Global economy struggling with a growing energy crisis. The mounting energy prices has become the hottest debate recently as prices of all energy sources from Brent oil and natural gas to coal reaching unprecedented levels with various knock-on effects on the global economy. For instance, the price of natural gas has risen by more than 400% y-t-d in Europe, while electricity prices spiked by 250%. Natural gas prices have also more than doubled in the US, while Brent oil price has recently exceeded USD80/bbl compared to ~50/bbl levels in the beginning of the year.
- At the core of the problem lies the demand-supply mismatch, as energy production was unable to keep up with the rising energy demand at the post-pandemic economic recovery, mainly due to disruptions to the supply chain caused by the pandemic.
- Extreme weather, such as colder than usual winter in Europe and hot summer in China, is reportedly another cause for the rising energy demand. This combined with falling gas inflows from Russia to Europe, partially due to political reasons, has induced a marked decrease in Europe’s gas reserves. The tightness in supply-demand balance is adding further price pressures as we are heading into winter.
- The shortage of truck drivers who ferry fuel to pumps due to Brexit and restrictions imposed due to the pandemic, for instance, has reportedly been a major cause behind the U.K.’s fuel crisis.
- The World is also struggling to cut down the dependency on fossil fuels, but the shift from fossil fuels to renewable energy has also caused an energy crunch. In China for instance, where half of all power is generated from coal, the pledge to cut-down carbon emissions has cracked down coal mining, resulting in a spike in coal prices and also leading to factory shutdowns, especially in energy-intensive industries like fertilizers. In Europe, as coal, which is the most polluting fuel, is phased out, countries resort to natural gas before adjusting production to green alternatives.
- All of these also demonstrate the interconnectedness of the global economy; a drought in China can drive up the price of electricity prices in Spain or the cost of soft drink cans in the US. Particularly the power shortages in China are leading to severe disruptions in supply chains, thereby affecting all prices elsewhere, adding further fuel to the global inflation conundrum. As such, although central banks are inclined to remain still against supply side shocks, potential “second-round” inflationary effects now make their job even harder.
Energy prices will be a major predicament for the disinflation process over the coming period. As you would recall, the government curbs energy inflation by sacrificing from SCT revenues from petroleum products (sliding-scale system), which was the also the case in September. The government recently revealed that the sliding-scale system has so far repressed CPI inflation by some 2.5% points, including indirect impacts. The government also announced that the cost of the sliding-scale system is expected to reach TL46bn in 2021. In fact, with current currency levels and Brent oil prices, the room to cover the rising costs from SCT is now rather limited, as the SCT per 1 liter of diesel has already been totally withdrawn by 23-Sep compared to the original amount of TL2.01 and the SCT per 1 liter of gasoline has declined to a mere TL0.23 as of 08-Oct from the original TL2.53. As such, we calculate that the cost on the central government budget may actually reach as high as TL55-60bn by the end of the year (which will also recur in 2022, if the sliding-scale system remains intact). This also means that rising energy costs will now be reflected into pump prices and the government may also opt to partially reflect the previous costs in order to ease the budgetary burden. This may prove to be a major predicament for the disinflation process over the upcoming period, along with the awaited price hikes in electricity and natural gas fees. Note that long-term natural gas agreements, particularly with Russia, also needs to be renewed soon (within 2021), which will also pressure consumer prices.
The effects of rising energy prices on companies;
- Due to the sharp increases in coal, petcoke and electricity prices, profitability margins of cement companies like Akcansa, Cimsa and Oyak Cement may be negatively affected. In a similar fashion, increases in natural gas prices may pressurize the margins of Sisecam.
- For Tupras, although the increase in natural gas prices could have a slight negative effect on the costs, the significant improvement in product margins globally and increasing trend in oil prices are affecting profitability positively.
- Natural gas price increases and oil price increases also has a negative effect on the costs of Petkim, however, the costs of natural gas based petrochemicals is rising at a higher speed that could help the product prices reducing negative effect on the company.
- Aygaz is a company that could benefit from the rise in the oil prices and LPG prices through inventory gains.
- Regarding electricity producers, natural gas and imported coal-based producers like Akenerji, Turcas and Alarko Holding could be affected negatively through higher costs. However, other producers like Odas and Galatawind could be affected positively through higher electricity prices in the free market.
- Rising coal prices also has a negative effect on the steel companies that could be partly offset by the decline in iron ore prices.
Gedik Investment