Dragoman Digest
23 February 2024
German manufacturing sector faces significant downturn
Berlin wrestling with high energy prices, Chinese competition and political roadblocks
German industry is experiencing a financial slump, as it tackles a series of compounding pressures. The value of Germany’s manufacturing sector – which accounts for almost 20 percent of its economy - declined 2 percent year-on-year last December. Key industries and mainstays of entire local economies have been affected.
Some of the most significant repercussions include:
Almost 10 percent of chemical companies plan to permanently cease production. BASF, the largest chemical producer in Europe, is laying off 2,600 employees.
Germany’s largest solar manufacturer Meyer Burger says it may offshore production to the US if production costs do not improve. Rival manufacturer Solarwatt slashed 10 percent of its workforce and threatened to relocate production overseas.
Tyre makers Michelin and Good Year will each close two plants in the next few years, affecting over 3,000 workers.
There are a variety of factors affecting Germany’s industrial sector. The energy-intensive chemicals industry is still trying to recover from the sudden loss of cheap Russian pipeline gas following the invasion of Ukraine. While Germany’s industrial energy prices have since returned to pre-war levels, they remain notably higher than alternative chemical manufacturing locations such as the US and China. Additionally, China has historically been a major importer of German machinery and automobile products. However, successive rounds of industrial upgrading have seen China become increasingly self-sufficient in those sectors, and even compete with Germany in foreign markets.
The government has also been slow to institute reforms to address the country’s shrinking working age population, aging infrastructure and abundant red tape. Split views between the coalition government’s three parties on how to revive the economy have complicated matters further. Germany’s Social Democrats and Greens are pushing to reform the constitution’s limit on government debt, while on the other hand the Free Democrats have corporate tax cuts at the top of their agenda.
Venezuela amplifies rhetoric on claim to land in Guyana
Campaign likely a ploy to pressure Guyana into sharing oil windfall
Venezuela has ramped up threats that it will annex the Essequibo region in Guyana, ostensibly to coerce its neighbour into sharing the benefits of its newfound energy reserves that are in disputed waters. The Essequibo is a mostly jungle-covered region that makes up around two thirds of Guyana and hosts about 16 percent of its population. In recent months, Venezuelan President Maduro has conjured a centuries-old claim to the region, remarking on national television that “the Essequibo is ours” and distributing maps of Venezuela that encompass the region. Maduro also pushed through a referendum held in December in which over 96 percent of Venezuelan voters supported annexing the Essequibo – albeit with a turnout of10 percent. Venezuela has moved in light tanks and expanded a military base on the Cuyuni River on the Guyanese border. It has also deployed Russian and Iranian-made missile-equipped patrol boats and anti-aircraft systems close to the coastal border. Venezuela’s army has 150,000 active soldiers, dwarfing Guyana’s 3,000. Venezuela’s military works closely with Russia and Iran, while Guyana receives military backing from the US and UK.
Venezuela’s provocations are an attempt to gain leverage in negotiations over Guyana’s oil reserves. In 2015, a consortium led by ExxonMobil – also including Chevron and China’s CNOOC - discovered vast oil deposits off the coast of Guyana. Last October, the consortium announced another major discovery off Guyana’s coast, bringing the country’s estimated oil reserves to almost 11 billion barrels. For months, Venezuela has been attempting to bring Guyana to the negotiating table for a deal in which would see it benefit from the reserves. However, it is yet to be successful. Venezuela has subsequently turned up the pressure on Guyana. Tellingly, the country transported its military equipment to the Guyanese border at the same time as the foreign ministers of Venezuela and Guyana met to discuss disagreements in Brazil last month. Maduro’s actions signal that the Biden administration’s efforts to moderate Maduro’s behaviour have failed. Last October, Washington struck a deal with Maduro to ease severe Trump-era sanctions on Venezuela’s oil and gas industry to incentivise Caracas to lift bans on opposition presidential candidates and for the release of political prisoners. Maduro’s threats to Guyana may play a part in causing the Biden administration to reimpose the sanctions.
Map of Venezuela’s claims to the Essequibo
Source: Venezuela’s National Organisation for Maritime Safety, Financial Times
Chinese EV companies working to establish internal shipping capabilities
Streamlining exports to Europe a key factor
Chinese EV companies are striving to develop in-house shipping capabilities, aiming to eliminate a bottleneck in the EV supply chain. Many are purchasing Roll-on Roll-off (RORO) ships designed to carry vehicles that can be driven on and off vessels using their own wheels. Rent prices and shipping times for vessels have hampered Chinese EV exports over the past year. The global carrier fleet increased only 2 percent from 2019 to 2023 despite soaring demand for Chinese EVs. The price of renting RORO ships has surged seven times to an average US$115,000 from 2019 to 2023, partially due to the rerouting of vessels avoiding the Red Sea in recent months.
Last month, BYD - the world’s largest EV manufacturer - completed its first voyage of the BYD Explorer No. 1. The company aims to operate 7 RORO ships in the next two years. Similarly, a JV between Chinese shipping company COSCO, Shanghai International Port Group and SAIC Motors intends to operate a fleet of 30 RORO vessels by 2026. A JV between China’s JAC Motors, Chery and Anhui Port & Shipping also aims to have three RORO ships by March next year.
The integration of shipping operations into businesses is a further factor enabling Chinese EV exports to Europe. As much as 18 percent of BYD’s new energy vehicles sales are sold abroad. However, maintaining manufacturing in China is key for Chinese companies to leverage far lower EV manufacturing costs - typically a fifth of those in Europe. China’s competitive production costs partially stem from its dominance of critical EV supply chain segments such as batteries, where it accounts for over three quarters of global production. This will complicate the EU’s efforts to contain China’s dominance of EV supply chains, and adds a new topic to the EU’s probe into Chinese EV subsidies.
Türkiye and Egypt rekindle long-fractured ties
Warming relations likely to deepen economic partnerships
Türkiye and Egypt’s leaders held their first bilateral meeting in 12 years, signalling a significant improvement in relations between the two countries. Relations between Ankara and Cairo fractured following Egypt’s 2013 coup in which former chief General El-Sisi – now President – overthrew former Islamist President Morsi. Türkish President Erdoğan – then Prime Minister – was a strategic ally of Morsi and the Muslim Brotherhood, and for years expressed outrage over the coup. The countries are still at odds in Libya, where Türkiye provides military support to the UN-recognised Government of National Accord and Egypt the opposing Libyan National Army. However, this has ceased to be a flashpoint in the countries’ relations in recent years as front lines have effectively stabilised. Türkiye and Egypt have in recent years moved to revive relations through multiple unofficial meetings and the restoration of formal relations last July.
The rehabilitation of relations between Türkiye and Egypt may have a significant economic impact on both countries. Despite the extreme lows reached in their relationship over the past decade, Egypt has remained Türkiye’s largest trading partner. Last August, the countries agreed to target an increase in bilateral trade from US$10 billion to US$15 billion in five years. Türkiye appears to be reprising the same playbook it used to repair relations with the UAE and Saudi Arabia for economic benefit over the past few years. One sector that is bound to benefit is defence, with the countries signing multiple deals on joint production in recent months and Türkiye’s aims to increase sales of its state-of-the-art drones. A closer relationship with Egypt could also give Türkiye a leg up in its dispute with Greece over the boundaries of exclusive economic zones in the Mediterranean Sea. Each country claims the other is violating its lawful right to sections of the Aegean Sea and has threatened the use of military force to stake its claim. Nevertheless, Egypt’s influence in the dispute is constricted by its own desire to maintain cordial relations with Greece.
Algeria emerging as focal point in Germany’s energy diversification efforts
Investors eyeing North Africa’s gas resources and untapped renewable potential
Algeria is emerging as an alternative energy hub for Germany, as the country looks to shore up supplies to replace Russian gas. This month, Algerian state-owned oil and gas producer Sonatrach struck a deal to supply pipeline gas to German gas trader VNG. The amount of gas that will be traded is unknown. The companies also agreed to establish a task force to explore the development of green hydrogen capabilities in Algeria. Algeria is the fifth largest natural gas producer in the world, with an annual production of approximately 106 billion cubic metres. Since the invasion of Ukraine, Germany has scrambled to make up for the loss of energy supplies from Russia, from which it sourced 55 percent of its gas.
The deal is a recent development in an ongoing trend that has seen Europe look towards North Africa for its energy supplies. Countries such as Portugal, Spain, France, Italy, Slovenia, the UK and Türkiye have also looked to secure gas from Algeria since the breakout of the Ukraine war. Many European countries are also looking to build wind and solar projects across the region due to its high wind speeds and solar radiation levels. Hydrogen is a further, future orientated plank of Europe’s energy diversification strategy. The EU’s Global Gateway Initiative, for instance, has designated €100 million (US$108 million) towards a hydrogen power plant in Morocco. While North African countries may face substantial challenges in securing water supplies and building out infrastructure to establish a hydrogen industry, the region remains poised benefit greatly from Europe’s energy diversification efforts.