Trade Alert

Monday 2 December 2019

The Federal Reserve Bank of New York concluded the US, not China, has paid the bulk of the tariffs in the trade war. Important features of the study further show that China has neither used exchange rates, nor lower prices to shield the blow to US buyers. Separately, however, to the extent that the trade war weakened economies and slowed global trade, goods prices globally have weakened in general, thus dampening the trade war’s effects on consumers everywhere, not just the US. For producers however, it’s a different story. Global trade is contracting for a fourth year in a row, as sectors from autos to commodities and other business equipment sales weaken.

China is very obviously the epicenter of weakness in global demand. The country is seeing a massive contraction in auto sales (more on that, further down in the letter) and its electricity demand, long a bellwether for its economy, is also far weaker in 2019. Indeed, global coal-fired power generation is set to fall substantially in 2019, according to a new report from Carbon Brief.

The trade war likely contributed to the loss of some GOP congressional seats in the 2018 US mid-terms. A new study from Emily Blanchard, Chad Bown, and Davin Chor suggests that 5 of the 40 house seats given up in last year’s elections were due to trade war effects. Importantly, the authors found no instances where the advent of the trade war helped, or increased support for GOP house candidates. Meanwhile, job growth in Ohio, Michigan, West Virginia and Indiana is now losing momentum.

Car commuting has plummeted in Seattle, as investments in transit and biking start to pay off. In 2010, 53% of Seattle residents commuted to work by car. This share has now fallen to 44%. The data comes from the US Census Bureau and one interesting finding is that the number two commuting mode to enjoy growth, behind transit, is walking.

Solar on the roof, a battery in the basement, and an EV in the garage: Europe starts to bundle energy transition as a service. Sonnen, the German home services energy company acquired by Royal Dutch Shell earlier this year, will make it ridiculously easy for consumers to go green. The bundle also comes with few if any upfront or backend hurdles, thus obviating the typical friction associated with comparable capital investments. Mobility forecasters have been adamant that cars-as-a-service are imminent; but, it may be that unlike petrol-powered vehicles, the EV slots in more perfectly to such a package.

The Rocky Mountain Institute has launched a new magazine of energy transition. I was fortunate to be able to contribute two articles to project: one on finance and another on energy poverty and the advent of new energy technology in developing countries. In the latter piece, Leapfrogging: A notion in need of an upgrade, I would call your attention to an important paper on the role of micro-financing, and the willingness to invest in money-saving tech upgrades. The research, by Susanna B. Berkouwer of the University of California, Berkeley, and Joshua T. Dean of the University of Chicago, demonstrates that availability of financing, rather than inattention to future costs, is the main factor that prevents users in Kenya from upgrading to a fuel-saving cookstove. My takeaway: it is well past time for citizens here, in the developed world, to face up to our own inattention to future costs, and the ways in which we irrationally fail to invest today, ignoring positive returns to decarbonization.

EV markets from China to California continue to weaken, as historically high EV growth rates plummet into single digits. The end of this decade’s unusually strong auto cycle inevitably presented a risk for EV adoption. Indeed, the multi-year decline in global vehicle sales is now approaching levels last seen during the financial crisis. Now, as data from Q3 starts to complete, it appears year-over-year EV sales may in some cases, like the US, be flat at best.

In China, where plug-in growth rose a heady 62% in 2018, sales may finish up only 10% this year. In America’s leading edge market of California, where plug-in sales matched China’s 2018 performance, EV will be lucky to hold on to just 5% growth this year. For the US as a whole, which continues to be more dependent than ever on Tesla sales, it’s not clear yet how Q4 will shape up. But things are not promising. According to Loren McDonald, whose original 2019 forecast (made last December) has turned out more accurately than most, 2019 US plug-in sales growth will be slightly negative. A lack of consumer choice also continues to plague the US market, where buyers generally face a short menu largely composed of sedans. And sedans in the US market, especially on the petrol side of the ledger, have been weakening for years. As The Gregor Letter noted previously, not until compact crossovers like the Kia Niro and the Hyundai Kona are widely available will we see a broader growth trend in the US, outside of early-adopter markets on the West Coast.

Sales of ICE vehicles are far worse, however, as most major vehicle markets have gone negative for the second or third year in the row after the global peaks of 2016 and 2017. Crucially, because EV sales are still flat to positive, ICE vehicles are now having to contend with both an overall decline, and, loss of market share. Peak ICE sales are now well behind us; and I encourage readers to resist any temptation to wonder whether ICE could advance again and make new highs. Readers of Oil Fall will recall a key thesis from the series: by the time global vehicle markets are ready to recover in 2020 or so, it will be too late for ICE.

How dramatic are the declines in ICE sales? Here is a chart of several key markets showing the peak sales year, and the declines projected through the end of this year.

Audi, a unit of VW, announced a layoff of nearly 10,000 workers as it hunkers down to survive the global auto decline while it re-tools for EV. The layoff represents roughly 15% of the Audi workforce. Meanwhile, The Financial Times saw fit to write an appropriately lengthy trend story on the massive changes bearing down now on the German auto industry. A key theme of the FT's piece is that a future auto industry will be a far smaller enterprise as the EV drive train strips out the need for myriad parts, specialties, and suppliers.

Head of Advanced Transport at BNEF, Colin Mckerracher, wonders whether we can escape a recession given the magnitude of the auto sector contraction. The discussion on Twitter elicited a number of thoughtful responses. You can start reading the various threads, beginning with Colin’s tweet:

My hunch: while not a major factor just yet, one dynamic that could extend the present downturn is the spreading awareness that ICE vehicles could decline rapidly in resale value, as EV storm the market over the next five years. Relatedly, one responder cited the Osborne Effect: the idea that consumers are avoiding a new car purchase until an appropriate EV in price and style is available. I suspect we won’t get a full measure of these effects until global auto markets actually start to recover. Then, we will see how strong is the shift toward EV. If purchases are indeed being deferred, the surge in EV sales could be dramatic.

Petrobras has auctioned off a specialized deepwater drillship, once worth $600 million, for $15 million. Readers will recall the excitement over Brazil’s far-offshore oil discoveries during the heady days of the oil bull market last decade. The country spent billions just to prove those reserves, and many forecasters saw a golden era for an offshore shipbuilding industry that would arise in the South American country. Alas, that never happened. Shares of Petrobras today are trading at levels 75% below the highs of 2008.

Gregor Macdonald, editor of The Gregor Letter, and

The Gregor Letter is a companion to TerraJoule Publishing, whose current release is Oil Fall. If you've not had a chance to read the Oil Fall series, the single title just published in December and you are strongly encouraged to read it. Just hit the picture below.