In-article:

“Inflation can stay high for ten years”


Can we compare the oil crisis of the 1970s with the energy crisis of the 2020s?

Yes, and that was the idea of ​​the last Cyclops report, titled “The World of Yesterday”. They are quite comparable, and not only in the energy field. The 1970s marked the end of the “glorious thirties”, the 2020s mark the end of other “glorious thirties”, those of happy globalization. In both cases, there is a profound rupture. The two shocks of 1973 and 1979-1980 were the spark that caused the economic reversal and the period of stagnation of the 1980s. The same is true today with the gas market shock. We have an energy crisis that has nothing to do with the crisis of 2008, when the barrel of oil rose to $147!

Until then, energy crises passed through the oil channel. These days, it’s natural gas that’s in charge. This is the first time that natural gas has caused a major energy crisis, and it is at the heart of the energy transition. By wanting, out of ideology, to give up nuclear power and shale gas, we have become totally dependent on renewable energies that are essentially intermittent. In Europe, we increased our dependence on Russian gas at the very time when the need for this extra energy was greatest. Gas prices have increased 20 times, natural gas is three times more expensive than oil and we need to import it because we are threatened by gas shortages.

Does inflation seem sustainable to you?

You never know how you get out of it. The high inflation that started in the 1970s continued until the mid-1980s, after the intervention of Paul Volcker at the Fed. Inflation, in my opinion, is serious from around 10%. In the euro zone, in August, it was 9.1%. In Poland, it reaches 15%… The return to normal, around 5%, can take time, perhaps a decade.

Can’t the recession expected for 2023 solve the problem?

This will not be enough, because the underlying inflation, ie excluding food and energy, is beyond anyone’s control. The energy shock can only result in inflation.

Was the commitment to a massive electrification movement a mistake?

We put the cart before the horse, because where will the electricity come from? In China, which has the world’s largest fleet of electric vehicles, two-thirds of the electricity comes from coal, which is absurd. In France, we are reduced, to ensure the join, to reopen Saint-Avold and import coal. We walk on the head. The bulk of the shock is ahead of us. It is good to cap the increase in electricity for households, but the real challenge is the cost of energy for businesses, especially small ones. The problem for the baker is not the price of wheat, it is the energy bill for his oven. In the charcuterie industry, the federation estimates that the increase in energy will absorb the equivalent of 3% of the sector’s turnover.

Can we do without Russian gas?

In the short term, it will depend on the temperatures this winter. France could do without it, but we are on European markets. Germany will find it extremely difficult to deprive itself of it, its industry being very dependent on Russian gas. It is illusory to consider capping gas prices in Europe, a global market. The only possibility would be for Norway to stand together in opposition to Russia and cap its export prices… There is also an idea of ​​disconnecting electricity and gas prices, but I don’t have the idea. impression that liberal Europe has the political will to return to administered prices.

How are commodity markets evolving in this turbulent environment?

Industrial and agricultural raw materials should be treated separately. In the industrial sector, we are experiencing the repercussions of the slowdown, or even the virtual disappearance of economic growth. Prices soared in the aftermath of the invasion of Ukraine. They were then following a trend that began in 2021, linked to the rebound in post-pandemic demand. Since then, they have recorded a net drop of about 30% for non-ferrous metals such as copper, and even more spectacular for nickel, tin or even in the steel industry. The only industrial raw material which has not fallen and, on the contrary, which is breaking records, is paper pulp. Apart from this particular case, on all markets, the fall in prices is linked to the Chinese economic slowdown and the prospect of falling demand in advanced countries. Rexecode economists anticipate zero growth in 2023 in the euro zone as in France. The figures are negative for Germany. We are facing a recession-inflation scenario. Admittedly, prices are still relatively high compared to the long-term trend, but the readjustment has been clear and should continue in the weeks and months to come. We have not yet reached the bottom levels.

What about agricultural raw materials?

The demand is still present, but there are questions about the Chinese demand. One of the reasons for the soaring cereals, from 2021, had been the importance of Chinese purchases, which increased from 19 million in 2019 to 60 million tonnes in 2021, which had made China the world’s largest importer. In 2022, these imports will decline by only 10% and therefore remain at a high level. It is quite difficult to understand the rationality of this. It should be noted that after the African swine fever, which reduced the herd by half, China has now returned to a comparable level of production – it produces and consumes more than half of the world’s pigmeat –, with, behind, the need for regular feeding for pigs. The level of imports should remain high, especially since the Chinese harvests, faced with the drought, are not very good. Conversely, the outlook for agricultural supply is very satisfactory in Australia, Latin America and Russia. Even in Ukraine, the export shortfall will perhaps be less significant than anticipated. There are no longer major tensions on wheat. On the European market, the price had passed the threshold of €300 per tonne in November 2021 to soar above €400 in the aftermath of the war. We returned to just over €300, which, for the producers, makes it possible to offset part of the increase in fertilizer prices.

The energy transition is increasing the demand for certain metals. Is there a risk of shortage?

Prices will play an important role in the diversification of demand. For now, lithium is essential in batteries, will it be the same in ten to fifteen years? We are already turning our backs on cobalt, due to political instability in the Democratic Republic of Congo, the main supplier of this raw material. It is replaced by nickel. There will be bottlenecks, but the risk should probably not be exaggerated.

How do you explain the drop in gold in a context of inflation?

Gold pays nothing and only had interest when rates were negative; when the yields on government bonds are between 2% and 4%, one can wonder about the interest of having them in the portfolio. It only thrives on the misfortune of men and benefits from the search for security in the event of the sound of boots. The extraordinary thing is that this “barbaric relic” continues to fascinate investors, especially in France!




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