The race to net-zero

The European Commission recently proposed a Green Deal Industrial Plan. Within this, the Net-Zero Industry Act, will set a target for 40% of the EU’s clean technology to be built inside the eurozone by 2030. These include: solar, wind, batteries, energy storage and heat pumps – all low carbon technology manufacturing. The EU wants to strengthen the resilience and competitiveness of its net-zero technologies manufacturing.

Concerns about relations between the US and China has seen an acceleration in the on-shoring of manufacturing of key components by many western companies. Russia’s invasion of Ukraine and security of global supply chains has added increased momentum with concerns about Taiwan – the world’s leading producer of semi-conductor chips. In addition, while China is still the world’s leading consumer of fossil fuels it is also the leader in many renewable technologies. China is estimated to account for over 40% of wind power manufacturing, 25% of battery output and 25% of solar power systems. More significantly, it produces 31% of the world’s refined cobalt and over 40% of its lithium.

One of the key drivers of the EU’s rapid shift has been President Joe Biden’s $369bn Inflation Reduction Act. The fear across Europe is that developers of renewable technology could be lured to the US by the huge green stimulus package. At the same time, European car manufacturers are concerned that they will be placed at a considerable competitive disadvantage in the US market as Americans who buy a US manufactured electric car will receive a tax credit of $7,500.

The European Commission has also announced the Critical Raw Materials Act aimed at cutting Europe’s dependence on imports, often from third country suppliers, including China for critical rare earth minerals. These are key components to many renewable technologies from electric vehicles to wind power. The move has been driven by the simple fact that Europe is facing two existential challenges- climate change and the escalating global rivalry between the US and China.  Some €250bn of existing EU funding will be made available to support the net-zero goal.

Besides an arms and technology race between the US and China, it appears the start gun has been fired in the global clean tech race. The UK government is attempting to participate in this race and the UK does have leading technologies such as offshore wind power, fuel cells and small modular nuclear reactors.  However, given UK government finances and political disruption and the economic clout of the US,  China and EU, will the UK be able to keep up with the pack as the pace picks up in the global clean tech race?

 

What have we been watching?  

 

Another week and another game of ‘whack- a- mole’ in the banking sector or should that be ‘einen maulwurf schlagen?’ Deutsche Bank, one of Europe’s biggest banks saw its shares fall -making a loss of over 25% in value so far this month. The shares slid after the cost of insuring against its default spiked. Germany’s Chancellor Olaf Scholz was forced to defend Deutsche Bank but markets have viewed the bank in a similar light to Credit Suisse with years of pain and restructuring. Markets are likely to remain volatile until we stop asking which bank is next?  

Not surprisingly, given the banking confidence crisis, markets focused upon central banks and interest rate policy. Would it be a case of ‘bad news is good news’ with central banks pausing or slowing the pace of rate hikes? Both the US Federal Reserve (Fed) and Bank of England (BoE) had key decisions to make last week. In the event, the Fed hiked by 0.25% and the BoE likewise with a 0.25% increase. Central bankers are walking the tightrope once again between inflation and financial stability. The debate now is whether the rate rise cycle is finished. Markets appear to believe that it is. Investor sentiment was also supported by news that the US is believed to be considering ways to guarantee all bank deposits as a means of preventing a run on some of the smaller regional American banks. Treasury Secretary Janet Yellen pledged further assistance for depositors if needed but said that the US is not considering plans to introduce blanket deposit insurance. Given this, smaller US regional banks may not be out of the woods yet.

The ‘shotgun’ marriage of Credit Suisse and UBS has opened a ‘can of worms’ with the Swiss government coming under fire from bond holders and international regulators. The deal involved the write down of $17bn of Additional Tier 1 (AT1) bonds, often called ‘contingent convertibles’ or ‘Cocos.’ The Bank of England said AT1 bonds should rank ahead of equities -so shareholders would suffer pain ahead of bond holders. AT1 bonds developed following the 2008 financial crisis to provide another layer of regulatory asset cover for banks. The Credit Suisse deal undermines trust in ‘Cocos’ as equity shareholders were not written down to zero and could now become a legal issue about market confidence and whether investors are treated fairly.

In the UK, public sector borrowing was much higher than expected in February at £16.7bn and the highest level since records started in 1993, reflecting government energy support for households and businesses. February’s inflation came in higher than expected with CPI at 10.4% with food prices the culprit. However, core inflation also edged up to 6.2%. The Bank of England hiked interest rates by 0.25% to 4.25% -the eleventh consecutive increase and the highest level in 14-years. The committee voted 7-2 for the hike. Besides the surprise shift in inflation in February, a key argument for increasing the interest rate was a more optimistic assessment of economic prospects. The BoE now expects the UK economy and employment to increase slightly in the second quarter. Interest rate futures now appear split 50/50 over whether there is a further 0.25% rate hike next month. Sterling edged up to $1.23.

In the US, the Federal Reserve (Fed) raised interest rates by 0.25% to a range of 4.75%-5% with no change in the ‘dot plot’ forward guidance with 5.1% by the end of 2023 and 4.3% by the end of 2024. Fed Chair Jerome Powell said the ‘US banking system is sound and resilient but recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring and inflation.’ The Fed intends to continue with QT (Quantitative Tightening). The US economic growth outlook was trimmed to 0.4% for 2023 and from 1.6% to 1.2% for 2024. US interest rate futures have no more rate rises this year and are suggesting a reversal is possible after mid-2024.

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Brent oil rallied to $75 as an element of calm returned to markets and in addition Russia stated its intention to extend the temporary 500,000 barrels-a-day cut in production until June 2023.

Finally, talking of the clean tech race, it appears electric cars might not be so green after all. Difficulties in repairing and safety testing of batteries is causing insurance companies to write-off electric cars even after minor accidents and collisions. On top of this the UK does not yet have an EV battery recycling facility so battery packs are piling up in scrapyards across the country. For example, the Tesla Y model has a new structural battery pack which has been described by experts as having ‘zero repairability.’

 

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