In Morocco, the think tank Policy Center For The New South (PCNS) has just published a note analyzing the current situation under the title: “2022 balance sheet and 2023 outlook: towards price stabilization”.
This analysis signed Yves Jégourel, the note outlines the main lines of the economic and financial situation in these terms: “If the year 2021 was marked, in a situation of post-Covid economic catch-up, by the progression of the all agricultural, mineral or energy raw materials, such was not the case for 2022, characterized, on the contrary, by a great heterogeneity of trajectories.
The outbreak of war in Ukraine certainly led to a sharp increase in many basic products due to the weight of Russia, Ukraine and even Belarus in world production.
Nevertheless, it is the imposition, or not, of trade and financial sanctions against Russian exporting companies as well as the implementation of retaliatory measures by Moscow that have fundamentally determined the upward or downward trajectory of prices.
However, not everything was explained by the geopolitical situation, with the global macroeconomics regaining its rights somewhat in the second half of 2022.
The appreciation of the dollar over most of the year thus weighed on prices, as did economic and health uncertainties in China and doubts relating to the zero-Covid policy decreed by Beijing until December. While the conflict between Russia and Ukraine is likely to persist, these same variables will largely determine the face of the markets in 2023 in a depressed macroeconomic situation.
+ The differentiated effects of the war in Ukraine on the energy markets +
According to World Bank statistics, the price of the Henry Hub (the North American gas benchmark) fell from an average of $4.33 per million British thermal units (Mbtu) in January 2022 to $5.50 ( Mbtu) in December, an increase of 27% over the period. That of the Title Transfer Facility (TTF) – used as a price benchmark for continental Europe – recorded a similar increase, standing at 36.04 USD/Mbtu1 in December, against 28.26 USD/Mbtu in January.
However, these monthly values are only a pale reflection of the reality of the European gas market. Record prices were indeed reached in August, at around 70 USD/Mbtu. In daily prices, much higher values could be recorded: on August 26, the TTF futures contract for the February 2023 maturity traded on the American stock exchange of the Intercontinental Exchange (ICE) was trading around 340 EUR per megawatt-hour (MWh) – the equivalent of 100 USD/Mbtu2 – a level much higher than that observed in March, a few days after the outbreak of the war in Ukraine, at around 230 EUR/MWh (73 USD/Mbtu3 ).
Despite a collapse in December 2022 thanks to a mild winter in Europe, gas prices rose over the year but also, on an annual average, compared to 2021: +65% for the Henry Hub and + 150% for the TTF.
The reason for this explosion in gas prices in Europe is well known. Almost 40% dependent on Russian imports, Europe has had to deal with the rapid decline, or even cessation, of deliveries passing through the Yamal Europe, Brotherhood, NordStream 1 or Turkstream gas pipelines.
Despite supplies from Norway or Algeria, it logically switched to American and Qatari liquefied natural gas (LNG), to a lesser extent. Unanticipated, these purchases were made mainly on the spot market, which explains this surge in prices.
Due to the size of European demand, this has spread to almost all spot prices, with most of the LNG market nevertheless operating under multi-year contracts at indexed prices.
+ A lack of strategic vision and consultation… +
With regard to this major energy crisis, the important thing is perhaps not so much this rise in prices stricto sensu as its quasi-systemic dimension. In addition to the diffusion effect on the international LNG market mentioned above, their increase has in fact had a large impact on wholesale electricity tariffs in Europe due to the application of the “merit order” mechanism and the resulting quasi-indexation of prices.
The spot price of electricity thus reached nearly 740 EUR/MWh at the end of August and more than 1,300 EUR/MWh for certain forward prices.
In addition, the rise in gas prices was largely transferred to those of fertilizers and in particular that of urea using natural gas as the main input. Thus, still according to aggregate figures from the World Bank, the price of this fertilizer reached a record level in April 2022 at 925 USD/t.
For comparison, they had settled at USD 785/t in August 2008, at the height of what was then considered a commodity super-cycle. A net decline was nevertheless observed at the end of the year, in the wake of that of gas. Urea thus saw its price increase by 45% between 2021 and 2022, but contract by nearly 40% between January and December 2022.
Central event of the year 2022, the war in Ukraine cannot be considered as the trigger for the gas and electricity crisis.
Drawing, in Europe, its deep roots in the mechanisms of electricity price formation and in an energy transition with often political and non-economic overtones, suffering from a lack of strategic vision and consultation, the latter has effect initiated in the summer of 2021.
For example, the spot price of electricity exceeded the threshold of EUR 70/MWh in June 2021 and reached a first peak at almost EUR 400/MWh at the end of December of that same year. Europe was not the only region of the world affected, from this period, by this energy crisis, China also suffering the effects of insufficient electricity generation from renewable energies.
In a very unusual gas-to-coal switching strategy, thermal coal has also benefited greatly from the European energy crisis and its international repercussions. Due to the high cost of gas, international buyers turned to coal, which had been doomed to public scrutiny a few months earlier, contributing to the spectacular recovery in its price.
In reference free on board (FOB) Newcastle, its price indeed embarked on an upward path from autumn 2020 and hardly left it before March 2022 when it stood at more than 420 USD/t. It reached an all-time high a few months later, on 5 September, at nearly 460 USD/t, which then offered it an increase of no less than 169%. It will ultimately increase by 93% between January and December 2022, and by 150% between 2021 and 2022.”
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