As expected, the Ukrainian war had a global impact. In the meantime, the energy war between Russia and the rest of the Western World may have a similar if not bigger impact on the global economy as the Ukrainian military action. Let’s take a look at it.
Impact of Russian actions on the metal industry
As a result of Russia’s shut down of the Nord Stream pipeline, prices in Europe soared. The cost of energy in Europe has increased significantly since then. Many companies feared the closure of many smelters in the metal industry and requested emergency EU actions. The energy crisis created by the actions of Vladimir Putyin pose an existential threat to the future of the European metal industry as many smelters will likely shut down permanently, further adding to the economic turmoil resulting in increased unemployment. As a result of unprecedented cuts in production last year, the trend is likely to continue unless large-scale interventions are taken. It is likely that this trend will lead to many more closures throughout Europe, many of them permanent, resulting in a 50% reduction in all of Europe’s production capacity (aluminium and zinc), as an aluminium smelter in Slovakia and
a zinc plant in the Netherlands have already stopped producing indefinitely. Smelters and heavy industry were directly affected by the increase in electricity prices as a result of gas price increases. Aluminium Dunkurque, following the example of the Slovak and Dutch metal Industries, announced a 22% reduction in production, while Outokumpu delayed restarting its furnaces. Despite their relatively uninteresting names, they are the largest primary smelters for metal and the largest producer of stainless steel in Europe, greatly hindering the metal industry across Europe. The increased expenditure on these companies can be quantified by considering an example. At current energy prices, it would cost about €10,000 just for the electricity needed to produce a tonne of aluminium, but they could sell it for around €2,500. As a result of expiring long-term energy contracts, a number of smelters will close by the beginning of 2023 if EU intervention does not take place right away. Due to the high cost and time involved in restarting smelters, these would likely be permanent as well.
What effects can this have on the global economy
After analysing the impact on Europe let’s look at the global economy. Following a summer rally in industria metal prices, the energy crisis is reversing these in China.
Even though advancements have been made, industrial metals are slowing down. The S&P GSCI index for industrial metals has dropped by over 9% since mid-August, while metal spot prices (copper, nickel, and aluminium) have plummeted by 17 percent. Gas prices rose 17% in one week in Europe. Copper, the barometer of economic health, fell to $7,650 a tonne from above $10,600 a tonne, followed by other metals. Iron ore has fallen to $100 from over $160. Following this bad news, China released underwhelming economic data, which is the result of their choice to enact lockdowns once more, resulting in a contraction in the country’s factory sector. As the United States tried to control inflation by boosting interest rates, the dollar reached a 20-year high, which increased the pressure on global economies since commodities are usually defined in dollars, making them more expensive. Further contributing to the commodity slump was the weakening of the Chinese Renminbi against the dollar, which increased the Chinese economy’s burden. Due to a shortage of energy, German banks have downgraded their prices for most important metals for the next two quarters. The global economy could experience a recession as a result of this energy crisis.
Europe in chains?
It will be a costly war, but Europe needs to find a way to free itself from Russia’s chains. Energy became one of the most important fronts in his war. It is estimated that the energy crisis will result in an increase in the terms of trade by about 5.3% for Italy and 3.3% for Germany in the next year. In addition, poorer households will suffer from worsening energy prices and disruptions to industrial activity. The 1970s energy crisis provides a perfect example of how Europe can handle a crisis of such magnitude, despite its smaller magnitude than the current crisis. During that period, the Bundesbank demonstrated that keeping an eye on inflation is more effective than attempting to prevent a decrease in real income, but this may also result in a recession, as the Bundesbank proved. There is a major difference between the current crisis and the one of the 1970s because global liquefied natural gas markets are reducing a large part of the shock hitting Europe now. EU gross national expenditures would fall by 1.4% – 2.5% if liquefied natural gas were not available. Nevertheless, this method indirectly increases prices across the globe except in Europe, primarily in Asia. The 0.4% also ignores demand effects considering a full global market integration. The actual impact will be greater than we anticipated based on these factors. It is likely that Germany’s GDP will be 1.5% lower in 2022, 2.7% lower in 2023, and 0.4% lower in 2024 as a result. Nevertheless, Germany is not the most vulnerable country. Hungary, Slovak Republic, and Czechia will be hit the hardest. To avoid this emergency, it may be necessary to reopen gasfields. Consequently, the EU should aim to reduce electricity demand, cap gas prices, and help vulnerable businesses and consumers. There is also the challenge that the crisis affects all European countries – except Norway – but these effects vary in severity and each country has different tax capacities. Abandoning weaker member countries would lead to an unimaginable political backlash, especially after Brexit. The European Central Bank will not be able to assist all countries equally. Furthermore, the UK will be under a lot of scrutiny as well since it has two options: either abandon European treaties and follow through with Brexit, or help its European allies.
The future of the energy crisis is uncertain, each approach has risks to it with many unknown variables still in question. One thing we know for sure is that Europe needs far more clean energy sources, both to reduce dependence on unreliable fossil fuel suppliers and to address climate risks. As a result, a green energy revolution is increasingly evident, and European responses will determine how the immediate future of the crisis and the longer-term future of the planet unfold.
- PFEIFER, S. (2022): “European metals industry warns of ‘existential threat’” l https://www.ft.com/content/46d3c3fb-e79a-464c-afe1-7079d3e4f23c?accessToken=zwAAAYNX0wpNkc9G08P755pGTNOv4XB50-TyPA.MEUCIQCmd4MKlfE3QEFp9WyLK8TJUr6dICMd6IHleWvWvOL9MwIgP5trZx5pLcpy_MPOJQ92VtOptQrT3FgGY0_Syu4yAAY&sharetype=gift&token=96d57def-3455-4293-9a2e-51c35cb432f2
- THE FINANCIAL TIMES (2022): “Industrial metal prices melt as global recession
fears flare up” l https://www.ft.com/content/d204f3f0-f03e-4c9d-846a-eca425fb48e4?accessToken=zwAAAYNX0woVkdPSBPPw8D5MndOEauykJftI5A.MEYCIQC1fmAMH3pTu58YJ3skyt1nFP5CinOxkXP5n1QgR8vqQQIhAOWv4eGYvqTvLLdLBHD5TSUhMDiI1O6SnClLfEPHhgxC&sharetype=gift&token=82868271-6b41-4c88-a8cb-873d36c895ef
- WOLF, M. (2022): “Europe can — and must — win the energy war” l https://www.ft.com/content/8584f3f8-5bd6-48c7-9319-8b9780447cdb?accessToken=zwAAAYNX0wsukdOFhPP4W9ZIx9OTGYuXgER82w.MEUCIQCA7A-0Of6MAgjX7AOCxrVJzNMbl-TifGO8xt7UIXO2TgIgOnhaUeWmrkQ5Nvy-U3K9BFOmJZoqELiEoPMquZwAAN8&sharetype=gift&token=2b65321c-ccfb-406f-9e12-98a79f8cadb9