Value context and insight. lkm@koreatimes.co.kr
'Greenflation' concerns mount amid ESG drive
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By Lee Kyung-min
Commodity price volatility to hinder economic recovery
By Lee Kyung-min
The specter of “greenflation,” as defined by surging commodity prices due to rising demand amid production cuts during a green transition phase, is weighing on the economy, already crippled significantly by COVID-19-oriented inflation woes over the past year.
The recent price increase in raw materials for green energy including aluminum, a crucial material for electric vehicle (EV) batteries, will be sustained for months to come, anchored by a global wave of carbon neutrality regulations, coupled with the ever expanding environmental, social and governance (ESG) drive.
The prospect of a much-awaited global economic recovery in turn will be dampened by fresh price volatility, flattened further by a sharp reduction both in household purchasing power and business sentiment amid soaring costs for goods and services, and of production.
Some experts point out the paradox of green energy, as illustrated by a spike in prices for industrial production, compounded by supply chain disruptions due to the renouncement of coal policy. Some say the toxic combination could be the spark that ignites an energy crisis in China and Europe.
China
According to the London Metal Exchange (LME), prices of aluminum, copper and nickel reported a year-to-date increase of 47.8 percent, 20.7 percent and 15.9 percent, respectively, as of Sept. 24.
The price surge is explained in large part by production difficulties due to stricter environmental regulations, compounded by rising demand from eco-friendly industries including manufacturers of EVs and batteries.
Chief among the price drivers is China, the largest producer of aluminum, a key material for EV batteries and solar panels.
Aluminum production requires a large amount of coal-dependent electricity, a reason why some provinces in China have restricted the electricity supply to aluminum producers. This had led to a drop in facility operation and the subsequent increase in price.
“The Chinese government is highly likely to push for the carbon-neutral policy ahead of the 2022 Beijing Winter Olympics, and this could significantly slow industrial activities,” a Hi Investment & Securities report said.
President Moon Jae-in, center, presides over a meeting on carbon neutrality at Cheong Wa Dae, Nov. 27, 2020. Korea Times file
Europe
Natural gas prices have more than doubled since the beginning of the year from $2.80 (3,318 won) in January to $4.96 as of Sept. 21, propped up by strong demand for power generation despite the decrease in supply.
Of note is a rise in the price of coal, the most widely used energy source, led by unexpected demand for Greenflation industrial power generation amid low output due to green regulations.
“Natural gas demand was pushed up, primarily because of little wind in the North Sea, hampering stable production of electricity through renewable energy. Manufacturers need energy for production, but a lower-than-needed supply drove the price hike,” the report added.
These factors are likely to disrupt the economic cycle, adding to the already heavy inflationary pressure, according to Seoul National University economist Lee In-ho.
Prices will rise, since supply chain disruptions have yet to and are unlikely to be resolved any time soon, in his view. The problem will become pronounced in the coming months with winter approaching, especially so in Europe, where natural gas is used for heating.
“Surging energy prices will put a greater strain on both businesses and households, already reeling from the yearlong fallout of the COVID-19 pandemic ― notably soaring prices,” he added.
The Bank of Korea said last month that the country is expected to report inflation of 2.1 percent this year, up 0.3 percentage points from the 1.8 percent projected earlier.