MARKET REPORT
SHORT READ PART 4
2023 APRIL ISSUE
Written by : Andrew Sia
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From the Desk of the Publisher
Part 4 covered many topics extensively. We feel that knowledge is power.
We reported about the different Acts of the U.S. which Biden government brought out for the country. It is part of the “Make America Great Again”.
From this report, we can feel that the market’s spending is still weak and inflation has caused the consumer spending to be cautious.
There is the dark cloud over the world’s political situation. This has also been creating uneasiness in the market. Perhaps the only thing hopeful is the return of the Chinese tourists, but this will have to take some time for the tourism to recover. There is at least the hope out there.
With all this market information we can better prepare ourselves and act accordingly.
Contents:
Long Covid Disability is Waiting for Approval
Huawei’s Diversification in Other Businesses Would Face U.S. Sanctions
Pandemic Causing Poor Attendance for Kids in School
SMEs Business Situation in China
The U.S. Is Reshaping Its Economy
Supply Chain Dilemma is Over
The Latest on Lithium Mining in Australia
India is Going Digital for its Payment
Liquified Natural Gas Situation for 2023
The CHIPS Act Has Been Launched
Thailand Hopes for the Return of Chinese Tourists
Mexico is Reaping the Benefit From Nearshoring
Ocean Shipping is Entering Into Slumps
Sales at Big Stores
Long Covid Disability is Waiting for Approval – CNN Business, February 25, 2023
The symptoms are cognitive impairment, migraines and severe fatigue and there are estimated up to 23 million Americans to be living with post-acute sequelae SARS-CoV-2 infection. PASC is the medical name often given to Covid-19 symptoms that last or evolve after an initial infection. The chronical condition can include symptoms from memory loss and extreme fatigue to muscle weakness and musculoskeletal pain.
A study by the Brookings Institution found that as many as 683,000 workers may have left labor force due to long Covid as of October 2022. Although workers may not be able to work and yet long Covid doesn’t always qualify as a disability. So the application for disability insurance would be a very long process to get the approval.
Now that the Biden administration has announced the Covid is over and for patients who are suffering from the long Covid would have to depend on the passing of the “Care For Long Covid Act” before they can be assisted.
Huawei’s Diversification in Other Businesses Would Face U.S. Sanctions – Nikkei Asia, March 3, 2023
t’s shifting away from smartphones toward cloud technology and other business solutions is facing the same fate. At this year’s Mobile World Congress in Barcelona, Huawei occupied the largest space among exhibitors, 9,000 square meters altogether. It was showing the digitizing ports among other infrastructure and also exhibiting work in health tech. It was not showing any new smartphones.
Smartphone is under the consumer devices and obviously the U.S. trade sanction of the microchips has brought upon the effect. The 5G smartphones would require the advanced semiconductors which can only leave Huawei in supply the 4G phones instead. Its annual business turned downward after its peak in 2020.
Now Huawei is focusing on business-products to develop digitization solutions for corporate clients. They turned into the business-to-business format. It helped Huawei to achieve the revenue of $92.1 billion in 2022, which remained unchanged from 2021.
However it is preparing for a new round of sanctions just as Huawei is regaining its footing. This suggests the U.S. could block all exports to Huawei. It is in the Entity List currently and its imports for those off-the-shelf products are on a case-by-case basis.
The new round of sanctions would mean that the U.S. companies like Intel and Qualcomm will be blocked from their exports to Huawei. Also the lawmakers in Congress have criticized the current export control is having too many loopholes.
The matter is further triggered by the recent incident of the Chinese surveillance balloon found in the U.S. airspace, and the sensitivity of China’s export of semiconductors to Russia to be installed in their weapons for attacking Ukraine.
Huawei’s mainstay telecommunications segment which makes those base stations accounted for over 40% of the group’s revenue in 2021. We have to know that Huawei is the global leader in base stations and it is holding 30% of the market share.
If the further sanctions would be carried out, it remains to be seen if Huawei can survive.
Pandemic Causing Poor Attendance for Kids in School – NPR, March 2, 2023
Before the pandemic, about 8 million U.S. students were considered chronically absent. This is according to Attendance Works, a research group’s finding. That is when a student misses 10% or more of the school year. But by spring 2022, the number had doubled to around 16 million.
In a survey of 21 school districts in rural, suburban and urban areas, from New York City to Austin, Texas that there are a heightened levels of chronic absenteeism.
For students who are chronically absent are at the higher risk of falling behind, scoring lower on standardized tests and even dropping out. Students who struggle with attendance are also more likely to live in poverty which is very unfortunate.
Covid may appear to become more endemic, which is not true. Transportation for children to go to school is also an issue. In higher poverty areas where parents don’t have a fix job may not have their own transportation.
There are also the increased mental health concerns as parents have heightened their cautions especially after being affected by Covid.
The schools have to find ways to improve student’s attendance. It is also correct to say that the effect of Covid is far from over.
SMEs Business Situation in China
SMEs officially defined in China as companies with 1,000 or less employees account for about 80% of total employment and 70% of corporate revenue, making them as the crucial driver of economy of China.
China’s National Bureau of Statistics announced that the economy expanded by just 3% last year, far below the government’s target of 5.5% and the second-weakest growth figure since 1976.
The U.S. Is Reshaping Its Economy
The U.S. has just passed three huge budget measures on infrastructure, semiconductor chips and greenery for a total of $2 trillion available to shape its domestic economy.
- The Infrastructure Act will be financing $1.2 trillion for roads, bridges, cables and a new green grid;
- The CHIPS Act which promotes making semiconductors in the U.S. for $280 billion;
- The Inflation Reduction Act which contains $400 billion in subsidies for green tech over the ten years, and this figure can become $800 billion eventually.
These three initiatives are implemented to reshape its global trade relationships for going forward. It is also used to boost its competitiveness. The three acts will be used to promote growth, rebuilding supply chains, addressing climate change and provide good-paid job opportunities to its workers. There are already various forms of preferential treatment for its domestic manufacturer of critical products.
The reshaping of the U.S. domestic industry comes after the pandemic, Russian’s invasion in Ukraine and rising tensions with China all triggered to the determination of the U.S. for this change in their supply chain. For a very long time it has relied on a few countries for critical products such as medical supplies, natural gas and advanced semiconductors.
The previous approach to trade marked by market liberation and tariff elimination had imposed costs on the U.S. economy resulted high concentration of wealth, fragile supply chains, deindustrialization and the offshore sourcing brought the decline of manufacturing communities. The U.S. government is taking this as a rebalancing act.
But this has drawn the criticism from the European Union, Japan and Korea about the U.S. electric-vehicle tax-incentive program. Its tax credit of up to $7,500 per vehicle requires the local-assembly and uses the local-content requirements has discriminated against those European companies and it might also violate World Trade Organization rules.
The CHIPS Acts is also a competition with EU, Japan, South Korea and Taiwan with the incentive of subsidies. This is used as a lure for the international investors to set up their production on the U.S. soil. It is too early to say if this can be a successful tactic as the cost factors would need to find out to make sure that it can be a cost-effective operation.
The Inflation Reduction Act is seen as subsidies of billions of dollars for green tech, it aims in investment from electric vehicles to renewable energy equipment. It is used to challenge the China’s dominance of green tech. Again the Europeans see it as a poaching of their business leaders in this area. What the Europeans want to see is something structure inside the framework where the allies can both work separately and together to achieve the common goal.
Supply Chain Dilemma is Over – WSJ, February 22, 2023
Both retailers and manufacturers struggled for more than two years during the Covid shutdowns, severe labor shortages, congestions at ports, railroads and warehouses, prolonged sailing time and multiple times of increase for freight costs. At one-point importers were paying $20,000 per container by sea from Asia to the U.S. ports in the West coast. It is now going back to $2,000 or even less. In another word, the situation has eased.
Now when these issues are all solved, the retailers have found that the consumers are pulling back their spending. This resulted with some retailers sitting on the pile of high inventory that they haven’t seen before. We can see this in their reports about their earnings at the end of last quarter.
What is in front is still unclear aa the market sentiment is very bad indeed.
The Latest on Lithium Mining in Australia – WSJ, February 22, 2023
Demand for lithium for this year is expected to be 910,000 tons, it is known as lithium carbonate equivalent (LCE) and around half of all lithium is mined in Australia. Most of it can be found in Western Australia and shipped to China in its raw form known as spodumene, which is consisting about 60% lithium. It is a critical battery metal and it is getting tighter because for the need of battery for the electric vehicles.
According Benchmark Mineral Intelligence, who is tracking the global battery supply chain, is estimating by 2030 around 2.7 million tons of LCE will be needed annually. There can be a shortage of 300,000 tons.
Benchmark Mineral Intelligence also mentioned that China would account for 44% of all lithium refining globally and responsible for 70% of battery cell production.
The world has taken an approach, that is to build the refinery in Australia to refine the battery metal in order to ship by reducing the waste and to develop a new supply chain to compete with China.
Tees Valley Lithium, a U.K. company is investing in a lithium-sulfate refining facility in Australia. It plans to construct a lithium-hydroxide refinery in the north of England to produce by mid-2025.
Green Lithium Refining Ltd. Is opening a similar operation in the north of England as well.
From China, Tianqi Lithium Corp. has established a lithium-hydroxide plant in Australia with an Australian miner IGO Ltd. as partner. This facility will supply battery-production factories in Germany and Sweden.
India is Going Digital for its Payment – New York Times, March 2, 2023
The country’s prime minister, Narendra Modi, has put down the scan-and-pay system as a foundation laid by the government. The little QR code is suddenly ubiquitous across India. This code connects hundreds of millions of people in an instant payment system that has revolutionize Indian commerce. Billions of mobile app transactions take place each month through a homegrown digital network that has made the business easier.
It has expanded banking services like credit and savings and also expanded the reach of government programs and tax collection. It proves such technological innovation can help the developing countries to spur their economic growth even as their physical infrastructure can be so much behind.
This has been a campaign in India started in 2009 under Modi’s predecessor, Manmohan Singh, who delivered every citizen a unique identification number called the Asdhaar. And now 99% of adults have a biometric identification number.
Nandan Nilekani, a co-founder of the information technology giant Infosys who has been involved in India’s digital identification since its early days said that the country is ready for a technology leap. This ID eases the creation of bank account and it is the foundation of the instant payment system known as the Unified Payment Interfaces. The platform is initiated by the India’s central bank that it run by a non-profit organization which offers from hundreds of banks and dozens of mobile payment apps with no transaction fees.
In January, about eight billion transactions worth nearly $200 billion were carried out on the U.P.I. The value of instant digital transactions in India last year was far more than in the U.S., Britain, Germany and France. Actually it was to combine the four countries and multiply it by four was the total number of digital transactions.
In 2016, we read that India was trying to remove all the large-denomination currency from the market to eradicate black money in politics. That shocked the small businesses for the fear of running out of cash.
Although the system has now embedded in Indian life, question between privacy and innovation has been raised. Soon the people realized the benefit especially during this time when the Indian government has been using the digital infrastructure to manage the world’s largest vaccination program and deliver financial aid to its people during the pandemic.
Liquified Natural Gas Situation for 2023 – WSJ, January 20, 2023
The world, especially Europe, was under the threat of Russia when they curtailed their pipeline gas supply to Europe. This sent the gas prices through the roof and threatened to push Europe into recession. Fortunately the LNG prices slid after a much milder than expected winter in Europe. Asian LNG spot prices have fallen nearly 67% from the record highs. They are currently at $23 per million British thermal unit, down about 32% since early December. It was still twice as high as in mid-2021.
During 2022, LNG imports by China rose 39% against only 23% in 2021. China made up the combined European Union and U.S. gas imports. Storage of Northwest Europe remains 82% full for the winter which has brought the comfort level.
The International Energy Agency reckons the EU would face a shortfall of 27 billion cubic meters in 2023 if Russia continues to stop the supply and China’s demand rebounds to 2021 level. The price can still be about $25 per million British thermal unit.
China’s reopen after Covid won’t be the key factor for prices in 2023 as it has a massive coal-power capacity. It has also the gas supply through pipelines through Russia and Central Asia. LNG only made up of 8.9% for its overall energy demand in 2021.
The CHIPS Act Has Been Launched – New York Times, March 1, 2023
In end February the Biden unveiled the CHIPS Act program to boost semiconductor research and manufacturing in the U.S. The Commerce Department is ready to hand out $50 billion in the form of direct funding, federal loans and loan guarantees. It is one of the largest federal investments in one single industry. Given that the huge cost of building highly advanced semiconductor facilities, the competition for the funding would be intense and it would go fast.
The larger portion, $39 billion, will go to the funding of new and expanded manufacturing facilities, and the balance, $11 billion, will support the research of the new chip technologies.
For the larger portion, the $39 billion will go to a few companies that produce the world’s most advanced semiconductors and this include Taiwan Semiconductor Manufacturing Company, Samsung Electronics and Micron Technology. In the future, this might use to help Intel to expand their U.S. facilities.
Some of the money will go to the makers for those older chips as required in cars, appliances, weapons and also industry that package the chips into their final products.
Questions were already raised as giving those grants to a profitable industry, but executives from those overseas players were saying the lack of incentive to invest in the U.S. because of the higher cost of workers and running manufacturing. The Taiwan based TSMC has committed to build a $40 billion plant has complained the lack of benefit as labor costs, permits and other costs at least four times higher than Taiwan. It is a political consideration more than anything else.
It is said that the grants will be between 5 to 15%; funding not exceeding 35% of the cost; and tax credit reimbursement for 25% of project construction.
United States is still a leader in designing chips and most manufacturing has been sent offshore. Today, more than 90% of the most technological advanced chips, crucial for the U.S. military and economy, are manufactured in Taiwan. The concern about the vulnerability, given China’s aggression toward Taiwan and the potential for a military invasion of the island, has put the program as the foremost concern for a national security initiative.
For the less advanced chips, China has increased its market share in cars, electronics and other products. The U.S. has only 12% of the total chips production, but none of the most advanced.
During the pandemic, the chip shortages became obvious when the supply chain was being disrupted and it grounded many manufacturing operations, and the car industry was one of those.
TSMC, the Taiwan chip maker, has been busy in building its plant in Arizona and committed to build a $40 billion plant. Samsung is expanding its plant in Texas. Micron has announced its expansion plan in New York. Intel has just broken ground on a mega-site in Ohio.
The Commerce Department has promised to look closely to make sure that the taxpayer’s money would not be handled wrongly. But on the other hand when the reshoring is planned, there is this tight labor market that has put many businesses under the struggle.
Any of these applicants for the CHIPS Act would have to fill out details for their engagement with labor unions, schools and workforce education programs with preferences given to projects that benefit communities and workers.
Child care centers will be required if the operation is to attract more workers.
The U.S.’s intention is to build at least two manufacturing clusters to produce the most advanced types of chips as well as for other chips for more common use.
Trainings to be offered to the workers for skills in welding and advance science training to assure the trained workers and workforce training and education investment is becoming necessary as everything will need to be planned for the longer term this time.
This government managed industrial policy is like a “manufacturing moon shot” and the stakes are high for the Biden administration to prove this venture into industrial policy which is for the sake of national security. We should look forward for the total dedication from all parties to make the CHIPS Act successful.
Not to forget we have also the Infrastructure Act and the Inflation Reduction Act, both will require different project management and to deal with the labor shortage situation.
Thailand Hopes for the Return of Chinese Tourists – WSJ, February 8, 2023
According to the United Nations’ World Tourism Organization, China is the world’s largest outbound-travel market where 155 million people take trips abroad and spend $255 billion in 2019. Those Chinese tourists were a growing source of revenue in destinations across the Asian-Pacific region including countries like Thailand, Indonesia, Japan and Australia.
Its strict zero-Covid policy kept its citizen from traveling abroad for three years was eased in January and a hope of the return of its tourists has increased.
In Thailand, tourism made up a fifth of the country’s gross domestic product in 2019. At that year, about 25% of the international arrivals were coming from China and that brought 40% of international tourism revenue. The absence of the Chinese tourists devastated the country and its officials and industry professionals are saying that it could take two years for the business to bounce back to the pre-pandemic peak. But the industry is getting ready to embrace the Chinese tourists who would bring them all the businesses and the hotel is being the first to benefit.
Even the monks from at Wat Arun temple, one of those Bangkok’s most popular tourist attractions have urged for the tourists’ arrival. Its modest entrance fee of $3 is helpful to feed the local community when times are tough.
Mexico is Reaping the Benefit from Nearshoring – WSJ, February 8, 2023
We saw the American companies and even some foreign companies are shifting production to Mexico for a manufacturing bub that is closer to the U.S. market. This is part of the change in global supply chains that are relocating from Asia after disruptions with China in particular during this period. This is also part of the “nearshoring” as the trend.
Big owners of the industrial properties are moving to Mexico and using the north of the border for warehousing. Prologis Inc., who is the world’s largest logistics real-estate company and Morgan Stanley, acting as investors, are focusing in the U.S. border towns in California and Texas for warehouses.
Industrial space overall has been one of the hottest sectors in commercial property and this has been in demand especially during the pandemic due to the e-commerce demand. Both rents and occupancies have been in high demand throughout 2022.
Prologis claimed to own 44 million square feet of industrial space in Mexico. Nearshoring-related expansions and relocations accounted for half of the market demand in 2022, particular in Monterrey, Juarez and Tijuana.
Likewise, nearshoring is also creating new demands for logistics properties in cities such as El Paso and Laredo in Texas, San Diego and Tucson in Arizona.
We have seen manufacturing shifts south of the border for the U.S. as for some goods like electronics and medical devices where a more skilled labor force is required for final assembly on parts and components ship over from Mexico.
This shifting of warehousing, logistics and manufacturing has created a new situation in the two borders that are shared by Mexico and the U.S.
For part of the considerations, more companies are debating whether to hold more inventory or to face the loss of the sales.
Ocean Shipping is Entering Into Slumps – WSJ, March 3, 2023
During the pandemic, we have seen the soaring demand for the shipping industry, and now because of the plunging exports, the ocean rates are falling which may trigger a price war among the shipping companies.
We have seen the port activities in China have slowed significantly and empty containers have stacked six high and trucks with no cargo loaded in the containers are driving on the highways to create a disillusion to hide the reality from its nationals.
The falling volumes have pushed the global shipping freight rate into a downward spiral. It dropped from its peak of $15,600 a year ago to $1,238 this week for shipping a container from China to Los Angeles.
Global shipping soared at the beginning of the pandemic and demand for goods resulted over 1,000 vessels line up off the coast of South California.
This, plus the other factors, created inflation, but also moved the consumers toward food, fuel, services and necessities, that left the retailers the retailers stuck with those dispensable items.
In these days those conglomerate shipping liners—A.P. Moller-Maersk A/S and Mediterranean Shipping Company—who made recorded profit during the pandemic, have been back now in a new reality, that is, over the past three months they have held back up to a third of scheduled capacity from Asia to the U.S. and 20% from Asia to Europe. The industry has to idle 7% of their global vessel capacity. These vessels are either moored at shipyards for maintenance, or anchored in the waters outside Malaysia and other locations in Southeast Asia.
This happened before during the 2008 financial crisis and also in 2016 when the shipping industry went into consolidation which cut the global players by half.
At the Trans-Pacific Maritime conferences in Long Beach, an annual gathering for the shipping and logistics industries that was held in February, the general consensus was that the inventory levels are still extremely high. The industry’s biggest customers—Amazon.com Inc., Target Corp, and Home Depot Inc.—are facing uncertainties from the market. It will need the consumers to spend to reduce the inventory level and the demand for imports will resume.
But if the economy contracts, freight rates will expect to fall below its breakeven level and this will trigger a price war among all the shipping lines. They will have to cough up those extraordinary profits they reaped in the last three years.
Already the shipping industry is preparing for consolidations, take for example, Mediterranean Shipping Co., (MSC), who have the largest fleet with 700 vessels, will return up to 60 chartered ships to their owners and scrap a number of older vessels. Its order of 300 new ships that will be added to its fleet over the next 3.5 years.
The National Retail Federation estimates that the U.S. sea import volumes to drop by 12% compared with January. This number also showed that the numbers went down 26% a year ago.
Already in January, the 2M Alliance—Maersk and MSC—declared that in 2025 the partnership will end. It was a partnership formed in 2015 to help each other to reduce costs by sharing cargo on major shipping routes.
It is important to know that rivals formed similar partnerships and created the Ocean Alliance and THE Alliance. These three groups account for 75% of the global container-shipping capacity.
At the Trans-Pacific Maritime conferences in Long Beach it was also mentioned that the shipping contracts at this time are 30% less compared with last years. Big shippers are known for negotiating the long-term ocean freight rate every year. The trend is now for the spot rate and after the hard negotiation. The shipping industry is facing hardship this time.
Sales at Big Stores – WSJ, March 3, 2023
We have noticed that consumers are pulling back spending on apparel and electronics in recent months while continuing to spend on groceries and other necessities. But the lifting of the pandemic, we have noticed consumers shifting from home goods to casualwear as homebound consumers look for spending from services to activities outside their home. And as health restrictions eased, we have seen spending on travel, entertainment and sales.
According to Commerce Department data, retail spending rose 3% in the first month of 2023 from December 2022. Spending was found in furniture, vehicles, clothing and dining.
We have collected the remarks from the big stores about the market as the following:
Macy’s Inc. – They are expecting the sales to fall this year which is the further drop after the decline in 2022. This is the result of the inflation and other economic issues weight on shoppers. It said that sales could fall as much as 3% this year. And as consumers across all income levels remain under pressure, projecting for sales growth will have to wait until 2024. The company plans to add 2,000 more brands to its online marketplace that offer items from third-party sellers. Macy’s profit in the quarter fell 32% from a year earlier to $508 million. Comparable sales fell 3.3% in the fourth quarter.
Kroger Co. – It is the biggest supermarket operators in the U.S. who commented that the consumers are behaving as if they are already in a recession. They are shopping more frequent than they have in recent months. Spending money on premium branded beer would be a treat for themselves. Kroger gained more customers from higher-income households as they cut back on dining out and switch from more expensive retailers. Its same store growth rose 6.2% compared with a year ago as customers continue to spend on groceries. Food prices increased 11.3% in January from same time last year. Its total revenue reached $34.82 billion this time.
Big Lots Inc. – It is a furniture and home-decor retailers, declined to provide annual guideline for now because of the greater-than-usual uncertainty in the macroeconomic environment.
Best Buy – Expects 2023 to be the bottom for the decline in tech demand as sales growth during the pandemic created a larger base of installed devices in American families. On average the U.S. households now have twice as many connected devices than in 2019. Its quarter, ended January 28, sales fell nearly 10% which was dragged down by soft spending on products from computers and phones to home theatres and appliances.
Walmart Inc. – There are more high-income customers who look for deals and opt for cheaper and private-label brands. Sales of food and beverages are on the rise as more people are making food at home.
Costco Wholesale Corp. – Reporting that people are buying more food and essentials but less expensive items. Shoppers are going to the warehouse retailers for bulk purchase. Its comparable sales, those from stores or digital channels for the last 12 months rose 6.8%. Its quarterly net sales rose 6.5% to $54.24 billion.