LNG revolution: Germany’s plan to wean itself off Russian gas takes shape
Three terminals could be built but the plants rub up against tight global market and Berlin’s long-term energy strategy
A small orchard on the banks of the Elbe River in northern Germany, overgrown and circled by seagulls, holds the key to the country’s Russia-free energy future.
The orchard, close to the city of Stade, will soon be cleared to make way for a €1bn liquefied natural gas terminal, one of three planned that should help Germany cut its dependence on Russian gas.
“The location is perfect,” said Jörg Schmitz, senior LNG project director at chemicals group Dow Germany, gesturing to the wide sweep of the Elbe, the North Sea to the west and the port of Hamburg, Germany’s largest, to the east.
If Schmitz’s vision is realised, Stade will become a hub in the global trade of LNG, gas that has been supercooled to minus 160C so it can be shipped around the world on tankers. “If it all goes to plan we’ll see about 100 landings a year here, up to Q-Max size,” he said, referring to the world’s biggest LNG carriers, each longer than three football pitches.
Stade is at the forefront of a revolution in German energy. Just days after Russian troops streamed into Ukraine, chancellor Olaf Scholz announced plans to radically reduce Germany’s reliance on Russian energy. LNG will be vital to the plan to reduce Russian natural gas imports from 55 per cent of the total to 10 per cent by the summer of 2024.
But the switch will be a challenge. Germany’s new dash for gas could clash with its commitment to achieve net zero carbon emissions by 2045. It might also struggle to source all the LNG it needs.
“The million dollar question is whether they’ll be able to find enough LNG,” said Frank Harris, an expert on the fuel at energy consultancy Wood Mackenzie. “There’s relatively little new supply over the next two-three years.”
The policy shift is being implemented with a speed that is unusual for Germany. In the weeks after Scholz’s speech in late February, the government rushed to charter four specialised ships known as floating storage and regasification units, or FSRUs — tankers with heat exchangers that use seawater to turn LNG back into gas.
The first FSRU comes online in Wilhelmshaven on the North Sea this year. They will operate as a stop-gap until the permanent terminals come into operation. So far three potential sites have been identified for those — in Stade, nearby Brunsbüttel, also on the Elbe, and Wilhelmshaven.
Dow has been working on building a gas terminal in the area for the past five years. “The idea was you should diversify your gas supply and not allow yourself to become too dependent on one source,” said Schmitz.
Chartering the four FSRUs so quickly was a coup for Germany — there are extremely few suitable vessels available. But finding the ships was only half the battle. “The big challenge is to fill this capacity with LNG, and that will be difficult because the resources on the market are so scarce,” said Andreas Gemballa, director of LNG at Uniper, the German energy company.
Ironically, the largest source of new supply expected in the next two-three years is from Russia — the Arctic LNG-2 project on the Gydan Peninsula in northern Siberia. But that’s looking “very challenged now”, said Harris, largely because sanctions have restricted Russia’s access to financing and technology, while some western buyers might not buy gas from the project.
Qatar could prove to be a big source of LNG for Germany, and its production of the fuel is due to increase 60 per cent by the middle of the decade. But 90-95 per cent of its current output has already been sold on long-term contracts.
That reflects another problem for Berlin — LNG contracts are typically long-term. But having pledged to make Germany carbon-neutral by 2045 the government might be reluctant to commit to importing fossil fuels for 20 years or more.
“Germany is saying — we want all this LNG, but we also want to accelerate the transition away from fossil fuels, including gas,” Harris said. “It’s a mixed message.”
In addition, a lot of the LNG Berlin has its eye on is indexed to the price of oil or, if coming from the US, to Henry Hub, the US gas benchmark, which can sometimes be higher than Dutch TTF, the European marker. That exposes buyers to risks of financial losses. Such contracts “don’t conform to the way we price gas in Europe”, Gemballa said.
For that reason, big LNG producers such as Qatar might prefer to strike deals with Asian countries that have fewer qualms about signing 20-year contracts and are more comfortable with oil-indexed prices, Harris said.
Robert Habeck, the Green economy minister, personifies Germany’s dilemma. He has travelled to Qatar and the UAE to discuss energy co-operation and overseeing the start of construction of the first floating LNG terminal in Wilhelmshaven in early May.
But he has also warned of the dangers of Germany getting stuck with expensive infrastructure that could lock in its dependence on fossil fuels.
“In the short term we’ve been pretty successful at replacing Russian gas, but we have to make sure we’re not too successful,” he said late last month. “We don’t want to spend the next 30-40 years building up a global natural gas industry that we don’t really want any more.”
The trick is, he said, to build “three or four times as many kilowatt hours of renewable energy” as the natural gas resources now being developed to quench Germany’s short-term thirst for the fuel.
Timm Kehler, managing director of trade body Zukunft Gas, does not see the imminent wave of gas infrastructure construction as a problem: the new terminals will also be designed to handle “green hydrogen”, a low- or zero-carbon fuel. “[They] will be a bridge into a future where we don’t import gas in the form of LNG but hydrogen in the form of ammonia,” he said.
For Dow’s Schmitz, Berlin’s sudden enthusiasm for LNG is a vindication. “The plan [for a terminal] always made commercial sense,” he said. “But now it has geopolitical significance, too.”
Elon Musk posts vulgar tweet about Bill Gates in midst of fued
Tesla CEO Elon Musk hit back at billionaire Bill Gates on Twitter after the Microsoft founder downplayed his attempt to short Tesla stocks Saturday.
Gates made the comments during an interview with French YouTuber HugoDécrypte. Musk has recently accused Gates of not being serious about fighting climate change because he made a “half-billion dollar” bet against Tesla.
Gates argued he had put more money toward climate change than Musk or anyone else, to which Musk responded “Sigh.”
“I give a lot more to climate change than Elon or anyone else,” Gates said. “I give a lot of philanthropic dollars, I back companies – you know electric cars are about 16% of emissions, so we also need to solve that other 84%.”
The exchange comes more than a month after Musk confirmed he rejected an opportunity to work with Gates on philanthropy in late April. Musk revealed a text conversation in which he confronted Gates over his purchase of $500 million in shorting stock against Tesla.
The billionaire pair appeared set to meet before Musk asked Gates if he still had a “half billion dollar short position against Tesla.”
“Sorry to say I haven’t closed it yet,” Gates responded. “I would like to discuss philanthropy possibilities.”
Musk then blew him off, saying he couldn’t take Gates’ offer seriously “when you have a massive short position against Tesla, the company doing the most to solve climate change.”
The exchange occurred just days before Musk posted a vulgar tweet comparing Gates to the “pregnant man” emoji.
Gates has yet to publicly comment on the tweet.
Elliott Management Sues London Metal Exchange Over Nickel Crisis
Exchange’s parent says claim by U.S. investment firm is without merit
Activist hedge-fund manager Elliott Management Corp. sued the London Metal Exchange for more than $456 million, after the exchange earlier this year suspended nickel trading and canceled some trades following wild swings in the metal’s price.
The lawsuit is a fresh headache for the LME, whose actions had already drawn criticism from some market participants and prompted a review by British financial regulators.
Elliott is challenging the exchange’s decision to cancel trades that it says it made in the early hours of March 8, according to Hong Kong Exchanges & Clearing Ltd. 388 +0.82% , which owns LME.
“The LME management is of the view that the claim is without merit and the LME will contest it vigorously,” HKEX said Monday. Elliott didn’t respond to a request for comment outside U.S. business hours.
The hedge-fund firm, founded by billionaire Paul Singer, argues the metal exchange’s action “was unlawful on public law grounds and/or constituted a violation of the claimants’ human rights,” HKEX said. Elliott has brought the case in the English High Court through two vehicles, Elliott Associates LP and Elliott International LP.
Russia’s invasion of Ukraine sparked sharp gains in many commodities. The nickel market proved particularly turbulent because the price moves upended a massive trade against the metal by Tsingshan Holding Group, a Chinese nickel producer.
The LME stopped nickel trading early on March 8 and retrospectively canceled trades in the eight hours before the suspension. It was the first time the LME had frozen trading for a metal since the collapse of an international tin cartel in 1985 and the 145-year-old exchange came under criticism from traders for the way it handled the crisis.
U.K. financial regulators in April launched a review into the breakdown in nickel trading. The Financial Conduct Authority and the Bank of England said they would look for ways that the LME can improve its governance, market oversight and risk management.
In late April, the exchange’s parent said LME Chief Executive Matthew Chamberlain would remain in his position, reversing an earlier plan to depart.
HKEX shares rose 0.6% by early afternoon Monday in Hong Kong, underperforming a 1.1% rise in the Hang Seng Index.
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Passive fund ownership of US stocks overtakes active for first time
Around 16 per cent of US stocks are held by index trackers and ETFs vs 14 per cent by actively managed funds
Passively managed index funds have overtaken actively managed funds’ ownership of the US stock market for the first time, data show.
Passive funds accounted for 16 per cent of US stock market capitalisation at the end of 2021, surpassing the 14 per cent held by active funds, according to the Investment Company Institute, an industry body.
The pattern represents a sharp reversal of the picture 10 years ago, when active funds held 20 per cent of Wall Street stocks and passive ones just 8 per cent.
Since then, the US has seen a cumulative net flow of more than $2tn from actively managed domestic equity funds to passive ones, primarily ETFs.
“It’s the latest milestone to fall [to index funds]. It’s been a slow build for decades now,” said Kenneth Lamont, senior fund analyst for passive strategies at Morningstar.
“It does raise questions of what the endgame is. Passive is only efficient as the active players in the market make it. We probably have some way to go before passive becomes less efficient, but it does raise questions as to where the equilibrium should be.”
The seemingly unstoppable rise of index-tracking funds has in turn helped fuel an unprecedented concentration of ownership — and thus voting power.
The five largest mutual fund and exchange traded fund sponsors — out of 825 in all — accounted for 54 per cent of the industry’s total assets last year, the ICI found, a record high and up from just 35 per cent in 2005.
The 10 largest control 66 per cent of assets (against 46 per cent in 2005) and the top 25 as much as 83 per cent, up from 67 per cent. The proportion of assets held by the many hundreds of managers outside the elite 25 has thus halved over the period.
The 10 largest fund houses manage the bulk of passive assets, and writing in its 2022 Factbook, the ICI attributed this surge in industry concentration to the meteoric rise of these funds.
Actively managed domestic equity mutual funds have suffered net outflows every year since 2005, even as their passive peers have had inflows every year bar 2020 and 2021. Index-tracking ETFs have proved more popular still.
US-listed ETFs, the overwhelming majority of them passive, have seen their assets rise fivefold to $7.2bn since 2012.
Growth was particularly strong last year with net issuance of ETF shares — which includes the impact of reinvested dividends as well as net buying — almost doubling from $501bn in 2020, itself a record, to $935bn.
Equity ETFs dominated with new equity issuance hitting $731bn, three to four times the level seen in previous years.
Overall, 88 per cent of ETF ranges saw positive net inflows last year, the ICI found, compared to just 48 per cent of mutual fund ranges, continuing a pattern witnessed over the past decade.
The number of ETFs available to US investors jumped by 398 in 2021, with 457 debuting — more than double the previous record of 197 set in 2015 — and just 59 were liquidated or merged.
In contrast, the number of mutual funds has declined every year since 2016. Stripping out money market funds, mutual funds have also seen net outflows of money for all but one year since 2015.
Lamont said it was unsurprising that industry concentration had risen against this backdrop.
As a result, the biggest houses “hold enormous [voting] power”, with some academics highlighting the “potential for oligopolistic collusion between these players”, he said.
Lamont lauded BlackRock’s decision last year to allow its largest clients to vote directly, reducing the fund giant’s proxy power. However he added that “it seems we are a long way away from individual investors picking preferences”.
Todd Rosenbluth, head of research at ETF Trends, said it was “easy to be fearful that more money is tied to a small number of firms”, adding that it was “imperative that these firms are as transparent as possible about their decision-making so investors can understand how their shares are being voted”.
Nevertheless he did not think the current level of concentration was harmful, and that instead the economies of scale it created had reduced costs for investors.
Rosenbluth was also relaxed about the rise of index investing, arguing that its “many flavours”, such as large cap, small cap and sectoral and style biases meant passive funds “are not owning the same assets”.
Vincent Deluard, global macro strategist at StoneX, a broker, was also unperturbed, arguing that “flows matter more than AUM and the passive sector has dominated flows for years”.
Demographic data suggest ETFs are likely to continue to grab market share from mutual funds. ICI data show ETF investors tend to be younger — with the average age of the head of the household 45, versus 51 for mutual fund owners — and wealthier, with average household income of $125,000 and household financial assets of $375,000, compared to comparable figures of $104,900 and $320,000 for mutual fund owners.
The current market dynamics may accelerate this process still further.
“If anything, every sell-off accelerates the rotation to passive. Investors sell actively managed funds first, while ETFs and index funds benefit from the mechanic demand of target-date funds,” said Deluard. “By default, all American savings are now invested in TDFs and rolled over into index funds.
“I expect the unfolding bear market will be very serious and will feature outflows from ETFs and index funds, but it will be much worse for the active sector. When the passive sector sneezes, the active sector has pneumonia,” he added.
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Stocks in Asia and US futures rose Monday as Beijing reopened further, helping soothe a fragile mood as inflation and rate hike concerns weigh. Oil gained. Japan equities erased losses, while technology shares jumped in Hong Kong. China advanced with the capital walking back Covid-19 restrictions. Australian stocks fell, bucking the trend, ahead of an expected second consecutive interest-rate increase Tuesday. S&P 500 and Nasdaq 100 futures rose. Treasury yields stabilized. Strong US hiring data for May suggested that the Federal Reserve won’t waver from its pace of steep interest-rate hikes to rein in price pressures. The next focus is consumer prices due this week, which can help gauge whether inflation has peaked. A dollar gauge was steady.
Crude oil traded near $120 a barrel as shortage worries persist. Saudi Arabia raised prices for its biggest market of Asia by more than expected, and the US was considering allowing more sanctioned Iranian oil onto global markets to counter the drop in Russian supplies. Copper hit the highest since April on China’s easing of virus measures. Investors are fretting that a restrictive Fed could plunge the economy into recession, while China’s lockdowns to control virus outbreaks have chocked economic activity and snarled supply chains, adding to inflation worries. The US jobs report quelled some concern that the economy is slowing too sharply, but also strengthened the view that the Fed will keep hiking rates to tamp down on rising inflation. Cleveland Fed President Loretta Mester said she would back a half-point hike in September if inflation is not retreating. Market-derived odds for a third 50-basis-point increase in September held steady near 85%. The European Central Bank will this week announce an end to bond purchases and formally begin the countdown to an increase in borrowing costs in July, joining global peers tightening monetary policy in the face of hot inflation. the pound was steady amid risks around a confidence vote on British Prime Minister Boris Johnson’s leadership. BTC Trading Back above the 30,000, Trying to escape the zone.
Nikkei +0,30% Hang Seng +1,07% CSI +1,32% Shanghai +0,92% Shenzen +2,07%
Eur$ 1,0723 CNH 6,6608 CNY 6,6544 JPY 130,48 GBP 1,2494 CHF 0,9617 RUB 62,9750 TRY 16,4925 WTI$ 119,81 +0,70% Gold 1,855,60 +2,2% BTC 31,115 +3,4% ETH &,877,60 +3%
S&P +0,52% Nasdaq +0,69% EuoStoxx +0,66% FTSE +0,97% Dax +0,64% SMI
Macro :
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