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Home›Gross substitutes›A more expensive world begins to destroy demand

A more expensive world begins to destroy demand

By Brian Baize
April 2, 2022
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Prices for some of the world’s most important commodities – food, fuels, plastics, metals – are soaring beyond what many buyers can afford. This is forcing consumers to cut back on spending and, if the trend picks up, could tip economies already rocked by the pandemic and war into recession.

The phenomenon occurs in large and small ways. Soaring natural gas prices in China are forcing fuel-burning ceramics factories to cut operations in half. A Missouri trucking company is considering suspending operations because it cannot fully recover rising diesel costs from customers. European steel mills using electric arc furnaces are cutting production as electricity costs soar, making the metal even more expensive.

World food prices hit a record high in February, the United Nations says, as Russia’s invasion of Ukraine disrupted shipments from countries that together supply a quarter of the world’s grain and much of its food. cooking oil. More expensive food can be frustrating for the middle class, but it’s devastating for communities trying to lift themselves out of poverty. For some, “demanding destruction” will be a bloodless way of saying “hunger.”

In the developed world, the crunch between higher energy and food costs could force households to cut back on discretionary spending — parties, vacations, the latest iPhone or PlayStation. China’s decision to place its main steel hub under Covid-19 lockdown could limit supply and drive up prices for big-ticket items like appliances and cars. Electric vehicles from Tesla Inc., Volkswagen AG and General Motors Co. may be the future of transportation, except the lithium in their batteries is nearly 500% more expensive than a year ago.

“Overall, this signals what could turn into a recession,” said Kenneth Medlock III, senior director of the Center for Energy Studies at Rice University’s Baker Institute for Public Policy.

The International Monetary Fund is about to lower its global growth forecast because of the war, and it sees recession risks in a growing number of countries, said managing director Kristalina Georgieva. The global economy is expected to expand further this year, although less than the 4.4% previously forecast, Georgieva said in an interview with Foreign Policy magazine.

Federal Reserve Chairman Jerome Powell said Russia’s invasion of Ukraine was adding to inflationary pressures by driving up the prices of food, energy and other commodities “at a time already too high inflation”. Tackling high inflation is a top priority and the central bank stands ready to raise interest rates by half a percentage point at its next meeting if needed, he said.

The danger is more acute in Europe, where energy bills are soaring due to a reliance on Russian supplies. Natural gas prices on the continent are six times higher than a year ago and electricity costs almost five times more.

These prices could merge with the conflict raging at the gates of the European Union to make businesses and households reluctant to spend all kinds of money. Great Britain. cut its economic forecast to 3.8% from 6% as consumers face the worst pressure on living standards in at least six decades.

“There is no doubt that inflation is going to stay higher for longer because of the war in Ukraine,” said James Smith, London-based economist for developed markets at ING. “A further spike in gas prices would lead to more widespread demand destruction.”

The dynamic plays out in products as ubiquitous as petroleum and as specialized as lithium, a key ingredient in advanced batteries for consumer electronics and plug-in cars. Battery makers in China who are paying five times more for metal than a year ago are having to pass on some of that cost to automakers, which could slow electric vehicle sales.

“The pressure is on automakers,” said Shanghai Metals Market analyst Maria Ma. “What worries the market now is that EV sales over the next couple of months may remain flat or not perform very well after price adjustments.”

Fertilizer makers, which use natural gas as a feedstock, began to scale back last year. Italy, Germany and United Kingdom. plan to burn more coal next winter to reduce the need for gas in power generation. This would free up more fuel for industries, such as glassmakers and large steel mills, which cannot easily replace it.

But that may not be enough yet, and there are contingency plans to limit some of the demand. Brickmakers in the UK. have been told by the government to prepare for production slowdowns if the war chokes off energy supplies, the industry lobby group said.

Rising fuel prices are already having a dramatic effect in Asia. Foshan, a city in southern Guangdong province, began rationing gas deliveries to industrial users, and half of the province’s ceramic production lines stopped working.

American consumers and businesses are better protected against soaring fuel prices since the country is not heavily dependent on Russian oil or natural gas, but they are not immune. U.S. crude oil prices soared in January and February as the threat of war grew, and retail gasoline prices followed, setting a nominal record high of $4.31 for a gallon of regular fuel. In Los Angeles, the average is now over $6.

However, the demand is not moving. That’s about 4% more than the same time last year, the US Energy Information Administration said. It may reflect how determined Americans locked down by years of restrictions are to travel.

“It skewed everything,” said Florida-based AAA spokesman Andrew Gross. “If there hadn’t been a pandemic, these high prices could crush demand.”

If oil prices remain sustainably high, demand destruction threatens. JPMorgan Chase & Co. cut its second-quarter global demand forecast by 1.1 million barrels per day and cut the outlook for the remaining two quarters by about 500,000 barrels. Europe accounts for most cuts.

“Whether it’s motorists to fill up their cars, or to heat or cool their homes, that’s a level that consumers have started to push back a bit, and we’ve seen demand plummet in the past,” said Ryan Lance, CEO. of ConocoPhillips, reported March 8 on Bloomberg TV. “People are starting to retain and change their behavior.”

Gary Hamilton, owner of an independent trucking company in Frankford, Missouri, plans to suspend operations until costs drop. Diesel there averages $4.67 a gallon, according to AAA, and if prices climb above $5.25, that’s good enough.

Part of the problem is that it doesn’t set its own prices; the agri-food companies for which it transports do so. If he asks for higher rates as fuel prices rise, they’ll “just call the next guy,” he said.

“Fuel is killing us,” Hamilton said. “It would be cheaper for us to park our trucks and possibly lay off employees than to just carry on.”

Like gasoline, the demand for groceries in developed countries tends not to change much with price. Buyers can change what they buy, ditching more expensive items for cheaper substitutes, but they still have to buy.

Still, restaurants are finding rising prices a stumbling block as they try to revive business after Covid. Gus Kassimis, owner of New York-based Gemini Diner, said customers were ordering fewer steaks and seafood, so he reduced his purchases from vendors by about 10%. Gemini raised menu prices once and is about to do so again.

“People are more careful about what they spend,” Kassimis said. “I don’t know how many more consumers are willing to take.” Bloomberg News



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