BMO - Whisper of Deindustrialization

Cracks in the system

Before we go further down the nest, I would like to point out to the reader, despite the title, and the dynamics we are about to discuss, I don’t think “modern civilization” will end, all the different aspects of how I think it might play out will be discussed. So rest assured I am more hopeful for the future. Alas, I also ascribe to the David Goggins mindset.

This piece is a continuation of the one below, at the very least I recommend you read it before this one.

Beyond Mathematical Odds - Coming Full Circle

While many other events took place, especially in the realm of “science”, this piece sat in my mind unwritten, for quite a long while. If you are not aware by now, which I find hard to believe, both NordStream gas pipelines were sabotaged with explosives, so my “analysis” within this piece bears much more weight now than when I first observed the trends and decided to write about it, deindustrialization is now a fact, the only possible argument is “extension of” which I will mention briefly here.

This was meant to be solely a “deindustrialization” focused piece, but I will need to cover a few other important aspects. So first we must address the biggest elephant in the room, or otherwise the biggest energy consumer in the coming years. Almost every aspect I covered since February of this year not only came to be, but now will find itself intensifying. The elephant in the room.

Semiconductors

It is no secret that modern computers (especially GPUs) are energy drains, and there is a cap on how much load a conventional house can sustain, newer GPUs (Nvidia 40XX series) will basically need a new, almost dedicated power supplier, so there is a race for energy-efficient chips.

The machines needed to make the world’s most advanced semiconductors are miracles of modern engineering. Known as extreme ultraviolet lithography systems, or EUVs, they bathe silicon wafers with waves of light invisible to the human eye, burning patterns into materials on the wafer’s surface that need to be exact within a few nanometers.

An extreme ultraviolet lithography system made by ASML

It currently has more than 80 and is in the midst of installing a new generation of the machines as part of a $20 billion chip foundry in Tainan, a city in southern Taiwan. Because of the vast amount of power needed to run EUVs, TSMC is expected to soon consume more energy than the entire 21 million-person population of Sri Lanka. In 2020 the company accounted for about 6% of Taiwan’s overall energy consumption. It’s expected to use 12.5% of it by 2025.

I won’t even get into the water, silicon, and other material needs, merely the sheer amount of electricity these new EUVs demand is big enough to create scarcity within markets with stable energy prices on a good day. After the events that transpired in the last 5 days, global energy security is nothing but a myth, stabilization of the markets will take years.

The semiconductor shortage, as I wrote months ago, to the criticism of insiders of the industry won’t go anywhere until 2024, this has been self-evident for months to anyone paying attention to the whole, and not only one part of the market. The dynamics at play are profound, the demand only increases, and the supply chain for the materials, tools and everything in between is too large to tackle consistent disruption every 4-6 months.

A typical semiconductor production line can involve 700 manufacturing steps across 14 weeks, Sharma said. The lithographic machines that are used to project circuits onto the chip can cost from $25 million to $200 million each, he added.

But Sharma is more pessimistic. "It's not coming to an end in 2023, if you ask me, honestly," he said. "Because the entire gestation period, the cycle time [for manufacturing] is wrong. There is a phenomenal amount of complexity."

As events unfold and we enter a fully hybrid war state in which disruption is the law of the land, otherwise you fall behind by leagues I expect scenarios like this to intensify, where companies and critical consumers cannibalize things for chips. Another critical component is Ajinomoto Build-up Films, experiencing supply constraints and once again, not getting much better anytime soon, as my previous analyzes months ago.

As a late addition and in the event you missed a few of my earlier pieces within this theme, Russia is one of the biggest Neon producers in the world, and Ukraine has a couple of the only factories that can refine the gases, and there is no quick way for a substitute this disruption, and the buffer and build-up of stock by the big chip manufacturers must be running low right now.

Currently, followed by oil, gas pipelines, and the energy sector, this field is one of the most open to disruptive efforts by both State and Non-state actors, and while long-term (5+ years) look rather “good” for some countries, we should not ignore the non-linear dynamics that rule the entire system. Countries will bleed dry of money, economies are taking and a lot of the investments in new fabs will fall flat because almost everyone ignores the network effects of human behavior.

Semiconductors and chips, whatever your opinion of the politics, and intents behind them, are the future one way or another, and conflicts might happen for the sole reason a country has access to natural resources needed for manufacturing.

Giving me the premise of this piece. 2 weeks ago, even mainstream outlets like Forbes were already talking about the possibility of Europe facing deindustrialization.

With natural gas prices over $100 more per megawatt hour than they were a year ago, the Western European economies are heading to the Middle Ages.

Forests are being cut for firewood as Russia retaliates with its own Ukraine war sanctions by shutting off the trickle of natural gas it was still piping into Europe.

Germany is signing long-term contracts for U.S. LNG to save itself, though it will have to find a place to put it all. For this reason, they will have to build new terminals to handle those shipments quickly.

“We now expect a deeper prolonged recession and more persistent elevated inflation due to the impact of higher energy prices, a more decisive European Central Bank tightening cycle and weaker...demand,” says Barclays Capital economists led by Silvia Ardagna.

In my more opinionated piece, I laid out that there aren’t enough LNG carriers on the planet to sustain European needs of gas, and these ships take 24 months to build. The fees for transport recently reached 300.000 per day and certainly after the sabotage of both Nord Stream pipelines they will reach, as some suggest the amount of 500.000 per day.

Most of these work in a brokerage style, and in the last 9 months many times ships diverted to other ports for better rates, now with a much tighter market without any Russian gas, you can expect this to play out again and again. Even 2 weeks ago, by merely extrapolating the loss of Russian gas, some analysts were already predicting that 2023 would be a worse year than 2022.

The German government is likely to announce as soon as today a price cap for household and business gas prices, at a total cost of as much as €200 billion (or ~5% of the GDP). But this is nothing beyond both a stop-gap and a subsidy by another name, which doesn’t help the entire continental and global. This does nothing to hold demand in place, if anything it incentivizes consumption, which neither Germany nor any EU country can cope with right now. As I forecasted many times, not even from a complexity perspective, but the self-evidence of it all, France which used to be a fairly energy secure country is rolling power cuts to parts of the country. Canada may face the same in the very near future.

The examples above are but two of the latest of a growing list of energy supply-market-cost crises, I could expand this for a long but at this point, anyone who reads this Substack, or uses social media is aware of what is going down. We are about to experience a fairly big economic contraction. The following piece from Fortune is a very good concise way to understand the situation.

The Russian invasion of Ukraine in February of this year created a ripple effect in global markets. Western nations that once relied on energy supplies from Russia—the world’s second largest natural gas producer and third largest petroleum producer—condemned the invasion by refusing to buy Russian energy, or were cut off by President Vladimir Putin. 

Electricity bills have already tripled in many places. Some coffee shops and restaurants have seen monthly bills rise from €2,000 a year ago to €7,000 now, and major industries have started furloughing workers and cutting back on expenses due to high electrical bills.

Over 70% of European fertilizer producers—which rely on the ammonia extracted from natural gas production—have already halted operations, according to Mitrova, and soaring energy costs are forcing those European factories and manufacturers to slow down operations.

But the worst-case scenario would be a shutdown of European manufacturing industries most reliant on natural gas—including glassmakers and steel companies.

This is where the deindustrialization comes in, these are not new, in fact, many of these events took place at different levels for the last 12 months, not enough for most of the media to pay attention or even governments with their recency/normalcy bias, but enough for some to keep track of it. Expensive energy makes industry unsustainable, and industry is not like a mobile or a tablet, the “on” and “off” buttons have weeks, even months of delay.

For a short period European industry might move to somewhere else, many are betting on America being the target, but that will give rise to bigger problems, as much as I love “American made” (products that are usually made to last almost forever) there is one slight problem. Anything American-made is expensive, labor in the US is expensive, and regions, where the industry can move to, are often not business-friendly, and lack skilled labor, regardless of where the industry moves, this will create a massive financial hole in Europe.

The loss of industry in Europe will affect the whole planet, not just European, and the European economy will also impact the entire market, because the only way to deal with such a massive loss of production will be to tighten the exports of whatever they can produce, heavily, and to fund all this, printing money out of thin air, taxing the wealthy, creating the same problems you are supposed to combat.

Another particular worrying trend is the Oil and distillate one.

The situation which I wrote about months ago didn’t get any better, in fact, if anything, it actually got worse, instead of building stock, the world lost stock and we are well below average, this was fueled by both Russia and the following sanctions and China exploiting its “Zero Covid” strategy and sometimes outright banning exports to stabilize its internal market.

Europe braces for heavy oil refinery outages amid tight supplies

A view shows the French oil giant Total refinery in Donges, France, November 21, 2017. REUTERS/Stephane Mahe

A heavy oil refinery turnaround season in Europe this autumn, plus French strike action, is set to push diesel prices higher and tighten supplies ahead of a European Union ban on Russian refined products which is due to come into force early next year.

In October, around 1.5 million barrels per day (bpd) of crude refining capacity is expected to be offline in Europe for planned and unplanned maintenance, Energy Aspect estimated.

The European Union will stop buying all Russian crude oil delivered by sea from early December, and will ban all Russian refined products two months later, in protest over Moscow's invasion of Ukraine.

"We struggle to see [diesel] stocks building massively from where we are," Woodmac analyst Mark Williams said.

"We expect prices to really spike ... mid-January, probably February, but we may see a spike little bit earlier as the market starts to panic,"

Oil and its refined products have as much impact on society’s function as does electricity, scarce and expensive fuel mean more inflationary pressures, extensive shortages of many products, extensive food scarcity in cities, and more trouble for farmers to grow, harvest, and ship their grains, followed by a big list of other important aspects.

Of course now completely without Russian gas for a minimum of months, perhaps years, we find ourselves at the same place where this Substack started. No gas, no fertilizer, way less food.

Across northern and western Europe, vegetable producers are contemplating halting their activities because of the financial hit from Europe's energy crisis, further threatening food supplies.

Surging power and gas prices will impact crops grown through the winter in heated greenhouses such as tomatoes, peppers and cucumbers, and those which need to be placed in cold storage, such as apples, onions and endives.

Sometimes I think I developed Early Onset Alzheimer’s or some aggressive form of neurodegeneration because often quotes and texts I write sound very much like the same quotes and paragraphs, dynamics I observed months ago. This is one of those moments. While trying my best to avoid politics and conspiratorial thinking here, I do find it quite intriguing how current global events fall perfectly in line with much of what parts of the elite-dictated media are pushing.

The purely made up, and recently pushed propaganda operation of “Anthropocene” anything. Care to guess who are the people who most subscribe to this framework, especially its modern meaning ?

Clube of Rome. Atlantic Council. But above all else. The World Economic Forum.

Among the elites, that word has a different meaning, and they talk openly about it among themselves. The real modern meaning is deindustrialization. And I see chances of the entire planet experiencing different levels of it in the next 10 years.

Have a nice day whenever you read this one. Another Beyond Mathematical Odds in the next few days, focused on other things, maybe with more opinion than usual, tomorrow or Saturday, a purely helpful one.

As always a big thank you to all supporters and people who share pieces they find useful.