Inflation

[divs4ever]

View attachment 145801

that would depend on if Europe also builds the facilities to accept delivery ( in the required volumes ) and transport it to regional customers .. at the current rate of decisions that would be a snowflake's change in an erupting volcano .

i have heard some interesting estimates .. but THEN we have the saga of the Siemens turbine to show us the NEW German efficiency ( which is still the manufacturing heart of the EU )

my bet is to consider investing in washcloths

 

[over9k]

that would depend on if Europe also builds the facilities to accept delivery ( in the required volumes ) and transport it to regional customers .. at the current rate of decisions that would be a snowflake's change in an erupting volcano .

i have heard some interesting estimates .. but THEN we have the saga of the Siemens turbine to show us the NEW German efficiency ( which is still the manufacturing heart of the EU )

my bet is to consider investing in washcloths

They're already under construction.

 

[divs4ever]

we will see

might be a little difficult with coal impeded by a lower than normal Rhine , Russia's reluctance to send gas via an uncertified pipeline , but maybe the Indian steel industry will get a tail wind

 

[Smurf1976]

that would depend on if Europe also builds the facilities to accept delivery ( in the required volumes ) and transport it to regional customers

They have some and are building more.

The basic problem however is there just isn't an adequate supply of LNG to supply the existing import terminals globally. There's already a shortage - adding more buyers simply makes that even worse.

Hence LNG is now the most expensive fuel around. Coal, fuel oil and even jet fuel are all cheaper on an energy content basis.

 

[divs4ever]

They have some and are building more.

The basic problem however is there just isn't an adequate supply of LNG to supply the existing import terminals globally. There's already a shortage - adding more buyers simply makes that even worse.

Hence LNG is now the most expensive fuel around. Coal, fuel oil and even jet fuel are all cheaper on an energy content basis.

there is a desire to make Hydrogen a big part of the mix , it seems that Hydrogen will not be created/generated inside the EU

so there will be similar issues for using that as well ( shipping and storage )

 

[qldfrog]

there is a desire to make Hydrogen a big part of the mix , it seems that Hydrogen will not be created/generated inside the EU

so there will be similar issues for using that as well ( shipping and storage )

If we become a giant H2 producers..i know??...we might soon be able to do a security operation in PNG , the Salomon islands or Timor..
Ohh sorry already done???

 

[waterbottle]

Euro PMI data out this afternoon. Likely negative given rising energy costs. Might be enough to push US markets down further.

 

[qldfrog]

Remember this next year:

$1 billion gas project denied express approval process

Tanya Plibersek knocks back a request to exempt an energy project in southern Queensland from assessment against environmental laws, saying she is "not satisfied" it is in the national interest.

www.abc.net.au

 

[waterbottle]

Australian & Japanese PMIs released today - both down...


Meanwhile on the IR front, market seems to be moving towards a 75bp hike instead of the original 50bp. Hmmmmmmmm

 

[JohnDe]

How will this affect inflation -

Against expectations, global food prices have tumbled

Six months after Russian tanks rolled into Ukraine, an inflationary shock is still ripping through boardrooms, finance ministries and households, with European natural-gas prices surging again on August 22nd owing to fears of further disruptions to supply from Russia. But in one crucial area, prices have come back to Earth. The cost of grains, cereals and oils, staples of diets around the world, have returned to levels last seen before the war began.

Russia and Ukraine are agricultural powerhouses—until recently, the world’s largest and fifth-largest exporters of wheat and two largest exporters of sunflower oil. It was not, therefore, a surprise that food prices surged in February and March, driven by fears that exports would be disrupted by war; indeed, the worry was that shortages would persist, decimating grain stocks and causing mass starvation.

That terrible outcome now appears to have been been avoided. Last week wheat futures in Chicago, for delivery in December, dropped to $7.70 per bushel, far below the $12.79 they reached three months earlier and back to their level in February. Corn is also back to its pre-war price. Meanwhile, palm oil, found in thousands of dishes from ice cream to instant noodles, has dropped not only back to its pre-war price, but to below it (see chart).


The recent deal brokered by the United Nations, allowing Ukrainian grain exports to leave the port of Odessa, can only explain a fraction of the shift: it was inked in late July, after most of the decline in prices. More can be credited to the strength of Russian wheat exports. America’s agriculture department suggests that Russian farms, far from being disrupted, will export a record 38m tonnes in 2022-23, some 2m tonnes more than they managed the previous year. A bumper harvest is under way, in part due to good weather earlier in the year, and there is strong demand from traditional importers in north Africa, the Middle East and Asia.

The worries about shortages may have been overstated in the first place. Charles Robertson of Renaissance Capital, an investment bank, argued at the time that cereal traders were overexcited—wrongly grouping together long-term disruption to oil-and-gas supplies and less plausible prolonged disruption to the food supply. “Global wheat stocks were extremely high,” says Mr Robertson, “which told us either that the relationship between stocks and prices had broken down or...that speculation had got ahead of itself.”

The sheer volume of speculation on futures markets may also help explain the volatility. Michael Greenberger of the University of Maryland, formerly a division director at the Commodity Futures Trading Commission, a regulator, notes that rules limiting speculation are routinely avoided by American banks, which assign swaps to their foreign subsidiaries.

The drop in prices will not immediately feed through to consumers. Wheat and other cereal prices have returned to their pre-invasion levels when priced in dollars, but not in many other currencies. The greenback has climbed this year on the expectation of more rapid interest-rate rises by the Federal Reserve, leaving some emerging-market economies struggling. The Turkish lira is down by 26% against the dollar this year and the Egyptian pound is down 18%. The countries are two of the three largest wheat importers in the world.

Prices were extremely high by historical standards even before the war, and there is no guarantee they will not rise again. Droughts across much of the world will affect crop yields. Meanwhile, fertilisers are still extremely expensive. Urea, a compound used in the production of nitrogen-based ones, currently runs to $680 per tonne—down from $955 in mid-April, but still considerably more than the $400 it cost a year ago. That reflects the surge in the price of natural gas, an ingredient in many fertilisers. With fuel prices in Europe continuing to hit record highs, there may be more nasty surprises in store. ■

 

[divs4ever]

Remember this next year:

$1 billion gas project denied express approval process

Tanya Plibersek knocks back a request to exempt an energy project in southern Queensland from assessment against environmental laws, saying she is "not satisfied" it is in the national interest.

www.abc.net.au

YEP !

and the delay on approvals for Acland 3 at New Hope

do anyone not how little coal was sold from New Hope's Queensland mines ?? ( 14,000 tonnes this quarter but none of it sold )

i hope they didn't need the royalties to help balance the state budget

maybe they are stock-piling the coal ready for Hydrogen production ( or for the European winter )

 

[over9k]

They have some and are building more.

The basic problem however is there just isn't an adequate supply of LNG to supply the existing import terminals globally. There's already a shortage - adding more buyers simply makes that even worse.

Hence LNG is now the most expensive fuel around. Coal, fuel oil and even jet fuel are all cheaper on an energy content basis.

And even worse than this, gas was already something that you only really used if you had no other choice, so there isn't even really any substitutes.

 

[over9k]

Euro's already at parity, pound to follow.

 

[divs4ever]

And even worse than this, gas was already something that you only really used if you had no other choice, so there isn't even really any substitutes.

if that is the case ( i have hardly ever used gas .. except a water heater at one house ) one must ask the purpose behind the push for increased gas usage ( even in preference to existing nuclear power plants )

SXE ( i hold ) had a nice boost in converting miner power plants to gas

 

[Smurf1976]

if that is the case ( i have hardly ever used gas .. except a water heater at one house ) one must ask the purpose behind the push for increased gas usage ( even in preference to existing nuclear power plants )

There are exceptions but for a generic power generation system:

Cheapest to operate = Renewables including wind, solar, hydro etc. Nuclear.

Next cheapest = Coal.

Most expensive = Gas, Oil.

Hence the normal operating approach is to make full use of renewables and nuclear first and foremost, then coal, and to use gas / oil to do the rest.

Reason for building gas / oil plant in the first place is that it's relatively cheap up front. It thus stacks up well economically for seasonal use, peak demand, backup etc since the cheap construction offsets the higher operating cost when use is intermittent. Plus the politics since gas comes with far less controversy than nuclear power or large on river hydro dams and it's generally seen as preferable to coal too. It's an "easy" option both economically and politically to build a new gas-fired power station.

The practical implication for inflation however is that it's rather hard to replace that gas in the short term. If the problem was a lack of coal, uranium or water (hydro) well then gas-fired plant could be placed into constant operation as a means of saving coal, uranium or water. It doesn't really work in reverse though since gas is already used primarily when other sources can't do the job so whilst not zero, the options to ramp up coal or nuclear in order to use less gas are far more limited than the reverse.

To the extent they exist, the options for using more coal to replace gas commonly involve returning disused 50+ year old facilities to operation and so on. Putting back into use things that are still usable technically but they're old, inefficient and relatively high cost - hence why they were closed in the first place. For example Sweden has 3 oil-fired steam (power generating) units back in operation now that date from 1969, 1971 and 1973 respectively, that's a typical example of the approach.

Then there's uses other than power generation.

The average household or office has one method of heating, cooking or providing hot water and no short term ability to switch fuels. If they're using gas, electricity, oil or whatever well that's what they're using, they don't have the equipment to just start using something else.

For industry it varies. Plenty of boilers that can switch between oil and gas for example but when it comes to things like fertilizer production, they're set up for gas and nothing else.

So overall demand for gas is somewhat inelastic. It's not zero but the ability to rapidly substitute something else is relatively limited. Not all but a large portion of the consumption occurs in situations where there's no immediate alternative - either direct uses (eg households and industry) or as "last resort" power generation when other sources are already fully utilised (or unavailable due to maintenance etc).

That's a perfect setup for a price shock. A commodity that's used for "essential" purposes where not all but a large portion of the consumption can't rapidly switch to a substitute.

 

[over9k]

There are exceptions but for a generic power generation system:

Cheapest to operate = Renewables including wind, solar, hydro etc. Nuclear.

Next cheapest = Coal.

Most expensive = Gas, Oil.

Hence the normal operating approach is to make full use of renewables and nuclear first and foremost, then coal, and to use gas / oil to do the rest.

Reason for building gas / oil plant in the first place is that it's relatively cheap up front. It thus stacks up well economically for seasonal use, peak demand, backup etc since the cheap construction offsets the higher operating cost when use is intermittent. Plus the politics since gas comes with far less controversy than nuclear power or large on river hydro dams and it's generally seen as preferable to coal too. It's an "easy" option both economically and politically to build a new gas-fired power station.

The practical implication for inflation however is that it's rather hard to replace that gas in the short term. If the problem was a lack of coal, uranium or water (hydro) well then gas-fired plant could be placed into constant operation as a means of saving coal, uranium or water. It doesn't really work in reverse though since gas is already used primarily when other sources can't do the job so whilst not zero, the options to ramp up coal or nuclear in order to use less gas are far more limited than the reverse.

To the extent they exist, the options for using more coal to replace gas commonly involve returning disused 50+ year old facilities to operation and so on. Putting back into use things that are still usable technically but they're old, inefficient and relatively high cost - hence why they were closed in the first place. For example Sweden has 3 oil-fired steam (power generating) units back in operation now that date from 1969, 1971 and 1973 respectively, that's a typical example of the approach.

Then there's uses other than power generation.

The average household or office has one method of heating, cooking or providing hot water and no short term ability to switch fuels. If they're using gas, electricity, oil or whatever well that's what they're using, they don't have the equipment to just start using something else.

For industry it varies. Plenty of boilers that can switch between oil and gas for example but when it comes to things like fertilizer production, they're set up for gas and nothing else.

So overall demand for gas is somewhat inelastic. It's not zero but the ability to rapidly substitute something else is relatively limited. Not all but a large portion of the consumption occurs in situations where there's no immediate alternative - either direct uses (eg households and industry) or as "last resort" power generation when other sources are already fully utilised (or unavailable due to maintenance etc).

That's a perfect setup for a price shock. A commodity that's used for "essential" purposes where not all but a large portion of the consumption can't rapidly switch to a substitute.

Here's the graph form of a lot of what smurf said:



I couldn't find a higher res shot but you get the idea - some things can only be done with X, some only with Y, some with both, some with one step for X but two or three steps for Y, so on and so forth.

Remember that using the alternative(s) requires essentially retooling and/or building entire refineries to do things the different way (which might still end up more expensive anyway) so in the meantime, until you've retooled your existing plants and/or built new ones, you have *nothing*.

If you can't get your feed stock/base material you need to build a new refinery and/or retool your entire existing plant to use something different.

Even then, you're now doing things the harder/more expensive way which increases costs of the final product (inflation) and can now also be outcompeted by anyone doing things the previous way the moment they, say, reopen the gas pipelines, which means you're going to have to put tariffs in place to stop your new industry from being bankrupted, which only serves to drive up prices (inflation) further.

In short, you are BONED.

 

[divs4ever]

looks like i will have to keep my axe sharp , some back-up handles , and my timber pre-cut ( and kept dry ) ( and a decent back-up generator )
lucky i didn't opt for the concrete jungle

is going to be interesting with the national GDP once grid power becomes unreliable/mom-existent ( at the current trend they should hit record levels )

 

[Smurf1976]

is going to be interesting with the national GDP once grid power becomes unreliable/mom-existent ( at the current trend they should hit record levels )

Putting this into perspective, the uses of gas can basically be placed into four categories:

1. Gas sold "as gas" to households and businesses who use it for heating, hot water, cooking etc. The majority have literally zero short term alternative.

2. Gas sold to industrial users engaged in complex processes as per the chart posted by over9k and who have no short term alternative other than to cease production.

3. Gas used for electricity generation. In some places it forms essentially the entire power supply or at least a major part of it, they don't have hydro or nuclear etc, but in most places it's a supplement to other sources used when needed.

4. Gas used in industry to fire boilers, kilns and so on. Some do have the ability to switch to some other fuel, some don't.

Bearing in mind the subject is inflation not energy per se but I'll post this chart which puts the use of gas for power generation into perspective. It's for the past 7 days in Victoria but the concept is generic to most power systems globally. Gas shown in orange and for simplicity I've left interstate power transfers off the chart:




From an inflation perspective the basic problem is that the only time gas is being used, is when other sources are already running to their limit. That's where the "gas is the last resort" bit comes from - it's what runs when everything else is already running and insufficient.

The chart's for Victoria but same basic concept anywhere. Gas (or oil (eg diesel)) plant that's cheap to build (but costly to operate) is filling the gaps whilst other plant generates most of the actual electricity.

In the event Europe actually does run out of gas then they won't be left completely without electricity but it's much like the above chart. There'll be times when it simply doesn't matter at all, because other sources are adequate, but at other times it'll bite hard.

Using 2021 data, gas only accounts for 10.4% of electricity generation in Germany for example. The trouble is, as with that chart for Victoria, there are occasions when it's very much greater than the average and any lack of availability will bite hard both physically (worst case the lights really do go out) and in terms of electricity prices on the wholesale market.

For industry with boilers etc some can just burn something else and carry on. For those that don't have that option however they're in trouble.

For industry with complex processes for which there's no alternative, it's game over if gas supply stops.

Same for households although they'll almost certainly be given first priority access to available supplies by government. Whether they can afford to use it is another question....

So overall it's not an "end of the world" situation, there won't be a complete failure of power supply, but if the EU ran out of gas then there'll certainly be trouble both physically and economically. Seriously high prices to households and industry, both for gas "as gas" and for electricity, are one outcome whilst for some industrial users it would mean ceasing production entirely.

Petrochemicals, fertilizers, plastics etc are we'll see any outright shutdowns in their most severe form. That's simply due to lack of flexibility - they need gas and nothing else will do.

 

[waterbottle]

How will this affect inflation -

Neel Kashkari (Fed member) speaking now. To paraphrase him: the Fed is avoiding food and crude oil prices when trying to determine monetary policy given their inherent volatility

 

[CityIndex]

Neel Kashkari (Fed member) speaking now. To paraphrase him: the Fed is avoiding food and crude oil prices when trying to determine monetary policy given their inherent volatility

This should make Friday's US PCE Core Price Index an important data point to watch, as the print will likely play a significant role in shaping expectations for the September FOMC Meeting, and therefore market direction in the build-up.