February 2023 saw supply chain struggles continue across Asia and Europe due to dwindling energy supplies, ongoing effects of COVID-19, high inflation, and more. This blog looks at the latest impacts of the energy crisis hitting the EU and Asia, including the industries affected, the outlook for global markets, and the overall supply chain impact.
Asia Energy Crisis
Currently, both China and Pakistan are suffering a major energy crunch from dwindling energy supplies and high global gas prices. China is one of the world’s leading importers of liquified natural gas (LNG). Pakistan is also highly dependent on imported natural gas: imported LNG accounts for a third of Pakistan’s yearly power output (Reuters).
China’s Natural Gas Shortage
Interestingly, China is facing an “artificial shortage” of LNG due to budget. While there is in fact enough natural gas to make it through until the warmer months hit, lack of budget and pricing regulations have resulted in a shortage (New York Times). This is due to the fact that China allocated more budge to zero-Covid initiatives. Compounding the problem, natural gas prices have risen due to cold weather, coupled with the effects on natural gas supplies of the Russia-Ukraine war.
Additionally, pricing regulations state that distributors may only pass extra costs to industrial and business users, leading wholesale gas prices to be up three times more than residential gas prices. To prevent future shortages, China plans to build more natural gas storage sites, and, as a preemptive measure, since the start of the Russia-Ukraine war, China has been stockpiling LNG imports (Bloomberg).
Pakistan Faces Blackouts Amid Shortage
Pakistan has been enduring an energy shortage for several months due to dwindling energy supplies, long-term contracts, and rising energy prices. On January 23rd, Pakistan faced a massive blackout that affected over 200M people as a result of the shortage. While in 2022 Pakistan received oil supplies from Qatar, Nigeria, Egypt, and Italy, this year supplies from Nigeria and Qatar are set to fall. Consider this: in January 2022, globally Qatar exported 7.2M tons and Nigeria exported 1.5M tons; this January Qatar exported only 5.7M tons and Nigeria only 790,000 ton.
Pakistan also relies on a long-term contract with Italy’s natural gas company, Eni. Per the contract, Eni will deliver one LNG cargo per month between 2017 and 2032. However, on January 26th, Eni warned it would not be able to deliver the LNG cargo to Pakistan because of a force majeure incident. Going forward, Pakistan plans to increase LNG supplies from Egypt to soften the impact of the shortages. The Damietta terminal in Egypt has already loaded 326,000 tons of LNG in January, up from roughly 200,000 tons in 2022 (Argus). Pakistan also aims to decrease dependence on LNG by shifting to alternative fuels in June 2022.
Learn more about Asia’s energy crisis in Resilinc’s special report.
Europe Energy Crisis
On February 5th, 2023, EU banned Russian refined product imports—severing ties with its biggest external diesel supplier. Europe has a 40% reliance on Russian refined product imports and uses nearly 500,000 barrels of Russian diesel every day.
As a result of the ban, diesel fuel and other refined oil product prices have remained elevated, creating an energy shortage in Europe which could impact diesel dependent industries such as agriculture, mining, and construction. The trickledown effect from this could be huge. As companies wait to receive fuel, this could lead to force majeure and delayed production. In agriculture, these wait times could result in less crops and less food. To combat the energy loss, the US and India have increased shipments in recent weeks.
The energy shortage has lead to closed factories, cuts to production, and layoffs. Liberty Steel, that employs 35,000 workers at 200 locations globally, plans to close three factories, due to high energy costs, weak market conditions, and lack of funding, putting 440 jobs at risk (BBC). As of February 22, 2023, another company, British Steel has announced 260 job losses (The Guardian).
Ahead of the EU oil ban, Russia started diverting petroleum products to North Africa and the Eastern Mediterranean. Now, this has displaced Asian supply, creating a diesel glut in Asia that is expected to last a few months (OilPrice.com). Analysts told Reuters, this glut will weigh on spot prices and premiums for transport and industrial fuel in Asia.
To move away from reliance on Russia, Europe is set to decrease usage of fossil fuels: 2023 usage for power generation is set to drop by 20% — the steepest drop on record for Europe (Bloomberg). Alternative energy sources such as wind and solar energy will take precedence. Nuclear generation, however, is expected to remain relatively flat due to the phase out of German reactors while hydropower is expected to increase by 40% (Ember).
Learn more about Europe’s energy crisis in this Resilinc Special Report.
Outlook on the Global Energy Crisis
Looking to the future, LNG prices are expected to rise as global supplies continue to decline. In response, a wide-spread shift toward cleaner energy is projected. While higher operational costs are expected across all industries, transportation & logistics, aerospace & defense, energy, agriculture, mining and construction are expected to see unique, industry-specific impacts (more on that below).
1) Prices on the Rise, As Supplies Decline
Gas shortages are expected to continue through 2026 as energy supplies decline. Diesel prices are projected to spike in 2023, averaging $38/barrel in H1 2023. As China’s economy reopens, diesel demand will go up, resulting in drastic price increases. As a result, countries will continue stockpiling materials due to high costs.
2) Move to Cleaner Energy
Pakistan and Europe are both planning a shift towards alternative fuels, as part of a larger global shift towards cleaner energy. The EU has already increased solar and wind power as well as a short-term boost in coal to end reliance on Russian oil and gas as fast as possible.
As other countries make the change to cleaner energy, demand for key materials such as cobalt, lithium, copper, and other rare materials for clean energy production like solar panels and batteries are expected to increase. As these rare earth elements (RAEs) will be in high demand, costs for the materials will also increase. Countries are already taking note. The US recently put together a task force to research feasibility of a Pan-American lithium-ion battery supply chain.
3) Industry-Specific Impacts
Higher operational costs are expected across all industries as energy prices continue to remain high.
- Transportation & Logistics should expect longer lead times, increased shipping costs, and increased labor costs.
- Aerospace & Defense will see higher costs for jet fuel.
- Energy will face skilled labor shortages specifically for electrical and mechanical engineers, electricians, and supply chain management roles, as demand for alternative energy sources increases.
Agriculture will see an impact to costs for production and materials (like fertilizer and transportation).
- Mining & Construction should expect steel production to be impacted due to high energy costs, since steel is an energy intensive material. Insolvencies are also expected to rise and were already up 63% in 2022 (BusinessPartnerMagazine).
For a more in-depth look at the energy crises, check out Resilinc’s special reports: Latest on Europe’s Energy Crisis – Top EU Actions and Potential Market Outlook and How Bad Is the Energy Crisis in Asia – Expert Analysis of The Impacted Countries.