Chinese government – with, by the way, low inflation rates – have resulted in a clear positive impulse for Chinese and global economies. For China is a heavyweight in regard to production, consumption and also raw material demand. In a certain sense, alongside the American economy locomotive there is now another in the Land of the Rising Sun.

Also, unconfirmed rumours are making the rounds that amongst the political cadres in China, there is quite some opposition to the zero-covid policy. The constant stop and go of the economy is a massive problem, which could slow the country down for many years to come. It would be better if a more “relaxed” but appropriate approach could be found, as, by the way, most countries all over the world have done. Of course, the apparent decision for the zero-covid strategy was originally strongly linked to the present leader, Xi, and turning away from this could lead to a considerable loss of face. Perhaps a middle ground can be found which ensures Xi political survival and China the necessary economic growth.

It has recently also been heard, that there is a silver lining on the horizon in regard to the stainless steel production in China, as stocks in the value chain have largely normalised. The bottom may have been reached there.

Freight rates fall, supply chains normalise
The problems in global supply chains which have led to numerous losses and difficulties, such as in the car industry, are beginning to slowly normalise. This is also reflected in the basically lower freight rates, which reduces cost and is therefore good for the economic development of companies. Since the major problem is in the cut in gas supply, then the increase in fuel prices, especially expressed in Euro, should also be a temporary phenomenon and should not contradict the effect of falling freight rates. For the coming period, oil prices are expected to be between 90 and 100 US-dollars a barrel. This is in an area which was regularly quite common in the past and did not necessarily put a strong break on the economy.

After the long drought in Europe, the rain has set in, which has led to a normalisation of the river water levels. This has, in turn, had the effect of lowering freight costs, and at the same time, larger quantities of fossil fuels could be transported more quickly to the alternative power stations, in order to close the gas gap in the power supply. Also, energy prices were pushed to dizzy heights by panicked market participants (and probably also speculators). If though, as it looks like now, that consumption and behavioural adjustments mean that the well-filled storage facilities may last longer through an average winter, then the first uncertainties are appearing on the markets. The story of further increasing prices is beginning to see first cracks and it is starting to crumble on the price front.

Once then when fears turn into certainty, a correction on the downside can very quickly happen and be just as hard on the way down. The extraordinary conditions on the nickel market on the London Metal Exchange (LME) in March of this year certainly proved this case. And so it is not really a surprise that the Dutch TTF gas price for Day 1, as one of the leading reference prices for the gas supply in Europe, saw a temporary high of EUR 330.00/Megawatt (MW) on the 26th August 2022 but by the 9th September this had already dropped to EUR 197.00/MW, which is still a correction of 40% over the course of a few days.

Purchasing power more in goods than in services
The necessary redistribution of the purchasing power of private households to cover higher energy costs must not unavoidably be at the expense of indispensible goods. It is, more rather, to be feared that the service sector will once more suffer the most. This is certainly good news for the producers of durable consumer goods and their suppliers. Furthermore, in private households savings have been still considerably higher because of the “spending restraints” caused by corona, despite certain anticipatory effects of costs. These savings can be used to maintain the same standard of living should prices temporarily increase.

This does not apply to the very low income groups and recipients of state benefits, for whom there is no way around state support in order to avoid social hardships. Generally speaking, in this context it would surely be an additional help if a clear perspective was in sight through convincing political action and decision making, and even more uncertainty would not be created, even if the solution still takes some time. The chief editor of the New Zürich (Neue Zürcher) journal, Eric Gujer, described the present situation in a nutshell in an editorial with the heading “Ignorance First, Expertise Second”.

The USA is also not out of the woods
As far as foreign exchange is concerned, the euro (and most currencies) has lost a lot of ground. This makes imports, such as commodities, more expensive in US-dollars, but supports the export business of the individual countries. It is not the case, however, that the US-dollar is, on the whole, particularly strong. Of course, in the USA the very early increase in interest rates plays a role. A leading and well respected chief economist compared the US-dollar to a dilapidated hotel where people would not be at all very keen to stay. If, however, the view from inside the hotel is in fact only on a pile of manure, then the hotel would still always be the better alternative. And this is like the US-dollar, still remaining the refuge currency in times of crises.

Yet the euro should not be written off too soon, for the USA, for decades, has been living above its means. The country regularly consumes more than it produces. This manifests itself in the constant trade deficits. These deficits have to be balanced by the inflow of money into the USA. Therefore, the US-American economy, for a long time now, had the tendency to create bubbles. And it has been seen already many times in the past that when the US Federal Reserve has consistently and significantly raised the key interest rate over a longer period of time, then the consequence has been that one of these bubbles has burst.

It remains to be seen which asset class is affected this time, and it is to be hoped that this does not in turn lead to an impact on the international financial system. But lessons should have really been learned from Lehman Brothers and the international financial crisis. Should it be a small or a medium bang then this would, of course, have an immediate impact also on currency pairings. Perhaps then the pile of manure would seem more attractive than the lousy hotel with the top floor on fire, to continue with the imagery used above. All in all, therefore, there is some confidence, it just has to be believed in and then quick action must be taken.

Incidentally, nickel, after a drop at the start of September to USD 20,000.00/mt, is holding its own on the LME with prices at the moment at around USD 22,000.00/mt. Higher energy costs also mean higher production costs in mines and refineries for nickel commodity products.

China opens its capital market further
At the start of September 2022, the Chinese government implemented another measure for the liberalisation of its domestic capital market. From now on, qualified foreign institutions are allowed to trade selected Chinese futures and options. With this gradual opening of the second largest capital market worldwide, the communist government is trying to strengthen its pricing power on the world market.

As a result, the China Financial Futures Exchange, based in Shanghai, published a announcement on its website homepage, that qualified foreign institutions are allowed to trade stock index options for hedging purposes. The Shanghai Futures Exchange (SHFE), important for metal trading, is now allowing the defined circle to trade contracts in gold, silver, copper, aluminium, zinc, concrete steel and hot-rolled steel. In addition, the option trade has been opened for gold, copper, aluminium and zinc. The nickel future contract is, however, not mentioned in the SHFE press notification.

The other big commodity exchanges, such as the Shanghai International Energy Exchange, Dalian Commodity Exchange and the Zhengzhou Commodity Exchange, have also published their product portfolios which foreigners will be allowed to trade in the future- The full list is to be found on the individual websites of the exchanges.

Volkswagen agrees on strategic partnership with Canada for battery raw materials
Europe’s biggest car manufacturer, Volkswagen, has entered into a strategic partnership with the Canadian government to secure the raw materials lithium, nickel and cobalt. The project has been set out in the framework of a joint memorandum of understanding and signed by the now former CEO, Herbert Diess and the Canadian Minister for Innovation, Science and Industry, François-Philippe Champagne, in the presence of Prime Minister Justin Trudeau and the German Chancellor Olaf Scholz.

The former CEO Herbert Diess, commenting on the new partnership, said that the supply of battery raw materials and the production of primary and cathode materials with a low carbon footprint will enable a quick and sustainable expansion of battery capacities.

In the long term, the Wolfsburg based company would like to surpass Tesla in electromobility. The raw materials named above are currently essential for battery production.

NGOs urge Musk not to invest in the Indonesian nickel industry
While VW has agreed a strategic partnership with Canada, Tesla has set its sights on cooperation with Indonesia, where the electro pioneer has recently purchased from various companies nickel products worth 5 billion US-dollars.

The report of Tesla’s huge purchase in South East Asia came just a few days after dozens of non-governmental organisations (NGOs) urged Tesla Chief Elon Musk in an open letter not to invest in the Indonesian nickel industry. The open letter was in reaction to a meeting last May between the Indonesian President Joko Widodo and Elon Musk, when potential investments were discussed.

The NGOs warned Elon Musk of the environmental damage which has been caused by the Indonesian nickel industry, and expressed their concerns that waste from nickel production is landing in the sea. In addition, in the letter the NGOs denounce the damage done on land where the Indonesian nickel industry has cut down forests and polluted lakes, rivers and beaches. Therefore, the NGOs recommend that the Tesla CEO cancels all planned investments in Indonesia and to stop sourcing any more nickel from this country.

The problems listed by the NGOs will be nothing new for Musk. Two years ago the Tesla CEO called on the Indonesian mining industry to produce nickel in a more environmentally friendly way. But these environmental abuses have not stopped him from placing the purchase volume. For the visionary Elon Musk, sustainability obviously only begins with the car and not already with the extraction of raw materials for the electric cars.

Indonesia export restrictions are not WTO-compliant admits President Joko Widodo
In November 2019 the European Union filed a complaint with the World Trade Organisation (WTO) about the planned Indonesian export restrictions for nickel ore and requested the Organisation, based in Geneva, to appoint a panel of experts. The Indonesian government did not let the EU’s expressions of discontent change their mind and did indeed impose the bans in January 2020. Since the introduction of the restrictions, numerous investments have flown into the Asian country. In the last few years there have been investments in the manufacture of the intermediate product nickel pig iron (NPI) as well as in the production of stainless steel.

Now the Indonesian President, Joko Widodo has admitted that his country will lose against the EU at the WTO in regard to export restrictions for nickel ores. Yet the President sees the export bans as a success, as the nickel processing industry in his country has been built up in consequence of the measures.

Furthermore, Widodo confirmed that Indonesia would also like to restrict the export of raw copper, bauxite and tin, in order to attract more foreign investment. He has not yet mentioned a time frame for this introduction of more restrictions.