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A world that’s more expensive is starting to destroy demand

Global food prices set a record last month, according to the United Nations.
A vegetable vendor hands change back to a customer at the Central de Abastos Market in Mexico City. Image: Bloomberg

Prices for some of the world’s most pivotal products – foods, fuels, plastics, metals – are spiking beyond what many buyers can afford. That’s forcing consumers to cut back and, if the trend grows, may tip economies already buffeted by pandemic and war back into recession.

The phenomenon is happening in ways large and small. Soaring natural gas prices in China force ceramic factories burning the fuel to halve their operations. A Missouri trucking company debates suspending operations because it can’t fully recoup rising diesel costs from customers. European steel mills using electric arc furnaces scale back production as power costs soar, making the metal even more expensive.
Global food prices set a record last month, according to the United Nations, as Russia’s invasion of Ukraine disrupted shipments from the countries that, together, supply one-quarter of the world’s grain and much of its cooking oil.
More-expensive food may be frustrating to the middle class, but it’s devastating to communities trying to claw their way out of poverty. For some, “demand destruction” will be a bloodless way to say “hunger.”
In the developed world, the squeeze between higher energy and food costs could force households to cut discretionary spending – evenings out, vacations, the latest iPhone or PlayStation.
China’s decision to put its top steelmaking hub under Covid-19 lockdown could limit supply and push up prices for big-ticket items like home appliances and cars. Electric vehicles from Tesla Inc, Volkswagen AG and General Motors may be the future of transportation, except the lithium in their batteries is almost 500% more expensive than a year ago.

“Altogether, it 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 poised to cut its global growth forecast because of the war, and it sees recession risks in an increasing number of countries, managing director Kristalina Georgieva said.

The world economy is still set to expand this year, though by less than the 4.4% previously anticipated, Georgieva said in an interview with Foreign Policy magazine.

Aggravating inflation

Federal Reserve Chair Jerome Powell said Russia’s invasion of Ukraine is aggravating inflation pressures by boosting prices on food, energy and other commodities “at a time of already too high inflation.”

Curbing high inflation is a top priority, and the central bank is prepared to raise interest rates by a half 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.

Those prices may fuse with the conflict raging on the European Union’s doorstep to make businesses and households averse to all kinds of spending. The UK downgraded its economic forecast to 3.8% from 6% as consumers face the worst squeeze on living standards in at least six decades.

“There’s little doubt that inflation’s going to stay higher for longer as a result of the war in Ukraine,” said James Smith, a London-based economist for developed markets at ING. “A renewed spike in gas prices would see demand destruction become more widespread.”

The dynamic is playing out in products as ubiquitous as oil and as specialized as lithium, a key ingredient in advanced batteries for consumer electronics and plug-in cars. Battery makers in China paying five times more for the metal than a year ago have to pass some of that cost on to car companies, potentially slowing EV sales.

“The pressure is on the automakers,” said Maria Ma, an analyst at Shanghai Metals Market.

“What worries the market now is that the EV sales in the next couple months may stay flat or may not perform very well after the price adjustments.”

Fertilizer makers, who use natural gas as a raw material, started scaling back operations last year. Italy, Germany and the UK are exploring whether to burn more coal next winter to ease the need for gas in power generation. This would free up more of the fuel for industries, such as glassmakers and large steel mills, that can’t easily replace it.

But that still may not be enough, and there are contingency plans to limit some demand. Brick makers in the UK have been asked by the government to prepare for production slowdowns if the war chokes energy supplies, the industry’s lobby group said.

Higher fuel costs already are having a dramatic effect in Asia.

Foshan, a city in southern Guangdong province, started rationing gas deliveries to industrial users, and half of the province’s ceramics production lines stopped running.

American consumers and businesses are more insulated from surging fuel prices since the country doesn’t rely heavily on Russian oil or natural gas, but they’re not immune. Crude oil prices in the US soared in January and February as the threat of war grew, and retail gas prices followed, setting a nominal record of $4.31 for a gallon of regular. In Los Angeles, the average now tops $6.

Still, demand isn’t budging. It’s about 4% higher than this time last year, the US Energy Information Administration said. That may reflect how Americans cooped up by years of restrictions are hell-bent on traveling.

“That has skewed everything,” said Andrew Gross, a spokesman for Florida-based AAA. “Had there not been a pandemic, these high prices might crush demand.”

If oil prices stay high for a sustained level, demand destruction looms.

JPMorgan Chase & Co trimmed its second-quarter global demand forecast by 1.1 million barrels a day and reduced the outlook for both of the remaining quarters by about 500,000 barrels. Europe accounts for most of the cuts.

“Whether it’s motorists in filling up their cars, or heating or cooling their houses, this is a level that consumers have started to push back a little bit, and we’ve seen demand destruction in the past,” Ryan Lance, chief executive officer of ConocoPhillips, said March 8 on Bloomberg TV. “People start conserving and changing their behavior.”

Gary Hamilton, owner of an independent trucking company in Frankford, Missouri, is weighing whether 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 enough for him.

Part of the problem is he doesn’t set his own prices; the agribusinesses he hauls for do. 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’d be cheaper for us to park our trucks and potentially lay off employees than to just keep going.”

Much like gasoline, demand for groceries in the developed world tends not to change much with price. Shoppers may change what they buy – ditching pricier items for cheaper substitutes – but they still have to buy.

Yet restaurants find rising prices an obstacle as they try to rekindle business post-Covid. Gus Kassimis, owner of New York City-based Gemini Diner, said customers are ordering fewer steaks and seafood, so he’s decreased his purchases from suppliers by about 10%. Gemini boosted menu prices once and is poised to do it again.

“People are more cautious on what they spend,” Kassimis said. “I don’t know how much more consumers are willing to take.”

© 2022 Bloomberg

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This is thanks to the US’s irresponsible monetary policy.

The West has become so used to bullying smaller *irrelevant* nations with sanctions – that they have absolutely no idea what impact those sanctions have on the receiving nations. Nor in most cases do they care. As the implications for the those imposing the sanctions, on usually tiny nation states, without any cogs in the global economy – are well irrelevant and negligible.

Russia is a giant cog in the global economy. Oil, Gas, Grains, Nickel, Neon, Fertilizers etc etc – the list is endless. Regardless of your position, economically, politically or emotionally – these existing economic realities cannot just be removed from the global system overnight – without catastrophic results. Well…

In true western politician form (bull in a China shop style and completely detached from reality) – they have in my opinion, marched into a competition to see who can place the most severe nuclear sanctions on Russia – without sparing a nano second to consider the consequences to their own economies and the electorates within. In most cases, this pile on seems to very conveniently deflect attention and focus away from their own rapidly unravelling economies (pre 24th February) – in the wake of their covid policies and spiralling inflation, caused in large part by the astronomical sums of money generated out of thin air, to cover the costs of those lockdowns.

There is a lot of talk about how the sanctions will cripple Russia and for sure they will have severe effects, but like it or not, the world is inextricably linked to Russia. The EU specifically are dependent on Russian oil and gas for at least the next 5 years and more likely the next 7-10 years before alternatives can be substituted at much higher prices – the question is – how do you stop violent food and energy riots across Europe and the UK over this time? And for the politicians how do you possibly hope to remain in power in such an environment? Russia is likely to fare much better than Europe over the next 5 years if they try to enforce all sanctions – i see some EU ministers already backing down.

Russia and Ukraine are referred to as the bread basket of Europe and western Asia and quite rightly so. Most countries hold reasonable stock piles of strategic grains in the event of droughts/ floods/ wars etc – however, Ukraine will start to plant soon and even if yields are down only 25% (some forecasts are showing yields to drop 50%) – it will tip the world more into a sovereign hording defensive mode – where exports of critical and strategic commodities are banned – this is essential for the politicians to stay in power and feed their citizens… we have not seen the real 2nd/3rd/4th… order effects of these attempted sanctions yet – we have witnessed the knee jerk so far…

America might be willing to fight this proxy war but do their “allies” understand exactly what it means – do the American electorate? How is the rest of the world on this score? It would seem not quite as keen as Boris, Biden and Ursula. These leaders represent about 1 billion people. India does certainly not agree with the extreme levels of (MAD) sanctions that have been implemented – they represent 1.3 Billion people. Africa in large – including our own RSA do not back such extreme sanctions either – that is another 1.3 billion people – with a lot more to lose than the EU or USA, after already taking a disproportionate hiding from following the EU and USA covid guidance. Last but not least China has taken a very hostile anti USA/EU approach and is actually bypassing the sanctions as will many others – another 1.4 billion people. I have not even included the OPEC+ countries but they are also naturally all opposed to these nuclear sanctions – with the Arab spring still fresh in their memories who can blame them.

Maybe these 4 billion people would like to have seen a more measured, staged approach to sanctions – what leverage is the west now left with? Heavy sanctions could have been imposed with some left off the table – as a stick and carrot approach. One sanction that should never have been used though was the confiscation of reserves – that made every country on the planet – friend or foe of Russia – sit bolt upright and start planning – for if they did it to Russia today they will do it to you tomorrow… or so the saying goes.

It would seem that we have at face value 1 billion people for extreme sanctions and 4 billion at the very least that are sceptical of same and the motives behind those trying to enforce them. Demand destruction is very real and will happen, ironically to things like Tesla, with Lithium up 500% in a couple of months – but demand destruction is not possible when it comes to hunger is it – without death.

Once again careful what you wish for. Russia and the USA (largely) are energy and food independent – most of the rest of the world is not.

No

Russian and Ukranian wheat is material but global maize rice and soya dwarf it fir human and animal feed.

Small reductions at the margin can and do have significant impacts on prices – the reductions of exports from Ukraine and Russia onto world markets are not likely to be small, they are also not limited to wheat and oil seeds.

In a perfect world food substitutions take place and always have – the price of animal protein is something i have always watched. Of course there will be a certain uptake of alternate food sources in rice, corn and soya – i do not deny this but the prices are likely to be eye watering as we look out a year or 2.

Food substitution also assumes efficient and effective global supply chains – they have been anything but and were still deteriorating from the pandemic lockdowns before the 24th February – choke points, chronic delays and severe vessel imbalances are a reality. China is once again playing havoc with supply chains – Shanghai being the latest large main city to now institute rolling lockdowns for testing. All of this has significant knock on effects down the road 6-24mths out.

My comments are personal opinion and observation. The MSM continues to down play the likely very significant and lasting impact, that these sanctions will have on the rest of the world. Never underestimate the ability of politicians to put a spanner in the works (Obama said something similar in a more colourful way) – with attempted price caps and rationing of all sorts – as well as protectionist policies globally that will seek to protect domestic markets – maybe not as much rice, corn or soya will be as readily available or forthcoming as some predict over the next year or two.

I seek only to try and understand current global economic trends in light of what has happened – and position myself and my family to make the most out of them. What disadvantage do i have, in preparing for a worst case scenario and then being met with one less severe – i look at such an outcome as welcome.

End of comments.

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