Low-Emissions Hydrogen and Ammonia
As decarbonisation quickens over the coming decade, the need for low-emissions hydrogen and ammonia will accelerate.
Our new Low-Emissions Hydrogen and Ammonia Service offers a full view of emerging markets, leveraging our data, insight, and expertise across major commodity markets and industrial sectors so that you can stay ahead, stay informed, and drive your business forward with confidence.
#Emissions #Decarbonisation #Hydrogen #Ammonia #lowemissionsammonia #lowemissionshydrogen
German industry: Not as bad as it seems?
Nowadays, there is widespread talk of Germany's deindustrialization, as its manufacturing industry has been in structural decline since 2018. This is at least true if you trust the German industrial production (IP) index, which stands 8% below pre-pandemic levels – but why would you not? Looking at the gross value added (GVA) of the German manufacturing sector, the picture is far less negative – see the chart below. In fact, the GVA of the manufacturing sector in Germany in the last quarter of 2023 is almost exactly at the same level as before the pandemic.
Why do the measures differ?
Although both series attempt to measure the same thing – namely the value added created by German industry – they differ in detail, most importantly in how they account for intermediate inputs. Value-added for any particular sector or firm is defined as gross output (production)minus purchases of intermediate inputs, so the treatment of the latter can make a big difference.
The industrial production index is the timelier measure and receives the most attention. It is based on production data and is published every month but relies on simplifications. Firstly, that the ratio of intermediate inputs to production in each industrial sub-sector is constant. Secondly, the IP Index assumes that the composition of German industry has not changed since 2015, as the weighting of sectors is based on 2015 shares.
The GVA measure is published quarterly, feeds into GDP data and is revised (usually upwards) when more accurate data becomes available. It includes (eventually) a full assessment of intermediate inputs – it does not assume the ratio of outputs to inputs remains fixed. The GVA measure is, therefore, the more accurate measure of the performance of German industry.
There are two possible causes for the divergence of GVA and IP. First, falling input ratios could be the cause. Secondly, the divergence could be due to changes in the structure of the industrial sector.
A fall in input ratios
Input ratios are the share of external inputs of any given production. There is real evidence for this hypothesis, as input ratios have fallen since 2010 after having risen significantly in the 1990s. There are several reasons that could have led to a decrease in input ratios. First, input ratios could have decreased due to changes in supply chains. In the face of supply chain disruptions due to trade wars, geopolitical tensions and climate events, European officials and manufacturers have increasingly discussed reducing supply chain risk through nearshoring.?
These nearshoring activities may have resulted in German manufacturers using fewer external goods in their production process. Another explanation for the decline in input ratios could be that the increasing automation of the production process has reduced the comparative advantage of low-income countries, so that production has shifted back to Germany. The decline in input ratios cannot be observed in all sectors of the industry; in sectors such as metal production and processing and mechanical engineering, input ratios have in fact risen.?
On the other side, input ratios could have dropped because of changes in the industrial structure, this could mean that high capital and input intensive production (such as a typical assembly line) moved abroad while more human-capital and less input intensive production took its place. Looking at Poland, we can observe the German divergence in reverse, for the last couple of year IP has been growing much stronger than manufacturing GVA. This could indicate that less GVA intensive industries have been moving from Germany to Poland and other economies in central and eastern Europe. It is likely that the offshoring of capital-intensive industries explains the divergence prior to Covid while the bigger divergence after the pandemic is due to onshoring developments in light of supply chain risks.?
Finally, input ratios could have decreased as German companies became more efficient in production (especially with regards to energy and gas). Many German companies have reduced their energy intensity while maintaining the same level of production (we have discussed this here). A survey by the German ifo Institute found that 75% of German manufacturers were able to use less energy while keeping their own output constant. The real input ratios would, therefore, be lower. However, as the gap began to widen after the pandemic and input ratios have been declining since 2010, the extent of the energy effect is likely to be limited.
Structural shifts in the composition of industry
Structural shifts in the industrial sector could lead to a decline in IP due to the 2015 sector weights used. For example, if a new and growing sector’s activity increases while an old and declining industry’s activity decreases, the weights would cause a decline in IP even if the aggregate value added remains constant. Early this year, the base year was moved forward to 2021, which should reduce any composition effects. Comparing the IP index based on new weights does not change the gap between IP and manufacturing GVA. This suggests that the between sector effect has been small.
A false alarm?
However, this does not mean that all is well in German manufacturing. While the two measures are at different levels, both show a decline in 2023, suggesting that the sector is indeed struggling. Stagnation in the manufacturing sector since 2018, as indicated by the GVA measure, is also no cause for celebration.?
Abstracting from the volatility during the pandemic, as seen in the chart above, there has been some downward trend in the share of manufacturing GVA in GDP, but not a dramatic one. Although current talks of a German deindustrialization may be exaggerated, German industry continues to face several structural problems, such as high energy costs, global supply chain frictions and increasing Chinese competition in the automotive sector.
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Exciting news! The CRU team will be attending the upcoming SIMPOSIO XV ENCUENTRO INTERNACIONAL DE MINERíA in Lima, Peru!
Join us from May 21-23 at the JW Marriott Hotel Lima where CRU's Simon Morris, Mario Molina, and Johan Pulido will be eager to connect and discuss the latest advancements in the mining industry, including the global significance of metals for clean energies.
On May 23 at 11:00 AM, our Head of Base Metals, Simon Morris will be delivering a lecture on the importance of #copper in the global economy. Don't miss out on this insightful session!
Attending the event? We'd love to meet you! Stop by to say hello or reach out to the team to schedule a meeting.
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The electricity grid: powering the energy transition
Our complimentary "The electricity grid: powering the energy transition" webinar is happening on 22nd May at 3:00 PM BST.
Don't miss out on insightful discussions about our Power Transition Service, Sustainability and Emissions Service, and forecast for solar power capacity and generation to 2050.
Our experts will also address the following key questions:
#emissions #sustainability #energytransition #solar
Regional overview of the steel market in Mexico for 2024 and global decarbonization strategies
Mexico has a key role in the regional #steel market, with new steel capacities in the country and the relocation of supply chains. What does this mean for the global industry?
Join us on 30th May at 12:00 PM CST / 7:00 PM GMT / 2:00 PM CLT for our complimentary "Regional overview of the steel market in Mexico for 2024 and global decarbonization strategies" webinar where our experts will provide insights into this topic.
#Decarbonisation #EnergyTransition #Mexico
(Please note that this webinar will be delivered in Spanish.)