Volatility in European electricity markets stemming from EU and UK sanctions on Russian energy, imposed in retaliation for Russia’s invasion of Ukraine in February, may soon cool off, but only after taking over a chunk of the economy. of the continent.
On Monday, UK Prime Minister Liz Truss announced plans to cap household energy bills at the equivalent of $2,300 a year. Meanwhile, German Chancellor Olaf Scholz unveiled a €65 billion aid package to ease the pain of quadrupling energy prices in his country.
These crisis measures are intended to reduce the economic damage caused by a continent-wide natural gas supply shortage following the cancellation of Nord Stream 2 and Russia’s shutdown of Nord Stream 1. Historically high energy prices could undermine the ability of consumers to spend money on other goods and services. dragging down economic growth.
But last week, Goldman Sachs analyst Alberto Gandolfi wrote that his team did not believe the scope of the contemplated price caps was enough to avert a 1970s-style energy crisis.
“We see scope for the introduction of price caps on power generation, which we estimate could save Europe some €650bn a year,” Gandolfi wrote in a note to a client on Saturday. “However, price caps would not fully solve the affordability problem: the increase in energy bills would still be +1.3 trillion euros, or around 10% of GDP, we estimate.”
Europe’s economy was relatively healthy until the energy crisis, with GDP growth of 3.9% year-on-year (yoy) or 0.6% quarter-on-quarter in the second quarter of 2022. But now the eurozone manufacturing PMI has fallen to 49.6, and the S&P Germany Global Composite PMI for August was revised down to 46.9.
The slowdown in economic growth in the EU has been exacerbated by high inflation, which reached 9.7% year-on-year in August. That has put a whopping 75 basis point interest rate hike on the table when European Central Bank President Christine Lagarde meets with her colleagues in Jackson Hole, Wyoming, this week.
Ocean container rates from Asia to Europe have already fallen sharply this year, and have fallen especially sharply since early August.
The Freightos Baltic Daily spot rate from China to Northern Europe, shown in white in the chart above, has fallen 24% since July 3, from $10,397.55 per 40-foot equivalent unit to $7,869. $10. Drewry’s spot rate from Shanghai to Rotterdam, Netherlands, shown in green, fell 18% over the same period, from $9,280 per FEU to $7,583.
Those recent cuts in ocean container rates came after the market had already weakened for months; Container rates in Asia-Europe trade peaked last October. The sudden and violent reduction in spot rates may indicate that incremental spending on goods is a long way off in Europe, and ocean carriers are starting to optimize for asset utilization rather than EBIT per shipment.
If steamship lines follow their well-established playbook, their response to weak demand could be to cut capacity, swap ships in major services with smaller ships, and deploy those assets elsewhere. The problem is that they may have nowhere to go: Trans-Pacific Ocean container spot rates are also rock-bottom due to declining demand.
Upstream ocean container booking data from FreightWaves Container Atlas reveals that European exports will also decline markedly. Shipping container bookings leaving Rotterdam for all world ports have been under downward pressure since July:
The maritime booking volume index from Rotterdam to all ports in the world has decreased by 25.4% since July 5, a strong downward trend, although the index remains at a high level compared to cargo flows prior to the pandemic. Lead times from Rotterdam are just over 10 days, so the trend lines above reflect booking activity approximately 1.5 weeks before cargo physically moves on a ship.
The widely cited European road freight rates benchmark is at all-time highs but it appears to include fuel costs (diesel in the EU is up 69% since January). The Russian invasion of Ukraine has restricted the supply of truck drivers in Germany, where immigrants make up 24% of the driver workforce, as Ukrainian men returned home to fight. European trucking analysts are betting that weakening economic growth will prevent rates from rising further.
“The effect of rising costs in 2022 is now very apparent with trucking rates across the European continent hitting new all-time highs,” wrote Nathaniel Donaldson, economic analyst at Transportation Intelligence. “Initial fuel price increases following the invasion of Ukraine have maintained and produced a much more costly environment for European road carriers, while industrial action and worsening driver shortages keep capacity constrained. A number of indicators point to a sharp slowdown in consumption and production, which will ease further increases as high costs keep rates elevated.”
The EU energy crisis has already affected Europe’s consumption and production, weakening demand for transport capacity inside, outside and within the region. The recently announced fiscal relief measures are likely not large enough to prevent a sharp economic slowdown, with knock-on effects for global shipping markets such as container shipping.