China Coal Prices Soar To Record As Winter Freeze Spreads Across The Country
One week ago we discussed why the “worst case” scenario for China’s property crisis is gradually emerging; to this we can now add that China’s worst case energy crisis scenario is also about to be unleashed as cold weather swept into much of the country and power plants scrambled to stock up on coal, sending prices of the fuel to record highs.
Electricity demand to heat homes and offices is expected to soar this week as strong cold winds move down from northern China, according to Reuters with forecasters predicting average temperatures in some central and eastern regions could fall by as much as 16 degrees Celsius in the next 2-3 days.
Shortages of coal, high fuel prices and booming post-pandemic industrial demand have sparked widespread power shortages in the world’s second-largest economy. Rationing has already been in place in at least 17 of mainland China’s more than 30 regions since September, forcing some factories to suspend production and further disrupting already broken supply chains.
On Friday, the most-active January Zhengzhou thermal coal futures closed at a record high of 2,226 per tonne early. The contract has risen almost 200% year to date.
China’s three northeastern provinces of Jilin, Heilongjiang and Liaoning – also among the worst hit by the power shortages last month – as well as several regions in northern China including Inner Mongolia and Gansu have started winter heating, which is mainly fuelled by coal, to cope with the colder-than-normal weather.
Meanwhile, even though Beijing has taken a slew of measures to contain coal price rises including raising domestic coal output and cutting power to power-hungry industries and some factories during periods of peak demand, so far all measures have failed with coal surging by 40% in just the past three days. Beijing has also repeatedly assured users that energy supplies will be secured for the winter heating season, and went so far as to order energy firms to “secure supplies at all costs.” Well, the energy firms heard it, because on that day, thermal coal closed at 1,436 yuan. Two weeks later it is some 800 yuan higher.
Unfortunately for Beijing, the power shortages are expected to continue into early next year, with analysts and traders forecasting a 12% drop in industrial power consumption in the fourth quarter as coal supplies fall short and local governments give priority to residential users.
Earlier this week, we reported that China undertook its boldest step in a decades-long power sector reform when it allowed coal-fired power prices to fluctuate by up to 20% from base levels from Oct. 15, enabling power plants to pass on more of the high costs of generation to commercial and industrial end-users. read more
Steel, aluminium, cement and chemical producers are expected to face higher and more volatile power costs under the new policy, pressuring profit margins.
Meanwhile, the latest Chinese “data” on Thursday showed factory-gate inflation in September hit a record high; but since thermal coal is the one commodity that correlates the closest to PPI, absent a sharp drop in coal prices in the next few weeks, expect the next PPI print to be far higher. Meanwhile as the power crisis leads to further shutdowns in domestic production, some banks – such as Nomura – have gone so far to predict that China’s GDP is set to shrink in coming quarters.
China, which laughably aims to be “carbon neutral” by 2060 even as its president announced he will skip the COP26 UN Climate Change Conference in Glasgow, has been “trying” to reduce its reliance on polluting coal power in favor of cleaner wind, solar and hydro. But coal remains the source for some 70% of China’s electricity needs.
Of course, China is not the only nation struggling with power supplies, which has led to fuel shortages and blackouts in many European countries. and threatens to send US heating bills up as much as 50% this winter. he crisis has highlighted the difficulty in cutting the global economy’s dependency on fossil fuels as world leaders seek to revive efforts to tackle climate change at talks next month in Glasgow.
China will strive to achieve carbon peaks by 2030, Vice Premier Han Zheng said in a video message at the Russian Energy Week International Forum, according to state-run news agency Xinhua late on Thursday. He also said that China and Russia are important forces leading the energy transition and they should cooperate and ensure smooth progress of major oil and gas pipeline and nuclear power projects.
Translation: Russia better save that nat gas and not ship it to Europe as China will soon be needed even BCF Russia an provide. As for China
US Economy Remains On Track For Strong Rebound in Q4
With the end of the year in sight, the US economy continues to show signs of a sharp pickup in growth in the fourth quarter, based on several nowcasts….
With the end of the year in sight, the US economy continues to show signs of a sharp pickup in growth in the fourth quarter, based on several nowcasts.
The US Bureau of Economic Analysis is expected to report in late-January that output rose 5.4% (annualized real rate) in Q4, via the median of several nowcasts compiled by CapitalSpectator.com. The estimate marks a dramatic upside reversal from the slowdown in Q3 that cut growth to a modest 2.1%.
Although roughly a third of the fourth quarter’s economic data has not yet been published, the available numbers to date suggest that the final quarter of 2021 will deliver upbeat news for the US. The fact that recent nowcast revisions have been relatively steady at the 5%-plus level strengthens the outlook that output has accelerated. Today’s revised median 5.6% nowcast is up from 5.0% in the Nov. 16 update.
Recent survey data aligns with the firmer expectations for Q4 economic activity. “The US economy continues to run hot,” observed Chris Williamson, chief business economist at IHS Markit, on Nov. 23, citing the consultancy’s US Composite Output Index, a GDP proxy. “Despite a slower rate of expansion of business activity in November, growth remains above the survey’s long-run pre-pandemic average as companies continue to focus on boosting capacity to meet rising demand.”
Supply-chain and worker-shortage issues continue to create headwinds, but a rebound in economic activity overall appears increasingly likely when the government publishes its initial Q4 GDP estimate next month.
The main question is whether the rebound proves fleeting? Looking ahead to 2022 suggests that economic activity could slow in the new year due to potential blowback from the omicron variant of the coronavirus, higher inflation and other factors.
Goldman Sachs, an investment bank, recently cut its forecast for US growth in the new year. “While many questions remain unanswered, we now think a moderate downside scenario where the virus spreads more quickly but immunity against severe disease is only slightly weakened is most likely,” says Joseph Briggs, an economist at the firm.
This week’s update of the UCLA Anderson Forecast has also trimmed the outlook for early next year, revising its Q1 2022 growth estimate down substantially to a 2.6% gain from the 4.2% predicted in September. The key assumption: the omicron variant “might be disruptive, while acknowledging that its effects cannot be predicted.”
Perhaps, but the good news is that economic momentum looks set to deliver a strong tailwind going into 2022.
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Markets stay booster’ed
Equities rally continues US markets managed to maintain omicron is weak, buy everything rally overnight, albeit at a much less frenzied pace than the day…
Equities rally continues
US markets managed to maintain omicron is weak, buy everything rally overnight, albeit at a much less frenzied pace than the day before. That sits nicely with my V for Volatility outlook for December and readers should not be fooled into thinking the risks of whipsaw price have now disappeared. I’ll say it again, volatility will be the winner in December, not directional plays.
Having said that, I am not calling for the end of days for the 21-month stock market rally, merely that we can now expect a lot more two-way volatility going forward. A case in point is the Nasdaq, which has once again bounced off its mighty March 2020 trendline support and will probably be a classical technical analysis case study for years to come. Here’s what CFD from OANDA looks like, the actual physical chart is even sexier, and I’ll leave readers to draw the lines on that one themselves.
Another sign that we may need to wait for next week’s FOMC meeting to climb aboard the taper trade again comes from currency and bond markets. The Australian dollar, the risk sentiment indicator to rule them all, rallied powerfully overnight. Even the euro managed to recover, and the US dollar generally had a tough day at the office. That came as US 10-year yields rose back above 1.50% to 1.53%.
The divergence in price action is a warning sign for tomorrow night’s US CPI. It suggests that the street is positioned for a “risk-off” taper move. With the US 10-year rising around 20 basis points over the last few sessions, reversing recent losses, there may not be much juice in the tank at a 7.0% CPI print. Quid pro quo, US dollar selling and equity buying hint that a 7.0% CPI is increasingly priced in. We likely need to see a print much higher than 7.0% to revive the taper trade in the near term and it wouldn’t surprise me if an on-expectation CPI release sees US yields fall, the US dollar fall, and equities jump once again. Remember what I said about V for Volatility and whipsaw price action?
Helping things along, although with a gentler market impact, were comments from Pfizer and Moderna suggesting a third shoot would do the job against omicron. Given that the US and Europe can’t even get 65% of their populations to have even two shots, let alone a third, we can assume two things. Omicron will yet have a role to play in surging cases over the winter, and vaccine hoarding by rich countries will continue until 35% of their populations stop taking advice from social media and saying me, me, me, instead of we, we, we. That means that the poor in the rest of the world will be waiting longer, thus allowing a higher chance of more nasty variants to arise. And thus, the cycle continues, sigh…
Today’s data calendar in Asia is thin. New Zealand Manufacturing Sales in Q3 fell a dismal 6.20%, suffering from the Auckland Covid lockdown hangover. You can’t buy anything in New Zealand these days anyway; it’s either too expensive thanks to the RBNZ, or there’s none of it left thanks to Covid-19. The New Zealand dollar continues to underperform its Australian cousin, thanks to being another 2,250 kilometers (1,400 statute miles for non-decimal dinosaurs) east of Australia, and the RBNZ hitting the W for Wimp button at its last policy meeting.
On a brighter note, Japan’s Large Manufacturing Index QoQ for Q4 outperformed, rising by 7.90%. Some Q3 baseline effects are in there, but overall, it bodes well for next week’s Tankan survey and suggests that Japan is recovering after it Q3 delta wave. Services may have a more difficult time as the country shut its borders to Johnny Foreigner again this month.
China’s Inflation data has proved benign as well, giving regional markets a small sigh of relief. YoY Inflation for November rose to 2.30% (2.50% exp), while MoM Inflation rose by 0.40% (0.70% exp), giving markets a nil-all draw. That should provide more relief to local equity markets which despite the bad news pouring in from the property developer space this week, is taking their pleas for debt restructuring as meaning the government will facilitate “something.” At least Kaisa suspended trading of their stock in Hong Kong, I’m surprised Evergrande still is. A debt restructuring is not usually good for stock prices, even if they have already fallen by 90%.
The rest of the day’s calendar globally is second-tier. Some regional inflation measures from Europe and Germany’s Balance of Trade. The focus will be on US Initial Jobless Claim with markets hoping for sub-200k prints to resume. Overnight, US Jolts Job Openings for October jumped to 11 million unfilled jobs. That doesn’t really compute with US Non-Farms falling to 210,000, or even a Household Survey suggesting 1.1 million jobs, or unemployment falling to 4.20% with a 61.80% participation rate.
The Federal Reserve may have shot itself in the foot with its unlimited free money we’ll backstop the dumbest investment decisions monetary stimulus which should have been a short term “shock and awe,” and not a monetary Vietnam. Macroeconomics is a beautiful thing when the orchestra all plays in tune, but too often, sticking your finger in one leak sees another pop up nearby. By enriching substantially, any American who owns a home, crypto, a meme or any other stock, they have created a situation where people don’t have to go back to work or have retired. The inflation trade may waver this week, but don’t put it to bed just yet. If James Bond can return from his most diverse and politically correct movie ever (the end credits said he would), inflation sure can as well.
FT-IGM US Macroeconomists Survey for December
The FT-IGM US Macroeconomists survey is out (it was conducted over the weekend). The results are summarized here, and an FT article here (gated). Here’s…
For GDP, assuming Q4 is as predicted in the November Survey of Professional Forecasters, we have the following picture.
Figure 1: GDP (black), potential GDP (gray), November Survey of Professional Forecasters (red), November SPF subtracting 1.5ppts in Q1, 05ppts in Q2 (blue), FT-IGM December survey (sky blue squares), all on log scale. FT-IGM GDP level assumes 2021Q4 growth rate equals SPF November forecast. NBER defined recession dates peak-to-trough shaded gray. Source: BEA 2021Q3 2nd release, Philadelphia Fed November SPF, FT-IGM December survey, and author’s calculations.
In the figure above, I’ve used the SPF forecast of 4.6% SAAR in 2021Q4; the Atlanta Fed’s nowcast as of yesterday (12/7) was 8.6% SAAR. A new nowcast comes out tomorrow.
Interestingly, q4/q4 median forecasted growth equals that implied by the Survey of Professional Forecasters November survey (which was taken nearly a month before news of the omicron variant came out).
The q4/q4 forecast distribution for 2022 is skewed, with the 90th percentile at 5% growth, the 10th percentile at 2.5%, and median at 3.5%. I show the corresponding implied levels of GDP (once again assuming 2021Q4 growth equals the SPF ).
Figure 2: GDP (black), November Survey of Professional Forecasters (red), FT-IGM December survey (sky blue squares), 90th percentile and 10th percentile implied levels (light blue +), my median forecast (green triangle), all on log scale. FT-IGM GDP level assumes 2021Q4 growth rate equals SPF November forecast. NBER defined recession dates peak-to-trough shaded gray. Source: BEA 2021Q3 2nd release, Philadelphia Fed November SPF, FT-IGM December survey, and author’s calculations.
On unemployment, the median forecast is for a deceleration in recovery,
Figure 3: Unemployment rate (black), November Survey of Professional Forecasters (red), FT-IGM December survey (sky blue square), 90th percentile and 10th percentile implied levels (light blue +), my median forecast (green triangle). NBER defined recession dates peak-to-trough shaded gray. Source: BEA 2021Q3 2nd release, Philadelphia Fed November SPF, FT-IGM December survey, and author’s calculations.
The survey respondents also think that the participation rate will take a long time to return to pre-pandemic levels.
Source: FT-IGM, December 2021 survey.
On inflation, the median is higher than the November SPF mean estimate for 2022 of 2.3% (and Goldman Sachs’ current estimate).
Source: FT-IGM, December 2021 survey.
The entire survey results are here.
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