by Louis Navellier

March 15, 2022

After closing down several domestic pipelines and energy sources, the Biden Administration amazingly is relying on a series of “bad actors” on the world scene to fill our energy shortages. It’s not just Russia and Putin, but the U.S. also sent a delegation to Venezuela to meet with the government of President Nicolas Maduro to have him break ties with Russia and restart trading crude oil with the U.S. The President also called Saudi Arabia, which is sponsoring its own oppressive war against Yemen, but the Saudis did not return his call. Furthermore, there are also widespread reports that a new Iran nuclear deal many be in the works, since many Western nations would be willing to import more Iranian crude oil to fill their needs.

Essentially, the U.S. is trying to disrupt all Russian crude oil output, which represent 7% of worldwide production, by making deals with our previous enemies, especially if these countries isolate Russia, but some of these competing energy producers may be only slightly less dangerous or corrupt than Russia.

Europe is “hooked” on Russian energy, so Germany has come out against a ban on Russia crude oil. Both France and Italy also want to continue to buy Russian crude oil. As a result, a Western alliance against banning Russian crude oil remains problematic. Britain’s Prime Minister Boris Johnson remains more hawkish against Russia than the EU, so Britain and the U.S. decided to proceed with their own Russian sanctions. Last Tuesday, Britain and the Biden Administration announced that they are implementing a ban on all imports of Russian crude oil. The U.S. ban is effective immediately, while Britain said they will phase out Russian crude oil imports by the end of this year – meaning 9+ months of phased withdrawal.

Interestingly, Elon Musk has tweeted that “it is now extremely obvious that Europe should restart their dormant nuclear power stations and increase power output of existing ones,” an apparent dig at Germany, where Tesla’s new Berlin manufacturing plant has been approved. Musk also tweeted the obvious – even though Tesla makes EVs: “Hate to say it, but we need to increase oil & gas output immediately.”

According to the United Nations, worldwide food prices have risen 20.7% in the past 12 months. Ukraine is “the breadbasket of Europe,” and Russia is also a major wheat producer (Ukraine accounts for 10% of global wheat production, and Russia accounts for 20%). Already, wheat futures prices have soared by nearly 50% and have been trading “limit up” for five days in a row – and they should continue to rise.

Furthermore, higher energy prices are pushing up fertilizer prices, which in turn naturally increase crop prices, so I think that we can all agree that food and energy inflation is now spinning out of control.

Ukraine also supplies 70% of the neon used in the world. Neon is used by semiconductor manufacturers to run their lasers that are required to manufacturer chips. Fortunately, most semiconductor manufacturers stockpiled neon prior to the Ukrainian invasion, so if there is a worldwide disruption in chip production, it will most likely materialize in the third quarter. Russia is the other major producer of neon, so the semiconductor chip crisis is about to get worse if the Russian invasion of Ukraine persists.

Let’s all hope and pray that the Ukrainian invasion is over as soon as possible.

The Impact of the Ukraine Invasion Will Hurt Electric Vehicle Production

In the meantime, the London Metal Exchange (LME) stopped nickel trading last Tuesday after the metal soared 250% in a week. This price surge is related to a short squeeze after the China Construction Bank, a state-owned company, was given extra time to pay a margin call for a client. This 250% surge in nickel prices is the most extraordinary rise in the 145-year history of the LME, which prides itself on being the “market of last resort” for industrial metals like aluminum, copper, nickel, and zinc.

Amazingly, according to The Wall Street Journal, the LME will remain closed for another week to resolve the massive loss in nickel trading from China. An official LME statement said, “The LME is doing everything it can to reopen the market as safely and swiftly as possible.”

Nickel is used to make stainless steel, but the key emerging use in today’s market is as a major component in lithium-ion batteries. Since Russia is a major nickel supplier, the Ukrainian invasion has effectively curtailed the EV revolution, since higher nickel prices will cause lithium-ion battery prices to rise. Lithium-ion batteries have been using more nickel in recent years, because adding more nickel allows automakers to increase the battery’s energy density. Specifically, lithium-ion batteries are now at least 60% nickel, up from about 33% a few years ago. Interestingly, Tesla’s new NCMA lithium-ion batteries from LG Chem are 90% nickel. Furthermore, LG Chem is GM’s battery supplier and its new EVs will also use the NCMA lithium-ion batteries with higher nickel density, so expect the price of EVs to remain high, since the prices of cobalt, lithium, and nickel are all at or near record highs!

Rivian Automotive (RIVN) announced on Thursday that it will utilize a new type of battery in its EVs. Specifically, Rivian is following Tesla in China by using less efficient iron-phosphate batteries that also use a lot of nickel. Rivian surprised many of its reservation holders with 17% to 20% price hikes that triggered some lawsuits. The company then reversed those price hikes for all reservation holders before March 1st. However, by utilizing cheaper and less efficient iron-phosphate batteries, Rivian is also effectively cutting the price of the components in its EVs, since originally all its EVs were supposed to utilize more expensive and longer-range lithium-ion batteries. This Rivian PR mess just demonstrates how EV manufacturers are struggling with the shortage and higher prices of lithium-ion batteries.

In the meantime, VW has shut down multiple manufacturing plants for its EVs and plug-in hybrids due to a wiring harness disruption from a Ukrainian supplier. Porsche announced it is shutting down production at its Leipzig factory through March 11th due to the same supplier problem. If this wiring harness disruption persists, then Porsche will also shut down its Stuttgart-Zuffenhausen factory production on March 14th for its 718 model and on March 17th for its flagship 911 model. As part of VW Group, Porsche has not been impacted as much as other VW brands, like Audi and Seat, because Porsche vehicles are so profitable. However, now that Porsche’s most expensive models may halt production in the upcoming week, this just demonstrates how acutely the current parts shortage has been exasperated by the Ukrainian invasion.

I should add that Russia had to shut down its Lada manufacturing plant due to Western sanctions. Lada is Russia’s only homegrown vehicle manufacturer, accounting for 21% of domestic vehicle sales in 2021. The Swift payment banking sanction has made it hard for Russian companies to transact with Western companies, so Lada is just one of many Russian companies that may have to shut down permanently, or at least until Western sanctions are lifted. Apparently, Ladas have a lot of German components, so fixing the Ladas on the road in Russia will soon become problematic.

Ironically, as Russia continues to get bogged down in Ukraine and causalities mount, the biggest fear is that Vladimir Putin may become more erratic if Western nations retaliate. The White House offered Poland F-16s as replacements if they give Ukraine their Mig-29s. Poland is in the process of upgrading its military aircraft and started flying F-16s back in 2006. Furthermore, Poland signed a deal in 2020 to acquire 32 F-35s that will arrive in 2024. So, the U.S. offered to help Poland upgrade its aircraft faster if Poland allows their Mig-29s to go to Ukraine. Then, on Tuesday, Poland decided to transfer its Mig-29s “immediately and free of charge” to a U.S. military base in Ramstein, Germany on the condition that the U.S. supply Poland with “corresponding capabilities.” The Pentagon dismissed Poland’s Mig-29 transfer plan as “not tenable,” perhaps due to the fact that flying the Mig-29s from a NATO base to Ukraine would raise the risk of escalating a NATO conflict with Russia, triggering Putin’s implied threats.

Not only has the Russian ruble has plummeted 50% — reaching a record low – but the euro is now losing its value (though more slowly), as the European Union slips into a recession. The European Central Bank (ECB) meets on Thursday and virtually no one is expecting a key interest rate increase. ECB President Christine Lagarde’s press conference is going to be closely scrutinized, but other than blaming Russia’s invasion for inflation, there is little that can be done to fight the recent surge in food and energy prices.

One big surprise was that the European Central Bank (ECB) said last Thursday that it is finally planning on winding down its quantitative easing (QE) in the third quarter before considering any interest rate hike.

Essentially, the ECB is now following the same steps as the Federal Reserve. This was a surprising move, since the ECB essentially pioneered Modern Monetary Theory (MMT) in 2015. This is essentially unlimited quantitative easing. Frankly, the ECB may be worried about the recent weakness in the euro, as the EU slips into a recession. Specifically, the ECB said that any interest rate adjustments would take “some time” and be “gradual,” so the ECB will remain at a 0% interest ratedespite hideous inflation.

Navellier & Associates owns Volkswagen Ag. (VAWAGY), and a few accounts own Tesla (TSLA), per client request in managed accounts. We do not own General Motors (GM), LG Chem, or Rivian Automotive (RIVN). Louis Navellier and his family own Volkswagen Ag. (VAWAGY), via a Navellier managed account, He does not own Tesla  (TSLA), General Motors (GM), LG Chem, or Rivian Automotive (RIVN) personally.

U.S. Economic News is Beginning to Reflect Runaway Commodity Inflation

The Commerce Department announced last Tuesday that the U.S. trade deficit surged 9.4% to $89.7 billion in January, much of it tied to rising energy imports and high-priced commodities. Exports declined 1.7% in January to $224.4 billion, while imports rose 1.2% to $314.1 billion. This bigger-than-expected trade deficit will likely cause economists to reduce their first-quarter GDP estimates, and the higher prices for energy imports since January will also likely push the U.S. trade deficit higher in future months.

Speaking of GDP, the Atlanta Fed on Tuesday raised its first-quarter GDP forecast to a 0.5% annual pace, up from its previous forecast of 0%. This 0.5% increase was based on a rise in real personal consumption expenditures growth from 2.3% to 3.4%. Still, there are a lot of economic headwinds in March, so I expect their GDP forecasts to remain erratic in the upcoming month. Still, we should avoid a recession.

The big news, as I summarized in the opener, was the Labor Department’s Thursday announcement that the Consumer Price Index (CPI) rose 0.8% in February and is now running at a 12-month rate of 7.9%, the fastest pace in 40 years (since January 1982). The core CPI, excluding food and energy, rose 0.7% and an annual pace of 6.4%, also the highest since 1982. Food prices rose 1% in February, led by a 2.3% increase in fruits and vegetables. Meats, poultry, fish, and egg prices rose 1.2% and have risen 13% in the past 12 months. Energy prices soared 3.5% last month, as gasoline prices rose 6.6%. Airline fares rose 5.2% in February due mostly to higher fuel prices. There is no doubt that inflation, led by food and energy, will continue to surge, so 10% annual consumer inflation is very possible in upcoming months.

Additionally, the Labor Department announced that weekly unemployment claims rose to 227,000 in the latest week, up from a revised 216,000 in the previous week. Continuing unemployment claims dropped to 1.494 million in the latest week from a revised 1.519 million in the previous week.

All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.

Please see important disclosures below.

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The Messy Geopolitics of Global Energy

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U.S. Natural Gas Prices Could Rally Big by 2023

Growth Mail by Gary Alexander
Beware the Ides of March (Again)

Global Mail by Ivan Martchev
Nickel’s Monstrous Short Squeeze

Sector Spotlight by Jason Bodner
At Times Like This, What Would Warren Do?

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