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The Macro Brief – Supply chains, energy outlook, ESG sentiment
28 Plays1 year ago
James Pomeroy explains why there has been a remarkable turnaround in supply chains, Charles Swabey examines just how reliant the global economy is on fossil fuels and Wai-Shin Chan assesses the growing anti-ESG sentiment in the US. Disclaimer: https://www.research.hsbc.com/R/51/fCGJ7Wh Stay connected and access free to view reports and videos from HSBC Global Research follow us on LinkedIn https://www.linkedin.com/feed/hashtag/hsbcresearch/ or click here: https://www.gbm.hsbc.com/insights/global-research.
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Transcript
Introduction to HSBC Global Viewpoint
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Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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Make sure you're subscribed to stay up to date with new episodes.
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Thanks for listening, and now onto today's show.
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The following podcast is recorded on the 13th of July 2023 by HSBC Global Research.
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All the disclosures and disclaimers associated with it must be viewed on the link attached to your media player.
Supply Chain Recovery
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Hello and welcome to the Macrobrief.
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I'm Peter Stegall in London.
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And I'm Aline Van Dyne in New York.
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Coming up this week, supply chain pressures have been a drag on the global economy in recent years, but there's been a remarkable turnaround over the past few months.
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We find out what's going on.
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As governments across the globe step up efforts to reduce carbon emissions, just how reliant are we on fossil fuels?
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And following the results of our latest ESG sentiment survey, we assess a growing anti-ESG feeling in the United States.
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Shortly after the COVID-19 pandemic began, the world experienced a supply chain shock.
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Shipping congestion and delivery delays led to shortages of products ranging from car parts to food, helping to drive global goods prices higher.
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But how are supply chains faring today?
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James Pomeroy, global economist, has been looking at the latest data.
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James, welcome.
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Thanks for having me.
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So global supply chains were under the most pressure they've ever been at the start of 2022.
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Things are looking a bit different now, aren't they?
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They certainly are.
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If you go back 18 months, we were in a world where there were long, long delays at ports in terms of boats that couldn't get in.
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You had huge amounts of congestion within global supply chains.
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So businesses missing key components.
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They weren't able to get their things out of the door.
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It was a huge problem.
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And we had shipping rates that were six, seven, 10 times what they were before the pandemic.
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But over the last 18 months, all of those things have alleviated quite considerably.
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We're now looking at a widespread set of data on supply chains that look as good as they ever have and shipping rates that are down right the way back in many cases below pre-pandemic levels.
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So some clear signs that a lot of those challenges that we faced have now completely gone away.
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So what exactly has underpinned that?
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Is it just getting back to normal or is it something else?
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There's an element of that.
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We did see some good policies put in place, particularly at some key ports around the world last year to try and get containers back moving and get them all in the right places.
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But broadly, there's a story here of the enormous amount of demand for goods during the height of the pandemic had drying up a lot.
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So we still saw a little bit of goods demand last year.
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and demand for goods has been reasonably decent, but businesses have been able to get that inventory and it's been slowly sort of accumulating and accumulating just as that growth in terms of demand for stuff has slowed down.
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So we're now at a situation in 2023 where more and more businesses are sat on elevated levels of stocks
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demand is lower, and therefore those businesses don't need to order in as many new items.
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And that drop in new orders has pulled down that global trade data, it's pulled down manufacturing PMIs, but also it's allowed supply chains to clear up from the number of challenges that we faced last year.
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So it's sort of bad news that is happening.
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It's weak global demand for goods, but it has helped to clear up a lot of the challenges in supply chains.
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about looking ahead?
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Do you think there is a risk of further disruption or is this kind of stability here to stay?
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A lot will depend on the goods demand side of things.
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There's a pretty good probability later this year that businesses have ran out some of their inventories and they start to order new items or you see some sort of spikes in demand around ordering for holiday seasons.
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Those sorts of things could lead to a little bit more congestion
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But essentially, the big existential challenges, which were that containers were in the wrong places or that we didn't have enough supply to meet rampant demand for goods, that's gone away.
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So unless we see some big supply shocks and sort of external shock or much, much stronger
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demand situation in terms of goods, it's hard to see how we get back close to where we were.
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It's not to say that these shipping rates are going to stay below pre-pandemic levels for a long, long time.
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They will probably edge back up a little bit in the months and quarters to come.
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But that very worst case scenario we had at the beginning of last year looks to be well behind us now.
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And James, just a bigger picture look, what is the impact of all this on global inflation and price pressures?
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Well, it's already having a pretty big impact in the US.
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If you look at durable goods prices, if you strip out cars, those durable goods prices have been falling or hardly rising at all for most of the last six or nine months.
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And as the supply chain pressures have eased, businesses can get that stuff and it brings you back into a
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competitive environment.
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And this impacts inflation two ways.
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One is that competitive environment coming back.
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So if you've got stuff back in 2020, 2021, you could sell it for whatever you liked, because there was no one else able to get enough stock.
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Whereas now you've got an ample supply and weaker demand and that in itself should pull down goods inflation.
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But also these costs for businesses have completely collapsed.
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If you look at the cost of freight alone, that's down 90-95% since their peaks.
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And so if you're a business who's shipping things across the world, and once that stuff arrives on your shelves or in your factory, the cost of that good is now going to be considerably lower than it was a year ago.
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And that too should help to alleviate some of those price pressures.
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So we're seeing really clear signs of this impacting US inflation data already.
Energy Transition Focus
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The question mark is going to be whether it starts to ripple around the rest of the global economy more forcefully in the next year or so.
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James, thanks so much.
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Very interesting and look forward to further updates.
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Thank you very much.
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Many countries around the world are committed to a net zero future and cutting carbon emissions from energy production is key to achieving that goal.
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But just how fast is the energy transition taking place?
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Analyst Charles Swaby has just published a chart book on precisely that topic, focusing on Europe, the Middle East, Africa and the US.
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He joins us now.
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Charles, welcome to the podcast.
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Glad to be here.
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So Charles, policymakers talk a lot about the need for more renewable energy, but how far does decarbonisation of the energy system still have to go?
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Well, there's still plenty happening on the policy front, whether that's the Inflation Reduction Act in the US or the repower EU reforms happening in Europe.
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And this is all positive for investment renewables and in low carbon forms of power.
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However, the scale of the challenge is huge.
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The recently published statistical review of world energy came out a couple of weeks ago and it was a stark reminder that fossil fuels are very much dominant across the energy system.
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If we look at primary energy demand, which is taking in power and transport and it looks across the entire energy landscape, fossil fuels make up 82% of primary energy demand.
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And in the global power sector, that's about 60%.
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So is the renewable energy supply actually growing at the moment?
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In short, yes.
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Wind and solar are growing rapidly and combined make up about 12% of global power generation.
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And this is up from about 2% in 2010.
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So the rate of growth is very, very sharp.
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And it certainly needs to be if countries are to reach their net zero targets.
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So you mentioned two technologies there, wind and solar.
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At the moment, wind supply slightly more than solar.
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Do you think it's going to stay in the lead?
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You're right that wind power makes up more than solar at the moment.
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However, the rate of growth in solar is much stronger than the wind.
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It was almost double that wind over the last decade.
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which suggests that wind stays in the top spot and numbered.
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This doesn't mean that wind is not going to be important.
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We see strong growth in both onshore and offshore wind, but at the rate of growth of solar supplies can be much stronger than that of wind.
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And you recently increased your estimates for growth in solar, didn't you?
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Why was that?
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Well, in the first half of the year, we saw exceptionally strong insulation rates in solar in pretty much every single major region.
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And we think this is set to continue.
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The main bottleneck on the supply side for the last few years has been polysilicon, which is this key component for solar modules.
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Due to a lack of polysilicon supply, module prices soared.
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This has resulted in higher project costs.
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However, what we now have is a complete reversal of that trend.
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There is a glut of polysilicon supply, which is driving down the price of modules.
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and should further support demand in the second half of the year and beyond.
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So going back to fossil fuels again, following the invasion of Ukraine, European policymakers set a goal of being free of Russian gas by 2027.
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Are they on track to achieve that?
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Well, it's pretty astounding what Europe has already achieved in this regard.
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Prior to the invasion of Ukraine, Russia used to make up around 35% of Europe's natural gas supply.
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That is now down to 5%.
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So it's already removed a significant chunk of rust and supply from the mix.
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On the supply side, Europe has made good progress in building out new forms of supply flexibility with the rollout of liquefied natural gas terminals in Germany.
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And its efforts on the supply side will also be helped by what we see as a massive glutton of LNG supply in the second half of this decade, which will make...
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liquefied natural gas much cheaper and much more available with huge products coming on the likes of Qatar in the US.
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So this gives lots of options aside from Russian gas for Europe.
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And then on the demand side, we also expect that the actual demand for natural gas in Europe to fall.
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This is partly due to higher penetration of renewables, which is eating some of that demand from the power sector.
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There's also a lot of efficiency gains in the industrial sector.
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This is partly due to the high prices we saw.
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And then there's also in the residential sector, for example, we see a lot of switching from using natural gas form of heat to other technologies such as heat pumps.
ESG Sentiment and Hydrogen Adoption
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Charles, thank you very much for speaking to us today.
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Thank you very much.
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This week, we also published the latest edition of our ESG Sentiment Survey.
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Over 300 ESG professionals took part, representing nearly $9 trillion in assets under management.
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The survey came against a backdrop of increased anti-ESG sentiment, particularly in the US.
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Wei Xin Chan is our global head of ESG research.
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He spoke to Graham McKay in Hong Kong earlier.
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Weixin Chan, Head of ESG Research, welcome to the Macrobrief.
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It's good to be back, Graham, and we're here to talk about our fifth ESG sentiment survey.
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We are indeed, which is called Pockets of Resistance.
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So let's start with that.
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Pockets of anti-ESG sentiment, where are we seeing these?
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That is very correct.
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We're seeing the anti-ESG sentiment in the United States specifically, resisting things like fund sustainability objectives, the reasons for having an ESG strategy, the approach taken to ESG and the acceptance of classification systems.
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However, I will say that that has been an influence in the US and it is isolated there.
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We haven't seen that in other regions.
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So that's very, very encouraging.
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All right.
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And what other statistics would you put at the top of the bill from this recent survey?
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What are the other headliners for you?
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I would compare it to the last survey we had, which came out sort of February, March, where the main driver of all things ESG was regulation.
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We've seen that regulation influence wane in this fifth survey across a number of different areas.
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And it's interesting because that may have arisen out of the confusion caused by
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the EU Sustainable Finance Disclosure Regulation and from corporate pushback on some of the regulations on disclosure, especially in the United States, but also elsewhere.
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So that influence of regulation beginning to wane would be a headline for us.
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Now, something that always comes up in this survey is ESG incorporation.
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Where are we in terms of that?
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Yes, that famous number out of 10.
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We are down from our February number.
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So we are now at 4.5 out of 10 and continuing that decline since the high in our October survey.
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So it's marginal, but I think it's corroborated by a slight fall in the levels of ESG understanding amongst investment professionals in our survey.
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And do we extrapolate from that that people are just becoming less inclined to integrate ESG into their investment decisions?
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Or is it because a number of them already have incorporated it, so we see that number go down because it's not going to go up in that respect?
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Yes, it could be a bit of both.
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We're finding that in Asia, as, for example, the awareness of ESG grows and they find out more about it, perhaps they realize that their understanding may not be as high as they thought it was.
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But at the same time, if we go back to those pockets of resistance in the United States, for example, we're finding that some don't want to label themselves as ESG.
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They want to label themselves as other things so that they are still conscious of what they're doing when it comes to sustainability issues.
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But the official label is not there.
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So perhaps that understanding has been confused a little given that anti-ESG sentiment.
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So very, very interesting developments there.
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Now, every time you put one of these surveys out, you have what you call a topical issue.
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What was it this time and what was the response?
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Thank you.
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Yes, good memory.
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Our topical issue this time was hydrogen.
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So we asked which sort of industries have the most promising outlook for the adoption of hydrogen.
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We gave a number of options and investors were asked to select all that apply.
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So if you're looking on a chart here, it might not add up to 100, but we found that
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chemicals has the most promising outlook.
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That's followed by transportation, followed by oil and gas, petrochemical refining.
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And so that was interesting.
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Another topical question was asked, which part of the energy sector is expected to have the best returns in the next 12 months?
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And that came out as oil and gas, closely followed by renewables.
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What's very interesting there is that
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If we split the regions up, it was the North Americans that were very into oil and gas, whereas the Europeans were heavily into renewables, as
Conclusion
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you would expect.
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So it's a lot of regional differences playing out there.
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All right.
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Well, clearly an ongoing talking point, Wei-Shin, and we will no doubt speak to you again when the next big survey comes out.
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Thank you very much again for joining us.
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Thank you for having me, Graham.
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So that's it from us.
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Thanks to James Pomeroy, Charles Swaby and Wei Xin Chan.
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And thanks to all of you for listening.
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We'll be back again next week with another edition of The Macro Brief.
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Thank you for joining us at HSBC Global Viewpoint.
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We hope you enjoyed the discussion.
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