MARKET REPORT
SHORT READ PART 1
2022 JULY QUARTERLY ISSUE
Written by : Andrew Sia
With our first report, we have focused on the invasion of Russia in Ukraine and the problems that it has brought out. It has created disruptions for the natural gas supply to Europe and other logistic matters. The overdependence of energy from Russia is taking effect on those European countries, especially for Germany.
All of the sudden, the geopolitical tension has been building up in the Arctic region.
Last and not the least, we made our observation of Elon Musk’s bid on Twitter.
Contents:
Russia’s Arctic Presence is in Peril
Melting of Arctic Opens Sea Routes and Potential Conflicts
Situations Arise by Russia’s Invasion of Ukraine
Latest of Asian Pacific Countries During the Pandemic
Global Chip Shortage
Solar Installation in the U.S.
Russian Oil is Snapped Up by China
An Outcry for Russian Energy
America is Governed by Old Politicians
Maersk in Record Quarter
The Lesson of Volkswagen’s Presence During This Time
The Controversy of Elon Musk
Russia’s Arctic Presence is in Peril – Financial Times, March 22, 2022
Russia has put its Arctic gas under the threat that perhaps even Putin would have neglected. Now it is being threatened by the international sanctions over its invasion in Ukraine is going to put its vast LNG under jeopardy.
First of all, the construction of its fleet of next-generation icebreakers depends on foreign companies—Korean shipbuilders, the U.S. and Finnish marine engineers, and the French knowhow over technology vital to transporting liquefied natural gas.
Now the Russian suppliers from the international shipyards are being added to the sanction lists, the EU is banned from exports of vessels, marine systems and equipment to Russia, the orders are now all in jeopardy.
There are three Arctic developments—the Yamal LNG project in north-western Siberia, which accounted for 5% of global liquefied natural gas export in 2020; the nearby Arctic LNG2 development which cost $23 billion is set to export in 2023; and the Sakhalin-2 oil and gas development in Russia’s far east.
The Koreans are building thirty-five LNG vessels for Russia will follow the U.S. sanctions.
Daewoo Shipbuilding & Marine Engineering has orders from Russia for three LNG carriers and two storage facilities worth $1.6 billion are on hold.
Samsung Heavy Industries and Hyundai Heavy Industries have joint ventures with Zvezda, for a shipyard which is under sanctions.
It is said that while orders from Russia for specialized ships are unlikely to be built as long as war with Ukraine continues and sanctions is in place, but Chinese competitors, the state-backed Shanghai shipyard, Hudong-Zhonghua, would take over the business. It is said that it can build eight LNG carrier per year with an order book that has been filled for years. But the orders would rely on Gaztransport & Technigaz, the world’s sole supplier of maritime containment tanks for LNG, who can provide knowhow to store large volume of fuel at minus 163-degree C.
Russia is risking all the technical supply that will support its LNG export.
Not only that, Russia will also lose the opportunity to develop the all-year round shipping route along the Northern Sea Route which connects east Asia and Europe via the Bering Strait between Russia and Alaska.
Melting of Arctic Opens Sea Routes and Potential Conflicts – New York Times, March 28, 2022
Tensions have been growing in the regions for years, as nations claim for shipping routes and energy reserves that are open up as a result of climate change. Now, with the geopolitical tension building up with Russia’s invasion, the competition over sovereignty and resources in the Arctic can intensify.
On the West Coast of Alaska, the federal government is investing hundreds of millions of dollars to expand the port at Nome, which can transform into a deep-water hub servicing Coast Guard and navy vessels navigating into the Arctic Circle. The Coast Guard is planning to deploy three new icebreakers there.
The U.S. Air Force has also deployed dozens of F-35 fighter jets to Alaska, and the Army has released its first strategic plan for “Regaining Arctic Dominance”. The Navy has been conducting exercises above and below the ice inside the Arctic Circle. All these acts are for protecting the U.S. interests in the region and are alerted any weakness that will be increasingly challenged by Russia and China.
Russia has its eastern mainland lies just 55 miles across the Bering Strait from the coast of Alaska, and for years have been prioritizing in expanding its Arctic presence by refurbishing airfields, adding bases, training troops and developing a network of military defense systems on its northern frontier.
The warming of climate has melted the ice in the region, and draws valuable fish stocks towards the north. Rare minerals, and substantial reserves of fossil fuels are becoming lucrative for exploration. Boat traffic from both sides for trade and tourism has increased.
Conflicts already occurred when Russians were trying to drive away the fishing boats operating in the U.S. water. Russian military aircrafts flew to the edge of the U.S. airspace resulted the U.S. to send their fighter jets to intercept them and warned them away.
At this time in response to the sanctions, a member of the Russian parliament openly demanded that Alaska, purchased by the Americans from Russia in 1867 for $7.2 million, in total’s value which is about $133 million, to be returned to Russia for control.
The vast waters for the Arctic Sea, used to be landlocked and its territorial boundaries as claimed by the United States, Russia, Canada, Norway, Denmark and Iceland, remain unsettled over the centuries. With the climate warming, the melting of ice has opened new shipping pathways and all nations have eyes on the vast hydrocarbon and mineral reserves below the Arctic sea floor.
Take for instance the U.S. and Canada have never reached any agreement on the status of the Northwest Passage between the North Atlantic and the Beaufort Sea.
China has been trying to establish a foothold and declaring itself as a “near Arctic state” and seek for partnership with Russia to look for a “sustainable” development and the use of the Arctic trade routes. Earlier, China has already included this “Silk Road on Ice” which is allowing China to have access through the Arctic to reach Europe.
Without saying, Russia has made it clear of its intention to control the Northern Sea Route off its northern shore. It is the route significantly shortened the shipping distance between China and Northern Europe. Russia is demanding countries to seek permission to pass and threaten the use of military force to sink vessels that do not comply to their demand.
Recently, negotiation through diplomatic channel have been carried out, but the current invasion of Russia in Ukraine has put the work to pause.
It is becoming imperative for the U.S. to strengthen its port, Nome, as a maritime gateway to the Far North. With the building of the air force, navy and army, Alaska is already one of the nation’s most militarized states with more than 20,000 active-duty personnel being assigned in the bases there. They have been trained to combat in cold weather which for many of them are having their first experience there.
Alaska is also the home of the nation’s missile-defense system in view of the broken relations caused by Russia’s militant behavior towards Ukraine. To maintain peace will take the strong foothold in Alaska.
Situation Arises by Russia’s Invasion of Ukraine
Germany has long had an ambivalent behavior with its military because of its association with Nazi atrocities in World War II. This was followed by the Cold War and West Germany was on the front line. West Germany stood with North Atlantic Treaty Organization and East Germany allied with Soviet Union. Both with formidable armies. The unification of the West and the East Germany came the same time with the collapse of the Soviet Union, at that time the military became less important. The German army became foreign deployments in Kosovo and later Afghanistan under the NATO, rather than a national defense.
This is followed by the budgetary cut in military expenses over the decade of peacetime, Germany has built its economy based on commercial activities. Their exports of machinery and motor vehicles have turned the country into an export-oriented country. It is the richest country in the European Union.
But this time during the war of Russia with Ukraine, it found that it has to militarize its national defense, and a budget pledged by their Chancellor Olaf Scholz for €100 billion to modernize its military, which is almost three times more spending from the previous year. In a very short time Germany found that they will need a stronger military force.
The program will need new warships, new helicopters, more tanks and armored vehicles, and an army of 184,000 soldiers to defend the country.
In fact, the German arms industry is still in presence, and over the years it has supplied the foreign countries with armored vehicles, military communication equipment, battle tanks,
Germany is known for its Leopard 2 battle tanks which has been delivered to many countries to arm their military forces.
Currently it is supplying Ukraine their older equipment that has been put in storage which will need to be refurbished and modernized.
Germany has committed the further €25 billion a year for NATO, and its Chancellor Scholz, also a Social Democrats, has promised to spend 2% of its GDP to reach the historical turning point. Take for instance, during the Cold War, West Germany had 12 divisions and nearly half a million of soldiers facing against the collective armies of the Communist Warsaw Pact controlled by Moscow. Today, Germany found itself hard to assemble three combat-ready divisions to NATO. It has about 300 operable tanks at the moment.
It is known that German military is woefully lacked of basic supplies, such as bullets, uniforms, body armors, winter jackets, backpacks and even uniform insignia. It has to ramp up its manufacturing facility and many of these are falling into the national security and the manufacturing should be carried out in its home industry or through countries that they are close allies.
Over the years its Social Democrats developed the economic and political ties with Russia, following the lead by its former Chancellor Gerhard Schröder. Projects that made Germany dependent on Russian gas in exchange of a belief that it would tame the Russian President Vladimir Putin. Its former Chancellor Gerhard Schröder was “bought” by his friend President Vladimir Putin of Russia to lead the shareholder of Nord Stream, the Russian controlled company in charge of the first undersea gas pipeline directly connecting Russia and Germany. Despites of years of warnings from the U.S. and Eastern Europe allies, Germany is still deeply reliant and dependent on Russian gas. It continues to prosper its economy and maintains the close link with Kremlin. In the past two decades, Schröder profited himself at the expense of Germany and of course he denied it.
At the beginning of February before Russia attacked Ukraine, Germany’s reliance of Russia gas surged to 55% from 39% in 2011. This means an energy payment to Russia of €200 million every day.
Schröder remains chairman of the shareholder committee of Nord Stream and receives $270,000 per year. He also serves as the head of the supervisory board of Nord Stream 2, the second pipeline connecting Germany with Russia which was shuttered before the war. It was three weeks before the attack on Ukraine, Gazprom, a Russian sate-owned, multinational energy headquarters in Saint Petersburg, with the total revenue of $120 billion, ranked as world’s largest publicly listed natural gas company and the largest in Russia. Gazprom was ranked as 32nd largest public company in the world, announced that Schröder would join its board.
Since 2017, he also presided over the board of Russian oil company, Rosneft, taking another $600,000 per year on public record. Calls for his oust are getting louder among members of the Social Democrats.
But if we looked back, Schröder was not the first one who has been dealing with the Russian. In 1970 when Willy Brandt became the first Social Democrats chancellor, who pushed through a new policy of engagement with the Soviet Union known as Ostpolitik, which meant “change through trade”. It brought the pipelines into Germany for a country who is poor in energy and the business went undisrupted even in the tough time during the Cold War.
Now we can understand even if this relationship has been unhealthy, but because of the financial interest, no one would like to start with any controversy. According to the World Trade Organization, Germany is the world’s third largest exporting country, after China and the United States.
Latest of Asian-Pacific Countries During the Pandemic – New York Times, March 28, 2022
Most of the Asian-Pacific countries have eased their Covid rules, even though the Omicron variant is still rampaging in certain parts of the region. This is driven by a mix of many things—economic pressures, more favorable medical advises, and sentiment of a pandemic-weary public that have spent more than two years under pressure that no one has ever experienced before.
India – Who at one point in May, 2021, was badly hit by the Delta variant, that crippled its medical system caused by the lack of respiratory equipment and the oxygen supply. Now the restrictions have been lifted, except for the requirement of wearing masks. During the end of March, the country was celebrating Holi, a Hindu springtime festival, when people were throwing colored powder at one another.
The Philippines – Covid rules have been eased. The Manila Zoo has been reopened. In the Philippines, it is also the time for the political rallies, and tens of thousands of people rushed into Ortigas business district to catch the glimpse of Leni Robredo, a candidate who is running to replace the departing president, Rodrigo Duterte. Masks are still required in public places, although school classes are still online.
Thailand – It has been gradually relaxing its entry requirements for foreign tourists. The country is depending on tourism.
Bali in Indonesia – It has reopened in a faster pace than the other parts of the country. Its tourism is its main income. Talks about new restrictions during the Ramadan holiday in April by the central government, but it would spare Bali.
New Zealand – It has relaxed its vaccine passes for visitors to enter public facilities. Its limitation for business visitors and citizens living abroad has been lifted.
South Korea – The country is giving way to business sectors for several antivirus measures. Small-business owners are asking for relaxing the pandemic rules, including night curfews, and limiting number of people to gather in public places. The country is in the midst of election, and the governing party’s candidates have tried to court voters.
Japan – It has maintained some of the tightest entry barriers, is also considering to remove quarantine requirements for foreign businessmen and students.
Singapore, Cambodia and Vietnam – Are starting to admit tourists, and knowing some countries’ coronavirus cases are still high.
Hong Kong – It is now known as a Chinese territory whose covid-policies that mirrored those in China, has costed it dearly. It has to budged from its previous tight border controls. Starting April, it has opened to the flights from nine countries and further relax its quarantine rules to one week. Its stern measure for the zero-covid policy had cut itself from the rest of the world and damaged its image for its global trade.
China – That leaves China, who is still strongly adhered to its “zero Covid policy”, and its strict border controls have been enforced since early 2020. The state-controlled media continues to boast that its country with 1.4 billion people has by far the best record of controlling the virus. Its superiority in keeping very low numbers in both the illness and the deaths has been its laurels. But now with its cases that in Shanghai, with almost 20,000 cases on April 7, in the city of 26 million is perhaps the defeat of its “zero Covid policy”. But on the other hand, it will apply tighter control under the order from the Chinese government until its order has been accomplished.
Global Chip Shortage
The global chip shortage is growing into its third year. What began as a pandemic-era irregularity of unpredictable demand for laptops, and other chip required equipment and gadgets, have created a structural problem for the industry. It is also noted that the problem will extend into 2023 and 2024, and perhaps even longer.
To get the machinery to manufacture the chips—one of the world’s most complex and delicate kind of manufacturing has extended from months into years to receive the equipment.
The chip industry sales topped $500 billion last year. It should double by the end of the decade.
Solar Installation in the U.S.
The Solar Energy Industries Association has cut the solar-installation forecasts for 2022 and 2023 by 46%, or 24 gigawatts, more than what was installed in 2021. Already in 2021, it was a slower-than-expected growth. This was due to the supply chain constrain and the rising prices. The industry has found raw material inflation, delayed deliveries and a tariff case has brought the industry to a halt.
In late March, the U.S. Commerce Department started an investigation whether Chinese solar manufacturers have illegally circumventing solar tariffs by routing their operations through the third country—Cambodia, Thailand, Malaysia and Vietnam. The four countries collectively export 80% to the U.S. in 2020. It is known that the vast majority of manufacturers in those countries are Chinese manufacturers.
The case was brought up by Auxin Solar, a small solar manufacturer based in California. The ruling will affect a very small difference in percentage. The fundamental problem lies in the installation where utility-scale photovoltaic solar in the U.S. is 75% more expensive than Germany and 70% more than China.
Russian Oil is Snapped Up by China – FT, May 4, 2022
Independent oil refinery in China is buying oil at a discount of $35 per barrel to fill up its need and shipping brokers have said that at least 6 super tankers, each capable of carrying 2 million barrels of crude each, have struck deals to consolidate cargoes of Russian Urals crude in Europe to ship to Asia, most to China but also to India.
This has been done discretely to avoid potential embargoes because of the war in Ukraine.
An Outcry for Russian Energy – New York Times, May 4, 2022
There are two obvious markets for Russia’s energy export, China, the world largest energy market, and India, the world’s third largest. The United States is number two in energy consumption.
Prices for natural gas, oil and coal have risen since last year because of the shortage in energy. The embargo on Russia’s export is potentially a more significant energy crisis than the 1970s, but at that time it was only oil.
Russia is currently exporting nearly five million barrels of crude oil , three million barrels of diesel, gasoline and other refined products, but finds itself harder to ship the natural gas due to the lack of capacity to liquefy and load onto ships, it is only about ten percent of its natural gas exports. To redirect Russian natural gas to Asia from Europe will require building extremely long pipelines and specialized ports to cool the natural gas and condense it into a liquid form for sea transportation.
Russian’s dominance of Europe’s energy market is falling apart. Global energy leaders are betting that Russia can find a way to export at least its oil and coal. Still there is the daily $310 million export of oil to Europe that represents 25% of Europe’s crude oil. For countries like Hungary, Slovakia, Finland and Bulgaria are depending on Russian oil. To decouple this link is going to add disruptions and costs to a situation that has been in existence for a long time. Selling of the oil to the West is the bloodline for Russia especially during this time when it is invading Ukraine.
Not to forget that in single-hand, Russia announced to stop supply oil to Poland and Bulgaria.
For Europe to realign the supply would means to find refineries to configurate different grades of crude. Oil, appears as a single commodity, is actually falling into different types with different characteristics. Different refineries would have to be used. Embargo will need to be carefully mapped out or it will cripple the refineries in Europe. There are joint ventures with Russia that have played them to the best interest and they cannot be replaced abruptly.
Meanwhile, Germany has determined to end their dependence on Russian energy, but they will still have to maintain some collaboration, even it if it accounted to 12% only for their import.
The embargo triggered the price increase of crude oils and have also increased the revenue for Russia so far. The effect will take a long time to show.
America is Governed by Old Politicians – The Week, April 29, 2022
In Washington’s hall of power, it is filled up with people in their 60s, 70s and even 80s. It is really becoming a problem and many of the senators are waiting to be found that they are mentally unfit to serve.
A recent YouGov poll found that a majority of Americans want an age limit of 70 for elected officers. If this is put in force would mean that 71% of the current senators will have to retire. A cohort of 70s and 80s are charting the U.S. future.
The current President Biden was 78 years old during his inauguration. If he decide for his second term, he will be 82 years old and end the term when he will be 86. He has been found to have the tendency for gaffes and he has his senior impulsive moments.
Donald Trump, if he would be reelected, he would be 78 when he would reenter the White House.
But there is the reluctant of stepping down as there is no age limit.
They have to recognize the importance of their stage of mind and their physical functions as their positions are important for the country.
Maersk in Record Quarter – FT, May 5, 2022
Although AP Moller-Maersk reported a profit record quarter, the highest profits in the Danish group’s history, but it still sent out warning about a series of growing economic risks including stagflation. The slowdown in the second half of the year is because of China’s Covid policy as China has used very heavy hand to lockdown its cities.
Its record result has not included losses from the fallout of Russia from Ukraine for an operating loss of $718 million. The group has left behind 20,000 containers in Russia and exiting operations in logistics and port terminals. Its expected operating profit for the year is $24 billion. Maersk transports more than one in six containers over the international waters.
The Lesson of Volkswagen’s Presence During This Time – WSJ, May 5, 2022
The war in Ukraine and the Omicron lockdowns in China caused Volkswagen to look for growth in North America which is currently only 4.1% of new-car sales compare with 39% for Europe and 41% for China. VW is known as the international manufacturer and it has 120 plants worldwide.
Its goal for the U.S. market is to reach 10% by 2030. It is betting on EVs and wants to use it to capture the U.S. market.
The United States is still the top destination for investment in according to Organization for Economic Cooperation and Development (OECD) and last year it surged 133% to $382 billion, compare with China’s growth of 32% to $334 billion.
To invest geo-strategically in this volatile world is very important, especially for those conglomerates.
The Controversy of Elon Musk
It is full of inconsistence with Elon Mask’s political views. The newspapers have commented that Elon Mask is a problem masquerading as a solution, he is creating a phenomenon, he is an eccentric billionaire, who is either a jester or a genius. The press even named him troll.
His $44 billion deal for the Twitter is expected at this latter part of the year.
Twitter is used by the right, the left and the conservatives. A recent audit conducted by researchers at Twitter that millions of Tweets from April to August 2020 found that the algorithms that actually show tweets from right-wing lawmakers in seven countries, including the U.S., and it is more than the left-wing lawmakers. Elon Musk has 85 million followers that makes him seventh most followed person in Twitter.
His claim that the social media company, Twitter, turn off users by stiffing free expression. He couldn’t wait to tweet that he would reverse Twitter’s bans of Trump once the deal of his hostile takeover of Twitter is completed. He succeed to take the company with his offer of $44 billion.
Calling Twitter a “de facto public square” and Elon Mush wants to transform it into a “platform of free speech” by loosening content moderation and makes it algorithm more transparent and customized. His behavior of acquiring Twitter doesn’t show his economic rationale and his seriousness about free speech isn’t that clear either.
We have to know that social media companies are not bound by the First Amendment’s protection against censorship. Twitter’s moderators have far too many power to shape any discourse, blocking misinformation and fake news are normal practices. One remarkable move in 2021 was to kick Donald Trump off the platform.
Twitter, like so many other social media platforms, are the sites use by people who inflict hostility, spread lies, harass people, and spread misleading information to endanger public health.
Moderators need a mindset which is sober and mature. People are questioning if Elon Mush has that kind of state-of-mind. Or is it just his way of flaunting his wealth and the power he has newly acquired?
His successful acquisition of Twitter would make him one of the titans of Silicon Valley who doesn’t create social media but “revolutionary products” like electric vehicles and even rockets.
Twitter has 200 million regular users and it is dwarfed by Facebook and TikTok who has billions posting on their website.
On May 13, he put his takeover of Twitter “temporary on hold” over concerns about the number of spam and fake accounts on the social media platform. Twitter’s regulatory filings suggesting that the number of fake accounts on the platform represented about 5% of its 229 million users.
Since then, he continues to create chaos, and it was known that he acquired his 9.2% stake in Twitter before his $44 billion hostile bid. In Fact, any investor owning more than 5% in a listed company is required to disclose the stake to inform other shareholders that it may seek to control or to do anything with the business.
It was as early as March 27 he told the board his various options with respect to his ownership, including potentially joining the Twitter board, seeking to take Twitter private or start a competitor to Twitter. Elon Mush applied the tactic of huff-and-puff.
The future of the $44 billion takeover is laying in the balance of the clarity of its fake-account problem.
Elon Musk has the right to question the legitimacy of Twitter’s user count. The 5% bot figure has never changed. Bots are software programs designed to do specific tasks. Normally the “good” bots are used for breaking news alerts. The social media company would need to closely monitor those “bad” bots to stop them from creating scams and spread fake news that are used to damage the community.
By the way that Facebook has been using the 5% for the bot accounts. Perhaps we can take it as a rule of thumb.
At this writing Twitter is insisting Elon Musk to pay $54.20 per share as the agreed price which is currently traded at around $38.32 only.
It is also known for many years that he had stopped making business plans. He is known for a trouble maker and this time the deal may end up in litigation. And for both side to walk away from the deal will cost $1 billion to each of them.
This may become a matter of face for Elon Musk.