The American authorities are focusing on several economic issues. The war in Ukraine is opening new markets for the American LNG, while massive investments in the semiconductors industry and new partnership are seen as a big opportunity to be always more independent in such a strategic field. While relations with Beijing keep being complicated, the implementation of the I2U2 format represents for Washington a geopolitical alternative that one day might be decisive.
At full throttle! The gas game
The dramatic ongoing war in Ukraine has surely shaken the global exchanges system. European countries are trying to diversify their gas partners, increasing supplies with countries such as Algeria, Mozambique, Kazakhstan; nevertheless, it takes time to increase gas flows. Meanwhile, Russia is threatening the European economy by reducing supplies coming from the key pipelines as the North Stream 1, officially due to maintenance problems, which will be shut off once again at the end of the month.
As a consequence, it will be harder for European capitals to fill their gas storage for the upcoming season. The consequences should have been foreseen before: the European dependence from Russian gas originated many years ago. The unwilling or the incapacity to effectively diversify in terms of partners and energy sources has now weakened the concept of sustainable transition which appears to be neglected, since countries like Germany are moving backwards by reopening coal plants or thinking to postpone the closure of nuclear facilities still working in the country.
Additionally, it should be highlighted that natural gas emissions are fewer than coal and oil in terms of carbon dioxide (Co2), but the methane leaks, one of the major causes of climate changes, are still very relevant. In fact, the European Union has invested massively, by granting billions to the construction of pipelines. It appears evident how the European authorities have suffered the lobbying activity of gas companies. Moreover, it seems a clear conflict of interest the circumstance that European Commission relies for its investment decision on gas, on the need forecasted by an organism called ENTSOG, composed by the gas companies themselves.
What about Washington?
In this scenario, US seems to have gained: they have found reliable and additional sales opportunity for their liquefied natural gas (LNG) and market shares, replacing Russia’s predominance. Indeed, they have significantly implemented their export of liquefied natural gas: during the first four months of 2022, US exported 74% of its LNG to Europe, compared with an annual average of 34% in 2021 as noted by the U.S. Energy Information Administration.
Another consideration needs to be reported: due to the deregulation, the gas price determination shifted from a long contract system between the seller and the buyer, where the price was substantially stable, to a financial market situation where an index the TTF, listed in Amsterdam, changes basically every second, granting bigger revenues for American companies.
During 2021, the gas price soared from 19euro MW/h to 180 euro at the end of the year, well before the Russian invasion, thus it does not appear to be the main cause. During the last few days, the prices soared again, reaching new records close to 300euro MW/h. The alert bell for the global supply chain will ring in the upcoming weeks and months also for another reason. Severe droughts are impacting the agricultural production and cargo shipments worldwide, as it is e.g., in the Rhine, where the extremely low level is reducing the transit through the waterway. As a consequence, the energy prices could move further up due to the fact that nuclear and hydro production plants needs water to work.
The FED recently decided to hike federal funds rate by three quarters of a percentage point for the second month in a row. However, financial equity markets lived an astonishing rally with Nasdaq index that rose of 4.5%, triggered by the fact that Powell used words that led investors to believe that the current rate-raise cycle may have come to an end. Nevertheless, the rise apparently came to an end, following an overbought market that led investors to ease their portfolios. Indeed, minutes from the Fed’s July meeting and comments from St. Louis Federal Reserve President James Bullard indicated the Fed likely would continue hiking rates in the near term.
Meanwhile, president Powell expressed his doubt about the fact that US economy should be considered in recession, given the unemployment rate which in June remained at 3.6%. According to the FED stance, rates are now “neutral”, which means interest rates neither hinder nor fuel economic growth. Time will give us the answer if this was enough and activated with the right modes and frequencies, in a scenario characterized by the nightmare of recession. The latest data, came out on July 28th, reported that the GDP fell in the last three months by 0.9%, second consecutive quarter of economic contraction. Generally speaking, two consecutive quarters of negative growth are seen as a sign of recession, however, it is not an official definition especially in consideration of the low unemployment rate as specified above.
At the same time inflation fear hasn’t faded: the CPI arrived in June at 9.1% which is the highest level in 40 years. The confrontation between Doves and Hawks is not certainly over and will take into account latest housing data. The debate investigates whether it is more appropriate and correct to further tighten monetary policies, reducing inflation but triggering a recession, or rather slowing the pace of increase in order to monitor effects over economy and inflation, as it was said during Chair Powell’s Press conference held on July 27th.
Looking ahead, members of the Fed will meet at the end of the month in Jackson Hole and the financial community will have clearer indications. Another element took the financial scene over the last few weeks: the parity between Euro and Dollar, reached twenty years after the last time. What does that mean and represent? The two currencies are worth the same amount and it has consequences both for firms and people. The European negative economic outlook has contributed to the reduction of the value of Euro. At the same time, dollar reaffirms its status of safe heaven for investors in time of uncertainty and dominance in the international monetary system.
Us-China: distension or not?
Tension between Beijing, Washington and Taipei keeps being high due to the visit of the speaker of the U.S. House Of Representatives Nancy Pelosi to Taiwan occurred earlier in August. Beijing considers Taiwan as a national problem and sees the visit as an interference over internal affairs. From the American point of view, however, it is necessary to reaffirm its presence and reassure his allies in the area.
Reciprocal military maneuvers are now threatening the weak dialogue that took place and was reopened shortly ago, during the Indonesian G20 between Blinken and Chinese foreign minister Wang Yi. Relationships between the two countries are at their lowest level in years, further damaged by the Chinese ambiguity over the war in Ukraine and its special partnership with Moscow. It is now imperative to cool down relations among Beijing and Washington, and the call between the presidents that took place July 28th is welcomed. In this sense, the possibility that Biden might proceed to rollback some U.S tariffs on Chinese goods may help.
The Energy Secretary Jennifer Granholm reported, “the eventuality of a pause on federal gas tax to bring down the inflation process” may result favorable. In fact, the trade conflict between the two giants has been going on for a while and some of the tariffs, inherited by Trump’s administration, are no longer useful. In conclusion, if anybody expects to see coherence in politics, they would be disappointed. Showing muscles is often a mere picture which is needed for galvanizing people or élites: real confrontation lies in economic leadership. In fact, we have analyzed the case of semiconductors and tariffs, but we do not have to forget that over the last years China was one of the biggest buyers of the American LNG, as aforementioned.
Showtime! the Chips and Science Act
The U.S. economic midterm outlook passes through the need of planning investments in strategically relevant sectors. The semiconductor industry represents undoubtedly one of them, as I already reported in my monthly analysis. The necessity to guarantee the framework for an independent and more resilient supply chain lies as the main reason for the “Chips and Science Act” which has just passed through the Senate approval with a bipartisan vote, counting 64 in favor and 33 against, followed by the House, where the counting reports 243 in favor and 187 against.
The bill, represents a huge investment plan of 280 billion dollars, in order to boost the domestic semiconductors production industry. U.S. has to reduce the dominance of China and keep up with other world players, like the European Union, which is investing in the semiconductors industry as the adoption of the “European Chips Act” or India demonstrates. In this regard, the I2U2 dialogue summit, gathering India, U.S.A, UAE and Israel represents a challenge and a strategic partnership among the involved countries: the semiconductors industry can really benefit from the potential implementation of the format.
The adoption of the “Chips Act”, already signed by the president, relieves big companies fears; indeed, Intel has recently threatened to ditch its ambitious $20B foundry project in Ohio if the bill remains in limbo, as the CEO, Pat Gelsinger announced. Other companies, such as Semiconductor Manufacturing, Global Foundries, Micron Technology, Applied Materials will take advantage of the funds. By comparison, the share of global chip making capacity has tumbled from 37% in 1990 to currently 12%, as reported by the Semiconductor Industry Association data.
In conclusion, the act, which is allocating 52 billion in direct financial assistance and 24 billion in tax incentives, appears to be a remarkable industrial policy application, aiming to improve the U.S domestic production, autonomy and competitiveness in order to strengthen the American geopolitical power, challenged in several fields and by various players.