MARKET REPORT
SHORT READ PART 1
2022 JANUARY QUARTERLY ISSUE
Written by : Andrew Sia
Contents:
Fuel-Supply Problems in the UK
Laos, the Piece of the Puzzles of China’s Belt & Road Initiative
Supply Chain Woes
India’s Latest Situation
What We Should Deal with the Plastic
Crypto Miners Are to Cut Emissions
Japan Reopened Borders and Lifted the Travel Ban
US is Spending $17 Billion to Improve Supply Chain Resiliency
German Economy is Stalling
Germany Covid-19 Cases Set Record
Rivian is the New Electric Vehicle Start-Up
Truck Drivers and the US Supply Chain
African Countries in the COP26 Discussion
China’s Factory Gate Prices in October
Nuclear as the Source of Clean Energy
Delivery on Promise for Businesses
Fuel-Supply Problems in the UK
The British motorists are queuing for petrol, one of the causes is the shortage of lorry drivers to deliver and this is exacerbated by Brexit. This has also made it harder and less attractive for foreign drivers to work in Britain. On the other hand the drivers are rushing over to get their tanks fill up but the government has assured the people that there are plenty of fuels in the depot.
Other European countries also have fuel-supply problems.
Laos, the Piece of the Puzzles of China’s Belt & Road Initiative
The China-Laos Railway, is known as a flagship project of the BRI, and it is connected to Vientiane, capital of Laos. It is also a $3.6 billion debt, and together with other debts, Laos already has sovereign debts equivalent to about 60% of GDP on its book and half of it owed to China.
AidData is a research unit at William and Mary, a university in the US, tallied a total of 13,427 projects which China had provided about $800 billion in lending over a period of 18 years starting in 2000. This included the so called “hidden debts” of $385 billion. And 44 countries that owe the equivalent of at least 10% of their GDP to China.
At this time of the pandemic it becomes serious as these developing countries are struggling already, but on the other hand they are trying to renegotiate the terms of their sovereign debts not only with China but also with multilateral lenders and other countries. During the G20 in 2020, it was agreed to suspend debt-service payments temporary with 73 countries and give them the chance to restructure their debts.
Many of the China’s BRI loans are agreed at commercial interest rates and often included collateral obligations of natural resources or major infrastructure. In the case of the debtors fallen behind on payments, the Chinese side would take a bigger equity stake in projects. This can be known as the “debt-trap-diplomacy” which China has earned a bad name.
But for the case of the China-Laos Railway, the $3.6 billion is already majority-owned by three Chinese state-owned firms and even if it is a financial flop, it will be left for China to deal with themselves.
Supply Chain Woes – FT, October 23, 2021
The missing of sales that resulted companies’ profit and EBITDA which is the common consensus of all companies. This unprecedented supply-chain challenges already created the poor performance of earnings forecast for the year.
The increase cost for the sea freight has gone up more than five times, but not only that, it is holding up the shipments to travel from Asia to the developed countries.
Already the manufacturing cost has increased and because of the tariffs, many of the manufacturing has been moved out to Vietnam and Cambodia. Clocs moved its production to Indonesia away from China and Vietnam because of the congestion. Shoemaker Steve Madden has reduced its reliance on Asia by shifting half of its production to Mexico and Brazil. North Face and Vans, they sourced half of their production from Vietnam and in this upsurge of the Covid-19, the factories are closed. The same we hear from Nike that their inventory is already facing the shortage which will take months to recover.
In order to assure that the shipments are not being stopped, big retailers like Walmart and Target are chartering their own shipments.
In order to have a better control of their supply chain, “reshoring” is being discussed more and more by the industry.
Up till now, the supply-chain disruption is far from being resolved, and for companies with the greatest flexibility will fare better than their competitors.
India’s Latest Situation
India has administered one billion Covid-19 shots after a once-faltering campaign that halted the country’s export of vaccines to other countries. It is said to allow to export soon. Although the double dosages have been given to only 31% of its population and more than 1.3 billion doses have been administered, made it the second country most vaccinated next to China.
More than 450,000 people have died because of the pandemic and the country suffered the most in April and May that daily cases of 400,000 almost destroyed its healthcare system. The supply of oxygen for the respiratory system was paralyzed. Now its daily infection rate is only below 15,000 cases.
The Serum institute of India, the world’s largest vaccine producer is producing about 220 million AstraZeneca doses a month, up from about 150 million in August. Its homegrown vaccine from Bharat Biotech International is supplying now 30 million doses and next month it will reach 50 million.
What We Should Deal with the Plastic
Almost everyone is blaming the fossil fuels for their cause of the climate change and not knowingly that they have helped us to build our world economy since their introduction during the industrial revolution about two hundred years ago. It is only recently that we have started to talk about the renewable energy and while fossil fuels will slowly recede from being the primary sources of energy, we must not neglect that the petrochemical industry is counting on the increasing of the production for plastics and toxic chemicals.
We can start to talk about plastic. Plastic production can jump three- to four-folds by 2050 according to the World Economic Forum report in 2016. The plastic waste is often exported to countries in Africa and Asia but they are lack of the capacity to recycle and to manage the waste. And often in the developed countries like the United States, the wastes are often ended up as garbage in landfills and as trash in rivers and oceans. They often ended in bodies of marine mammals, sea birds and humans.
Petrochemicals are commonly used in everyday products and we can find them in those stain repellents, flame retardants, and phthalates and other toxic chemicals that are causing cancer, falling sperm counts, obesity and damage our neurological, reproductive and immunity system.
Fracking and natural gas have made the United States one of the world’s most competitive places in the world to make polyethylene which is a common plastic used primarily for packaging. The biproduct, a cheap ethane is used to make the single-use plastic containers.
Since plastic is coming from fossil fuels, it will continue to generate greenhouse gases. We are talking about an additional nine million tons of ethylene for 2021 alone and it is the result of takeaway packaging from the restaurants during this time of the pandemic when restaurant dining is still not encouraged.
The world can learn from the European Union who declared to become carbon-neutral by 2050 and it has developed a plan to build a circular economy based on the reuse and recycling products and to deal with the presence of those hazardous chemicals in those products. This will take further research in technology to achieve a healthier environment for our children.
Crypto Miners Are to Cut Emissions – WSJ, October 22, 2021
Earlier on in April, 2021 a voluntary framework was set up to reduce carbon emissions from electricity to zero by 2030 and some 180 companies signed up. The Crypto Climate Accord was created for this purpose. The mining of the bitcoin using fossil fuels, including coal, to power their computers.
But investors are considering to reduce their carbon emissions and research has been made for using the renewable energy. Already the legislators in New York state are considering a bill banning the use of fossil fuels to mine bitcoin. Documentation on carbon footprint and buying carbon offset credits are ways to control the cheapest source of energy which are also the dirtiest.
About 76% of the companies mining proof-of-work cryptocurrencies combine green and fossil fuel power sources. And less than 40% of the total energy used to mine bitcoin and other cryptocurrencies comes from renewable sources.
Cryptocurrency mining has increased in the US and Canada after China banned transactions with bitcoin. Both the US and Canada combined are accounted for 45% of the global bitcoin-mining activities in August, up from 12% in January. But bitcoin activities decline 20% after China’s shutdown.
The miners are focusing on environmental issues and will announce actions addressing to climate change in the coming weeks. It is a good sign that they are aware of the challenge that they are facing.
Japan Reopened Borders and Lifted the Travel Ban – Nikkei Asia, November 10, 2021
Before the Covid-19 was exploded, 140,000 daily arrivals in Japan took place, since then the country has enforced the travel ban. Now it has finally lifted the ban and already 370,000 foreigners are waiting to enter. About 70% of them are students and technical trainees.
As of October 1, these 370,000 visas have been approved but the travelers have to submit the application forms, in total there are 6 of them, including an application, a list of arrivals, a written pledge and a detailed itinerary. These documents must be approved by the ministries overseeing their relevant industries.
But the daily arrivals will be capped at 3,500 for the time being and this can be increased to 5,000 at the end of the month.
The government has allowed the private companies to put in charge for arranging quarantine housing, transportation and health checks upon their arrivals.
Detailed rules for public transportation for the required seven-day supervisory period after the three days in quarantine. The arrivals are only allowed to ride on express trains, including the bullet trains, with reserved seats, or buses with reserve seats.
Unfortunately the approval is taking a very long process and even allowing 5,000 per day to enter will take a very long time, and you can calculate how long it is to process the 370,000 visas being issued.
US is Spending $17 Billion to Improve Supply Chain Resiliency – Just Style, November 11, 2021
The US$17 billion is to improve infrastructure at coastal, inland and land ports in order to strengthen the country’s supply chain issues.
It has been mentioned that the investment will create good-paying jobs as it is known that the lack of the truck drivers, for instance, is because of the low-pay job. This will help to ease the congestion at the Port of Savannah.
This funding will tackle bottlenecks in Mexico and Central America and create the new initiatives to help the customs process between Southeast Asia and the US. It will help the US to outcompete China.
German Economy is Stalling – WSJ, November 9, 2021
Germany is the leading economy of the European Union, known for its export-oriented economy, is stalling under the Covid-19. German manufacturers today are struggling to produce cars and factory equipment in the midst of parts and labor shortage. The energy price is at its all-time high while on the other hand the country will have to get ready to invest huge sums of money over the coming years for the clean energy to meet the emissions standard.
According to the European Union’s statistic, German industrial output in August was about 9% below its 2015 level, compare with an increase of 2% for the EU as a whole. Recently the International Monetary Fund lower its forecast for Germany economic growth in 2021 to 3.1% from 3.6% earlier on.
The economy is now one of the topics in the negotiations in between the center-left Social Democrats, the environmentalist Greens and the pro-market FDP to form a coalition government. In October, the three parties disclosed preliminary plans to increase public investments, especially for the climate protection, high-speed internet, education, research and infrastructure. This new coalition government resulted from its September election and talks about raising wages, streamlining planning procedures, and if all these can be implemented this could means the most comprehensive economic overhaul in years. This biggest industrial modernization would probably be its largest for over 100 years and it would definitely help Germany’s economy going forward.
To safeguard the German export business, it has already invested in its biggest market, China, with factories in order to be more closed to its market. This is also reducing the domestic production but this can be offset if the business can increase in other recipient markets. This business is under the challenge of the rising cost of raw materials, constrain in the shipping and the lack of labor.
There is the decline for German car production in this summer due to the lack of chips. Its car production has fallen by more than 50% since 2017. It is around 200,000 cars per month. As the result, German’s share of global motor-vehicle production has dropped from 7% to 5% in five years. This industry is by far the largest in Europe supports about 800,000 German jobs and accounts for 5% of the country’s overall economic output. About three-quarter of the cars produced in Germany is for export.
Now it has to look into manufacturing electric vehicles and they require far fewer parts than the traditional cars. Its leading edge for the combustion engine will lose to electric motors and batteries but this is the trend to go. By 2030, 30% to 50% of all new car registrations in the European Union will need to be electric cars in order to meet the carbon emissions targets.
Germany is the country which is underinvested as the country itself. Its net investment is around 0.5% of its economic output. Take Italy and the US for example, they are 1% and 1.5% respectively.
The country’s transition to green-energy will require investments of €5 trillion through 2045, or 5.2% of Germany’s annual economic output for every year. Germany’s export-oriented business model will be at stake. Any mistake in the green-energy transition will be catastrophic.
During Chancellor Angela Merkel’s 16-year tenure, Germany’s labor force increased by almost four million, and now this older and migrant workforce will phase out over the next decade. By recruiting fresh workers both locally and from the Eastern bloc will have to add in with the robots, especially when the electric vehicles will replace the conventional ones.
But as a whole, it will be challenging for Germany and especially during this time of the Covid-19 and also the change of the government.
Germany Covid-19 Cases Set Record – WSJ, November 9, 2021
The infection rate was kept relatively low in this past summer. But infections are rising again in Europe and the temperature is dropping, also the vaccine-induced immunity is fading, with these factors the cases are rising. But it is not all the countries in the Western Europe, for instance France, Italy and Spain are doing better. This can probably be too early to tell.
Over 67% of the Germany population have been fully vaccinated and this help to keep hospitalization and deaths below their level compare with the previous surge.
RIVIAN is the New Electric Vehicle Start-Up – FT, November 10, 2021
With Jeff Bezos of Amazon as the investor, RJ Scaringe, the 38-year-old founder of Rivian listed on Nasdaq before recording any significant revenue, with an opening market value of more than $100 billion. It began trading at 106.75
per share, which is 37% higher than its initial public offering price. This gives Rivian the biggest initial public offering and it will raise $85.9 billion for a US company since Facebook in May 2012. It would also be a larger market capitalization than Honda and Hyundai and has its worth of more than 80% of Ford, who is also one of its biggest backers
The company expects to ship a little over 1,000 vehicles this year. It has also received an order from Amazon for 100,000 electric delivery van by 2025.
Its current facility is in Normal, Illinois, a former Mitsubishi plant which has the capacity to build 150,000 vehicles every year.
Its rival carmaker Ford will hold 12.1% stake post IPO, worth at listing price. Although Rivian can pose as a competitor to Ford’s upcoming Ford F-150 Lightening electric pick-up truck.
Truck Drivers and the US Supply Chain – New York Times, November 10, 2012
According to the American Trucking Association, the industry is short of 80,000 truck drivers and truck drivers have been in short supply for years. But lately with a wave of retirements combine with those quitted for less stressful jobs is exacerbating the supply chain crisis in the United States. First of all with the panicked holiday shoppers, the congestion at ports, warehouse around the country are overflowing with products. Then the short of warehouse workers, and when all these have been added up would have lengthening delivery time for the products to the store shelves.
The supply chain from abroad of the suppliers’ side are not doing too well as the factory shutdowns and the port shutdowns are not helping. We have seen the container vessels are backing up outside the ports.
The time for the drivers to drive on the highways is high on average, and sometimes it can be as high as three weeks out of a month. Their medium wage is $47,130 for a year although the trend is to have it increased to $70,000 which hopefully can also take in younger drivers.
But the Transportation Department is very critical about safety and the legislation includes a three-year pilot apprenticeship program that would allow commercial truck driver, as young as 18, to drive across the state lines. This isolating lifestyle for the younger generation has made it harder to entice drivers. For the trucking companies to retain their workers are equally difficult.
The $1 trillion infrastructure bill that the House passes in the past week could probably help to mitigate part of the problems. As part of the plans, $8 million will be used by Port Savannah go to convert existing inland facilities into five pop-up container yards in Georgia and North Carolina to help ships to offload cargo faster.
To allow the ports and the workers to work 24 hours to ease the grid lock will have to be agreed upon.
We have already seen the increase cost in the operating and this will have to pass on to the consumers and right now the inflation is a major issue with the country already. In this time with the supply chain being seriously disrupted and this seemed to be inevitable.
We have to ask ourselves for what have we done wrong or is the system never been challenged and it seemed that we don’t have any contingency plan to pull ourselves out from the hole.
African Countries in the COP26 Discussion – New York Times, November 10, 2023
The proven crude oil reserves on the African continent total more than one hundred billion barrels across elven countries, with Libya and Nigeria among the ten biggest producers globally. The region is rich also in gas too. Combined, Nigeria, Algeria and Mozambique hold about 6% of the world’s natural gas reserves.
At COP26 in Glasgow, some African leaders opposed a swift shift to renewables for their countries. Instead they want a slower transition and to continue to rely on fossil fuels, knowing that gas burns cleaner than coal or oil, although it will still discharge carbon dioxide into the atmosphere.
Africa is known for the unreliable power supply because of the power grids. It has been using diesel generators to keep its air conditioners running for instance. Not only that they are noisy, but also they are bad for the environment.
The use of the solar panels has not been very effective and its maintenance cost is three times higher than the generators. With the solar panels, they have to buy more batteries for storage, and they have also to buy the air conditioners with inverters that work with the solar energy.
African continent is home to 1.2 billion people, and half of them don’t have access to electricity. Lack of the power-generating capacity, absence of technical expertise, and corruption are the most difficult to deal with.
Only a handful of countries will have renewable energy by 2050, such as South Africa, Egypt, Ethiopia, and Morocco in according to the African Union. It is the continent waiting for the developed countries to invest there, and not only they will have to bring capital, but technologies of all kind. It will be a long way before the continent can be industrialized, and can allow the better healthcare program, supply of food and introduce the education system to its people.
Knowing that global warming is causing climate change, and natural calamities like deadly heatwaves, water shortages and ecosystem collapse grow sharply especially in the African continent. For instance the region’s temperature rises faster than the global average. Take for instance that average temperatures in South Africa are 1.7 degrees Celsius higher than the global average at 0.9 degree Celsius at the beginning of 20th century. Not to mention that Africa experiences in the increase of sea-level as well. Parts of East Africa haven’t received rain in years and they are struggling with droughts. In the Sahel region of West Africa, conflicts between farmers and herders caused by vegetation loss.
African countries, in total 54 of them, have a bigger problem to solve than the reducing of the carbon emissions. You just can’t take up the under developed countries and give them this mission to accomplish.
China’s Factory Gate Prices in October – FT, November 11, 2021
Factory gate prices refer to the cost at which wholesalers buy materials from producers, not taking into account transportation and distribution fees. It is also known as our ex-factory prices.
For China in October the prices increased by 13.5% compared with October 2020. This was due to the power shortages and the record commodity prices that hit China.
China has been struggling with the soaring coal prices after flooding in mining regions and the government’s implementation of clean energy goals that reduce output. The introduction of power rationing also played an important role.
In October, the oil topped $85 a barrel in the US and coal reached $360 a ton in China. Production materials rose by 17.9% while the coat price also increased by 130.7%.
Nuclear as the Source of Clean Energy – FT, November 11, 2021
We all remember the nuclear disasters, first it was Chernobyl, and then Fukushima, which was a quarter of a century apart, but we are still very skeptical for recognizing it as an energy solution.
But few would question if renewable sources like wind and solar must be the mainstay of future electricity generation. The drawback is still their intermittent nature and the lack of large-scale means to store electricity. Their storage technologies are not big and fast enough. Nuclear power is on demand anytime.
Currently, the fossil fuels are accounted for nearly two-thirds of the global power. At the same time the use of nuclear power is only 10%. And for the renewable energies to take over everything, it will be a daunting challenge.
We have been given the impression that by 2035 the internal combustion engine cars will be replaced by electric vehicles and global electricity will be decarbonized by 2040. Already the International Energy Agency is saying that the world would need to ramp up building solar and wind plants so that by 2030 we can add four times the capacity annually to reach the goal.
We talked about hydrogen and ammonia, but the technologies are pre-matured.
Nuclear plant has a bad reputation, it is expensive to build, difficult to handle, the nuclear waste is hard to dispose. It has never meant to be easy. But, do we have any easier alternatives? We may have to call for the governments, regulators and the industry to come up with a plan and to turn this hurdle into something that we can make use of. After all, it is effective and it is a question about how to manage it.
Delivery on Promise for Businesses – FT, November 11, 2021
This time we are taking the case of Ikea, the world’s largest furniture shop, as an example. Ikea is one of the world’s biggest buyers of wood.
And Earthsight is a UK-based campaign group, who has twice in the past 18 months published reports alleging over woods from Russia and Ukraine saying that illegally felled woods have been used in the Ikea’s supply chain. Actually Ikea sources large parts of its woods from countries like China, Russia and Belarus where these are classified as “high-risk countries”. Ikea denied that it has knowingly accepted woods that have been illegally felled.
Ikea was founded in the forests of southern-Sweden, and the company’s headquarters is now based in the Netherlands. It has always quoting that wood is a sustainable and renewable material that is far better to use than plastic or metal.
Timber suppliers normally have to obtain permits for getting the timbers but illegal logging can still be found from time to time. The abuse of using the practice of “sanitary felling” where all trees in a certain area are cut down to ring-fence the tree disease.
Ikea claimed that they request their suppliers to present to them the annual wood procurement plan, they send out a team of 40 internal wood supply specialists to do around 200 audits each year, and also use the certification by the Forest Stewardship Council as an additional safeguard. Ikea insisted to use wood from responsible sources.
For the time being, Ikea has stopped to use wood that has been obtained through “sanitary felling” which is the loop hope that they would have to fix.