Citadel Global Weekly Wrap: Power outages, a global threat

By Bianca Botes, Director Citadel Global

The challenges of South African utility company, Eskom, has been apparent for a number of years now, with little light at the end of the tunnel in the short to medium term. South Africa however is not the only country facing electricity supply concerns.

Power outages: A global threat

According to research firm, IHS Markit, major power outages impacted at least 350 million people – more than 4% of the global population – in 2021, as new power supply challenges have emerged on top of the more traditional ones. Some of the largest power supply disruptions included regions that have had relatively reliable supply, including rolling blackouts and power rationing in China and the winter-storm Uri power crisis in Texas.

While other regions impacted are those with existing power problems, like the nationwide blackout in Pakistan and rolling blackouts in Sri Lanka. The IHS Markit report, Are we entering an age of increasing power supply disruptions, notes extreme weather conditions and changes in the energy sector as two of the newer reasons for power outages. However, in certain parts of the world, these are only adding to existing troubles.

Russia’s invasion of Ukraine, and the unprecedented economic sanctions that followed, have thrown the global energy market into chaos, with top consumers scrambling to find alternative supplies to replace Russian coal. Markets, however, were tight even before the Russian invasion of Ukraine, as the energy crisis and soaring natural gas prices in Europe and Asia were already a major point of concern.

This week saw South Africa thrown into darkness, as Eskom implemented stage 4 loadshedding, yet again. The country’s energy crisis comes as aging infrastructure, a lack of proper maintenance, and corruption scandals have caught up with the electricity giant. The electricity crisis remains one of the biggest threats to the country’s growth and ability to attract foreign investments. Now steps to enhance electricity supply in the country are topping government agendas.

South Africa, though, was not the only country left in the dark this week. India faced daily eight-hour power outages, on the back of scorching temperatures and lack of coal supply. The rolling blackouts created new concerns around a potential power crisis that could derail Asia’s third-biggest economy. India, like South Africa, faces numerous infrastructure constraints that prohibit the country from navigating the coal crunch during times of increased demand. The pressure has been further exacerbated by the reopening of the Indian economy following the COVID-19 pandemic.

While many countries are looking for alternative energy sources, the capital outlay required to transition away from conventional coal-based electricity is often a big ask from developing countries, which already face numerous social and economic constraints that require a large portion of their budget allocation. The electricity dilemma is one that is, and needs to be, viewed in a serious light, as the future of economic growth hinges on the ability to keep the lights on and equipment operating.

Data in a nutshell

The Chinese economy expanded 4.8% year-on-year in the first quarter of 2022, above market expectations of 4.4% and faster than a 4% growth in the previous period. However, the risk of a sharp slowdown in the coming months has been heightened, amid widespread COVID-19 lockdowns, a prolonged downturn in the property sector, and uncertainty from the war in Ukraine. Additional data released, based on March activity, indicated that Chinese retail sales fell 3.5% year-on-year, down for the first time since July 2020.

European Industrial Production increased 2% year-on-year in February, the biggest annual gain in five months and compared to market forecasts of 1.5%. Annual inflation in the region was revised slightly lower to 7.4% in March from initial estimates of 7.5%. However, even after the downward adjustment, it remains the highest EU inflation rate on record, compared to 5.9% in February, as the war in Ukraine and sanctions on Russia pushed fuel and natural gas prices to record high levels. EU inflation is now more than three times above the European Central Bank’s (ECB’s) target of 2%. Energy costs made the highest upward contribution as prices soared 44.4%.

The annual inflation rate in South Africa rose to 5.9% in March, up from 5.7% in the previous month and slightly below market expectations of 6%. This marks the eleventh consecutive month in which annual inflation has been higher than the midpoint of the South African Reserve Bank’s target range of between 3% and 6%. Upward pressure came predominantly from prices of transportation, food and non-alcoholic beverages, housing and utilities, and miscellaneous goods and services. The annual core inflation, which excludes prices of food, non-alcoholic beverages, and fuel and energy, accelerated to 3.8% in March, its highest level since February 2020.

All eyes on earnings

United States (US) futures gained nearly 1% on Thursday, bolstered by strong quarterly corporate results. Electric vehicle manufacturer and clean energy company, Tesla reported better-than-expected results, United Airlines stated that it expects to return to profit in 2022, cigarette manufacturer, Philip Morris International, topped forecasts on both earnings and revenues. Earnings per share (EPS) from NextEra Energy, AT&T, Blackstone and American Airlines also beat expectations. Traders also turned their attentions to the appearance of US Federal Reserve (Fed) Chair, Jerome Powell, at the Volcker Alliance and Penn Institute for Urban Research Special Briefing and the International Monetary Fund debate on the global economy for further clues on the Fed’s next steps and outlook for inflation and interest rate hikes.

The FTSE 100 traded almost flat on Thursday, underperforming its European peers, as investors digested newly released corporate earnings, amid headwinds from expectations of an aggressive tightening of monetary policy by major central banks and inflation woes. 

On the earnings front, mining giant, Anglo American, joined peers in announcing a weak start to 2022, with production in the first quarter down 10% over the previous year, citing COVID-19 related absenteeism and heavy rainfall in production sites, as well as lowering its full-year outlook on higher costs. London-listed, Chilean mining multinational, Antofagasta, said copper output fell in the first quarter, as expected, and added that 2022 capital expenditure is expected to reach $1.9 billion. Anglo American fell 6.2%, while its Chilean peer slumped 8.8%.

European stock markets traded widely higher on Thursday, with the DAX showing gains of 0.5% and the CAC 40 leading gains with a 0.8% rise. Corporate results for the session included, Swiss food and beverages multinational, Nestlé, reporting a 5.4% increase in first quarter sales, reflecting organic growth of 6.7% in developed markets and 8.8% in emerging markets, and confirmed its full-year 2022 earnings expectations to include a 5% rise in organic-foods sales growth.

The South African JSE FTSE All-Share Index was down 0.6% on Thursday, as losses in mining and tech stocks more than offset gains in financials. In particular, mining heavyweight, Kumba Iron Ore, plunged about 8%, after the company released a gloomy quarterly production and sales report and announced the adjustment of its outlook for full-year 2022. At the same time, mining giant Anglo American said heavy rain in South Africa and Brazil, along with COVID-19 and other operational challenges, resulted in a 10% production fall in its first quarter to the end of March. On the domestic front, concerns persisted over the impact of power cuts and the devastating KwaZulu-Natal floods on the country’s outlook.

Coal prices soar to four-week high

Newcastle Coal futures, the benchmark for top consuming region Asia, moved to levels not seen in almost a month, to around the $330-per-tonne mark, supported by continued robust demand against a tightening market backdrop. Still, soaring domestic production from top consumer, China, poses a downside risk to prices. Chinese coal output surged 15% year-on-year to 396 million tonnes in March, while daily production hit a record after Beijing pressured state-owned producers to increase activity to ensure energy security. China confirmed the addition of an extra 300 million tons of coal mining capacity this year.

Brent Crude futures climbed 1% toward $108 per barrel on Thursday but remained down for the week as volatility in oil markets is expected to continue, due to several market moving events. Investors remained wary as the EU weighs a ban on Russian oil for its invasion of Ukraine and evaluates ways to offset potential supply shortfalls as a result. The oil market also remains tight with the Organisation of the Petroleum Export Countries (OPEC) members struggling to meet their production targets and with US crude inventories down sharply last week. Libya, an OPEC member, said Wednesday that it was losing more than 550,000 barrels per day of oil output due to blockades at major fields and export terminals. Meanwhile, the demand outlook from China continues to weigh on the market, as the world’s biggest importer slowly eases strict COVID-19 restrictions that have hit manufacturing activity and global supply chains.

Gold prices weakened to below $1 940 a fine ounce on Thursday, its lowest in two weeks as a rebound in US Treasury yields dampened bullion’s safe-haven demand, stemming from the Ukraine crisis and its potential impact on the global economy. 

Treasury yields have edged higher as investors prepared for the Fed to aggressively raise interest rates to bring decades-high inflation under control. The dollar also gained slightly after dropping in the previous session, making gold less attractive for other currency holders.

Euro claws its way back to two-week high

The euro rose as much as 0.7% to above $1.0935 on Thursday, the highest level in nearly two weeks, propelled by growing bets for an early ECB interest rate hike and optimism about French President, Emmanuel Macron’s, re-election. ECB Governing Council member, Martins Kazaks and Bundesbank President, Joachim Nagel, said the ECB may raise interest rates in July and Belgian Central Bank Governor, Pierre Wunsch, said policy rates could turn positive this year. Money markets are now pricing in a 20 basis point rise from the ECB by July, and more than 70 basis points of cumulative increases by the end of 2022.

The British pound hovered around $1.30, close to a 17-month low of $1.297 reached on 13 April as high inflation pressures, arising from soaring energy prices, are hurting households’ purchasing power and squeezing their finances. Markets expect the Bank of England to raise rates to 1% during the meeting on 5 May and that we will see a further 140 basis points of hikes by year-end.

The South African rand was trading around 15.20/$ on Thursday, its weakest level since 15 March, as the return of severe power cuts and devastating floods in KwaZulu-Natal and the Eastern Cape raised concerns over the country’s economic outlook. This comes after a stellar performance by the rand over recent weeks, due to soaring commodity prices and a positive trade balance.

The rand is trading at R15.52/$ R16.83/€ and R20.16/£.

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