The Coffee Table Economics (CTE) with Anchor note by Casey Sprake is distributed intermittently. It is a collection of Casey’s thoughts and perspectives on key economic factors, socio-political events, and the multiple dynamics shaping markets globally and in South Africa (SA).
Executive summary
In this week’s edition, we highlight the following:
- Powering the dragon: China’s growing energy demands. China’s energy needs have been steadily rising, driven by industrial growth and the ongoing urbanisation of its massive population. The country’s high energy needs are rooted in its economic model, rapid industrialisation, and a growing population. Locally, these needs create environmental challenges and dependency on energy imports, while globally, they affect energy prices, supply chains, and geopolitical dynamics.
- Coal’s enduring grip: Balancing economic reliance with environmental challenges. Despite many nations moving away from fossil fuels, global coal consumption in 2023 reached a record-breaking 164 exajoules (EJ), the highest level ever recorded. Coal remains a major contributor to the global energy mix, providing 26% of the world’s energy last year – more than all non-fossil fuel sources combined.
- Slow climb: SA food prices on the rise amid global shifts. In September 2024, global food prices saw their fastest rise in 18 months, led by a 10.4% MoM surge in sugar prices due to poor crop conditions in Brazil and ethanol production changes in India. SA experienced a drop in headline inflation to 4.4% in August, its lowest since 2021, though food inflation ticked up, with maize prices soaring due to drought impacts.
Powering the dragon: China’s growing energy demands
China’s energy needs have been steadily rising, driven by industrial growth and the ongoing urbanisation of its massive population. Beginning in the 1990s, rapid industrialisation fuelled a surge in electricity demand for factories and infrastructure projects. Today, mass migration to cities and improved living standards are pushing demand even higher. Urban areas have overtaken the industrial sector as the largest consumers of energy in China. Estimates from the National Bureau of Statistics (NBS) of China department suggest that a 1% increase in the urbanisation rate results in an additional 60mn tonnes of coal consumed annually. Moreover, urban households consume 50% more energy per capita than their rural counterparts. As a result, China’s electricity demand is projected to reach 10,498 terawatt-hours (TWh) by 2025, more than double the 4,475 TWh forecast for the US.
One key reason for China’s significant energy demand is its status as the “world’s factory.” China’s manufacturing sector, which produces goods for global markets, relies heavily on energy-intensive industries like steel, cement, and electronics. Furthermore, rapid urbanisation has led to the construction of vast infrastructure networks and housing, further increasing energy consumption. The growing middle class has also contributed to rising demand for energy through higher consumption of goods, transportation, and electricity. This high demand for energy presents several economic problems, both in China and globally. Domestically, China relies heavily on coal, which accounted for nearly 60% of the country’s electricity supply in 2023, indicating that record-high solar and wind capacity growth was yet to lead to a ramp-up in power production (according to a report published in January by the government-backed industrial association China Electricity Council [CEC]). While coal is abundant and relatively cheap, it is also a significant source of air pollution and greenhouse gas emissions, contributing to severe environmental problems, including smog in cities and increased health costs. The country has made efforts to transition to cleaner energy sources such as renewables and nuclear power, but the scale of demand makes this a complex and costly shift. Additionally, energy security is a concern, as China imports a significant portion of its oil and gas, leaving it vulnerable to geopolitical tensions.
On a global scale, China’s energy consumption impacts energy prices and supply chains. As the world’s largest oil, natural gas, and coal importer, fluctuations in China’s energy demand can influence global energy markets. If China’s demand for energy spikes, it can drive up prices, affecting other countries, particularly those heavily reliant on energy imports. Conversely, a slowdown in China’s economy could decrease global energy prices, disrupting economies dependent on energy exports. China’s energy needs also contribute to international competition for resources, especially in regions rich in oil and gas. China’s investments in energy infrastructure in countries such as Russia, Central Asia, and Africa raise geopolitical concerns about influence and control over crucial energy corridors. This global competition for energy can create tensions with other major energy consumers, such as the US and the European Union (EU), potentially leading to economic and political conflicts.
The bottom line
China’s high energy needs are rooted in its economic model, rapid industrialisation, and growing population. Locally, these needs create environmental challenges and dependency on energy imports, while globally, they affect energy prices, supply chains, and geopolitical dynamics. Addressing these challenges will require China to balance its economic growth with transitioning to more sustainable energy sources.
Coal’s enduring grip: Balancing economic reliance with environmental challenges
Despite many nations moving away from fossil fuels, global coal consumption in 2023 reached a record-breaking 164 EJ, the highest level ever recorded. Coal remains a major contributor to the global energy mix, providing 26% of the world’s energy last year – more than all non-fossil fuel sources combined. The only energy source that contributed more was oil. While coal use has declined in many regions, with North America and Europe lowering their consumption by 16% YoY in 2023, the Asia Pacific region’s heavy reliance on coal has kept global consumption stable over the past decade. China alone increased its coal consumption from 88 EJ to nearly 92 EJ in 2023, accounting for 56% of global coal use. This surge helped the Asia Pacific region dominate the global coal market, consuming 83% of the world’s total coal supply. The continued use of existing infrastructure and the affordability of coal has maintained global consumption over the past decade and opened the door for future growth. Many developing countries are expanding their reliance on coal, creating opportunities in the market. For example, according to the Statistical Review of World Energy 2024, between 2022 and 2023, Bangladesh and Colombia saw coal consumption rise by 41% and 53% YoY, respectively.
As such, coal remains a critical component of the global economy, particularly in energy production and industrial processes. Despite the rise of renewable energy sources and increased awareness of climate change, coal continues to play a significant role in powering electricity grids, especially in developing countries. Its importance is mainly due to its abundance, low cost, and reliability as a fuel source, but its continued use presents environmental and economic challenges. In terms of energy production, coal is one of the most reliable energy sources, providing around 36% of the world’s electricity. It is used extensively in countries like China and India, where rapidly growing populations and industries require affordable and reliable energy. For many developing nations, coal is a readily available resource that can fuel economic growth and development, offering a relatively cheap way to generate power and drive industrialisation.
Beyond electricity, coal is essential for steel production and other heavy industries. Coking coal, for example, is a crucial ingredient in steelmaking, which supports global infrastructure projects. As demand for infrastructure and construction materials grows in emerging economies, the need for coal in industrial processes remains high. In many regions, coal provides a buffer against energy insecurity. Unlike oil and natural gas, which are often subject to geopolitical tensions and market fluctuations, coal can be sourced domestically in several countries. This makes it a more stable and predictable energy source, especially for countries with abundant reserves.
The most pressing challenge associated with coal is its environmental impact. Coal is the dirtiest fossil fuel, responsible for about 40% of global carbon dioxide emissions. Burning coal releases large quantities of greenhouse gases, which contribute to climate change, as well as pollutants like sulfur dioxide and particulate matter, which harm air quality and public health. The long-term reliance on coal also conflicts with international climate goals and efforts to transition to cleaner energy sources. Shifting away from coal poses economic challenges, particularly for coal-dependent regions and industries. Millions of jobs are tied to coal mining, power generation, and related sectors. A rapid transition to cleaner energy could result in significant job losses and economic disruption, particularly in regions where coal is the primary industry. Governments face the difficult task of balancing environmental goals with the economic and social implications of reducing coal use. Although renewable energy is becoming more cost-competitive, the infrastructure required to transition from coal to cleaner alternatives is expensive and time-consuming. Many developing countries still lack the resources to invest in renewable energy at the scale needed to replace coal. The cost of retrofitting existing coal plants with cleaner technologies, such as carbon capture and storage (CCS), is also high, further complicating the transition.
Like many other developing countries, coal remains vital to the SA economy. According to the University of Stellenbosch’s Centre for Renewable and Sustainable Energy Studies, most of SA’s electrical energy in 2023/2024 was generated from coal (78.5% of total system demand), with renewable energy providing 8.8%. Furthermore, coal continues to play a vital role in various industries, including steel and cement production. It offers significant employment opportunities, supporting thousands of jobs directly and indirectly, particularly in rural areas. As one of the world’s largest coal exporters, SA benefits from valuable foreign currency, contributing to the trade balance and economic growth. The coal industry has also driven infrastructure development, enhanced transportation networks and facilitated trade. However, the country faces challenges balancing its reliance on coal with the need for sustainable energy solutions amid global climate change efforts and SA’s well-known energy supply issues.
The bottom line
While coal remains crucial for the global economy, particularly in energy production and industrial processes, its continued use presents significant environmental and economic challenges. The world faces a delicate balancing act: addressing the urgent need to reduce carbon emissions and combat climate change while managing the economic and social impact of moving away from coal. As global demand for energy rises, especially in developing countries, finding sustainable solutions that reduce dependence on coal without disrupting economic growth will be one of the central challenges of the 21st century.
Slow climb: SA food prices on the rise amid global shifts
In September 2024, the UN Food and Agriculture Organization’s (FAO) Global Food Price Index (FFPI), the benchmark for global food commodity prices, experienced its fastest increase in 18 months. Prices rose across all five of the FFPI’s commodity group price indices, with sugar leading the surge. The FFPI averaged 124.4 points for the month, marking a 3.0% increase from August and a 2.1% YoY rise. The FAO Sugar Price Index saw the most significant jump, climbing 10.4% MoM. This spike was driven by worsening crop conditions in Brazil and concerns that India’s decision to lift restrictions on sugarcane for ethanol production might reduce its sugar exports. The FAO Cereal Price Index rose 3.0% MoM, mainly due to higher wheat and maize prices. International wheat prices have increased, primarily due to excessively wet conditions in Canada and the EU, though competitive supplies from the Black Sea region offset some of the pressure. Low water levels on major transportation routes along Brazil’s Madeira River and the Mississippi River in the US influenced maize prices. Meanwhile, the FAO All Rice Price Index dropped by 0.7% MoM, reflecting quieter trading activity. The FAO Vegetable Oil Price Index rose by 4.6% MoM, with palm, soy, sunflower, and grapeseed oils all seeing higher prices. Palm oil prices were buoyed by lower-than-expected production in major Southeast Asian producers, while soy oil prices rebounded due to lower-than-expected US crushing volumes. The FAO Dairy Price Index increased by 3.8% MoM, with higher quotations for whole and skim milk powder, butter, and cheese. The FAO Meat Price Index edged up 0.4% MoM, driven by more robust demand for Brazilian poultry meat. Bovine and pig meat prices remained stable, while ovine meat prices decreased slightly from August.
Amid a streak of positive developments for South Africans, August inflation, as measured by the Consumer Price Index (CPI), revealed a continuation of the disinflationary trend, with headline inflation decelerating further to 4.4% YoY from 4.6% YoY in July. In addition, the print came in slightly below consensus economists’ expectations and is the lowest inflation rate since April 2021, when it also printed at 4.4%. The easing of price pressures appears widespread, with a notable slowdown in energy prices, which fell from 12.1% YoY in the previous month to 11.5%. However, inflationary pressures persist in certain areas, as seen in the slight uptick in categories such as food and alcoholic beverages and tobacco products. After an eight-month decline, annual food & NAB inflation rose to 4.7% in August from 4.5% in July, putting upward pressure on the headline inflation rate. Most food categories saw higher annual rates, including bread & cereals, meat, fish, milk, eggs & cheese, oils & fats, and vegetables. In contrast, lower rates were recorded for fruit, sugar, sweets & desserts, and hot and cold beverages.
Yellow maize prices increased by 2.6% MoM in the SA maize market, while white maize rose by 1.4%. Compared to August 2023, prices remain significantly higher, with yellow maize up 11.9% and white maize surging 48%, from R3,616/tonne to R5,357/tonne in 2024. The sharp rise is due to drought-related production declines, particularly in white maize, which is grown in drought-hit areas. White maize prices are also supported by strong domestic demand and in neighbouring countries affected by the drought. White maize is expected to trade at a premium of over R1,000/tonne above yellow maize this year, though this premium is likely to disappear in the 2024/2025 season as surplus crops are expected.
In the vegetable oil market, soybean prices fell by 2.2% MoM and 7.8% YoY, continuing a downward trend from earlier in the year. The drop reflects lower global soybean meal and oil prices despite a 36% YoY decline in SA’s soybean production. Sunflower prices decreased by 1.8% MoM but are 2.4% lower YoY, showing resilience against drought conditions.
In the dairy market, August 2024’s YoY inflation was the highest for condensed milk (+18.3%), with modest inflation for fresh milk (+3.5%) and cheese (+2.29%). Most dairy products saw stable prices despite high production costs.
In the meat market, beef carcass prices dropped slightly in August (by 0.8% MoM) but remained 5.2% higher YoY, driven by increased exports and stable market conditions. Pork prices grew modestly by 1% MoM, while poultry prices remained stable, rising by 0.7% MoM. Prices dropped by 14% YoY as production recovered post-avian flu outbreak. Fresh produce inflation rose slightly in August, with fruit inflation at 1.9% and vegetable inflation at 4.4%. Oranges and papayas saw the most significant price increases, while bananas experienced a price drop due to higher traded volumes. Vegetable prices were driven by lower tomato production, while higher onion volumes eased prices in the local market.
The bottom line
Overall, as at August 2024 (the latest available data), South African maize prices remain elevated due to a reduced summer crop, with significant price decreases anticipated only when the 2025 harvest arrives. Strong demand from SA and neighbouring Southern African countries further boosted white maize prices. The vegetable oil market showed mixed results, with soybean prices falling, reflecting lower import parity prices for soybean oil and protein meal. Dairy prices increased, particularly for whole milk powder and butter, driven by strong global demand. In the meat market, beef prices dipped slightly but remained higher than the previous year, supported by increased cattle slaughter and export activity. Fresh produce inflation was notable, especially for oranges and papayas, while bananas saw deflation due to higher trading volumes.
While food inflation is expected to remain stable over the short term, meat prices could rise towards the end of this year due to demand for the festive season. Additionally, the appreciation of the rand, following September’s 50-bp interest rate cut in the US and 25-bp cut in SA, could help lower inflation on imported food products.
