MARKET REPORT
SHORT READ PART 2
2023 APRIL ISSUE
Written by : Andrew Sia
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From the Desk of the Publisher
In this report we are covering most of the news that took place in January. The world is not in a good shape, especially with the stock markets across the world didn’t perform well in 2022. We read that the inflation in Japan hit its all-time high in 41 years.
Biden’s Inflation Reduction Act is becoming a protectionism and has tried to protect the U.S. to hold on to the niche for the semiconductor and to lead the world in climate change.
China is caught in between the U.S. and Europe as both have tried to wrestle off from its dominance of the supply chain and other ambitious policies.
It has made the world in a more messy situation.
Contents:
Apple is Produced in India
Stock Markets Lose More Than $30 Trillion in 2022
U.S. Companies Find Production in Mexico
Microplastics
China Lifted the Informal Bans on Australia’s Export
Consensus Reached at World Economic Forum 2023 in Davos
Orsted the Danish Wind Farm
European Delegates Changed Tone at the World Economic Forum Over the U.S.’s Inflation Reduction Act
Zambia is in the Middle of a Debt Crisis
Japan’s Core Inflation Reaches 41-Year High
Rewriting the Supply Chain
U.S. Greenhouse Gas Emissions in 2022
Hopes for China Economy to Come Back
Chinese Consumers Are Back at This Time
Apple is Produced in India – WSJ, December 28, 2022
India fits in perfectly for Apple’s strategy of “China plus one” at this time because of China’s uncompromising approach to public health especially during the last year. The violent protests at Apple supplier, Foxconn’s Zhengzhou factory in November highlighted the risks of an overly concentrated supply chain.
Apple is already assembling the iPhone through three of the Taiwanese factories there. It is estimated that 18% to 20% of the iPhone will be made in India in 2025, up from only 3% in 2021.
India has a substantial domestic market and it has the same population like China or perhaps higher, but it has a higher birthrate unlike China. The country also has a deep pool of English-speaking software talent and the government has rolled out new investment incentive for electronics manufacturers.
Another electronics-making upstart is Vietnam, but it is limited by its smaller market and labor force.
But India has its own challenges as at this moment the locally sourced components accounted for 15% in total, with the rest being imported and four-fifths of these imports are coming from China.
India’s labor situation and other trade conditions are set by its provincial governments which is taking long time to adjust. India has to find its way to be more effective to build up its manufacturing base.
Stock Markets Lose More Than $30 Trillion in 2022 – FT, December 31, 2022
Global stocks and bonds lost more than $30 trillion in 2022 as inflation, interest rate rises and war in Ukraine triggered the heaviest losses in asset markets since the global financial crisis.
The Morgan Stanley Capital International (MSCI) All-World Index of developed and emerging market down nearly 20% in value at the end of the trading year.
U.S. tech companies were particularly hit hard by rising interest rate. Tesla, the electric vehicle manufacturer, lost two-thirds of its value in 2022. Chip maker, Nvidia dropped 50% in value. Apple and Microsoft lost almost 30%. Alphabet, parent company of Microsoft, lost nearly 40%. Meta, parent company of Facebook lost 64%.
Overall, blue-chip US S&P 500 stock index was down 20%, Dow Jones Industrial Average down by 8.8%, and tech-focused Nasdaq Composite down 33%.
China’s CSI 300 fell 28% in dollar terms. The MSCI Europe index down 16% in dollar terms, or 11% in Euro.
London’s FTSE 100 focused on energy, mining and pharmaceutical companies, was up slightly in sterling terms.
All these were brought by Russia’s invasion in Ukraine, which sent the prices of oil and gas up in February and March.
Bitcoin slumped more than 60% which was a sharp reversal after it rose to records in 2021. We saw the crashed of TerraUSD, the suffer of runs when investors chased after Celsius Network LLC and Three Arrows Capital for their investments. This led to the bad yearend for cryptocurrencies by the collapsed of the industry’s giants including FTX.
Oil prices topped $130 a barrel in March, a 13-year high, was the reaction of Russia’s invasion of Ukraine. But it failed to maintain its momentum in the second half of the year. Still they posted a modest gain for 2022.
Most economists would say that U.S. is entering into recession in 2023. The unemployment rate has maintained a historical low level.
Without any denial, it was the worst year since 2008.
U.S. Companies Find Production in Mexico – WSJ, January 1, 2023
This is known as “near-shoring” and we can see the U.S. is shifting south to Mexico which is closer to home.
In the last two years, we have seen the supply chain was disrupted by the pandemic which caused the cost of the shipment. Ports were congested with shipments and the weakness of the supply chain was exposed when everyone sourced from one location, China, which is on the other side of the Pacific.
During the first 10 months of 2022, Mexico exported $382 billions of goods to the U.S. which was more than 20% over the same period in 2021.
China will remain as a manufacturing for componentry, but the assembling and the finishing part can be shifted to where it is closer to the market. It is a realignment for the supply chain and some roles have moved out to the better and safer locations so to speak. It is also mentioned that regional network would be established all for the shortening the delivery time.
Given that the United States, Mexico and Canada operating within an expansive zone where the supply chains can be intertwined. The car industry is a very good example to use to explain that each party can contribute parts and even components and finished in the other party’s final assembly lines. Overall, some 40% of the value of Mexico’s exports to the U.S. are consisting of components made in the U.S. plants. China in this case is only 4% in this case.
Microplastics – Nature Briefing
It was in 2004, Richard Thompson, a marine ecologist at the University of Plymouth, UK pointed out to us about the potential harms of microplastics to the marine life. He described that the plastic particles were smaller than 5 millimeters across and could be found on British beaches.
Scientists have found them everywhere: in deep oceans, in Arctic snow and Antarctic ice, in shellfish, table salt, drinking water, and beer, they drift in the air and fall with rain over mountains and cities. We can find them almost everywhere.
We found them earlier on in personal-care products, pellets of virgin plastic that escaped before they were molded into objects, and also on fragments that slowly eroded from discarded plastic bottles and they have all washed into rivers and oceans. There are also other sources of microplastics that shed from the synthetic microfibers from textiles.
In 2015, oceanographers estimated that there were between 15 trillion and 51 trillion microplastic particles floating in the surface of water around the world.
Evaluating their effects of those tiny plastic particles on people and animals has not been easy as those smallest piece, smaller than 1 micrometer, may enter into cells or tissues that may cause damages. And because they are too tiny, it is quite impossible to spot them.
Plastic manufacturers are adding compounds in the plastic materials, such as plasticizers, stabilizers and pigments onto them and many of these substances are hazardous.
China Lifted the Informal Bans on Australia’s Export – FT, January 21, 2023
China decided to impose sanctions on some Australian products in 2020 hit the coal sector, wine, lobster and barley. It was triggered by the Australian government’s call for an inquiry into the origins of Covid-19. Australian coal was diverted to Japan, South Korea, India and Europe and benefited from the coal export revenue hit $75 billion in the year to June 2022 compared with $21.4 billion the year before. This was due to the surging commodity prices after Russia’s invasion in Ukraine.
Coal price in December 2022 hit A$552 per ton or $370 which was a record for the period.
Consensus Reached at World Economic Forum 2023 in Davos – January 21, 2023
This time at this annual gathering of business, economic and political elites seemed to have reached the consensus view that were becoming more positive. We tried to focus our report in the following areas:
China – Before the summit, China ended its zero-Covid policy and this spurred the hopes of a bounce back in one of the world’s three largest economic zones.
China’s vice-premier, Liu He, who predicted growth in China would rebound from a 3% to something more typical like 5.5%. Like all the predecessors from China who went to Davos, Liu expressed the desire of China to reconnect with the world economy. But knowing that he would be stepping down pretty soon and there is no senior economic advisor in sight to see this reconnection.
He also made remark that China would not pursue a planned economy.
Gas prices – A fall of over 80% in natural gas prices has brought relief to Europe especially. A lower energy price would help to avoid inflation.
Inflation Reduction Act – It is a $369 billion package that produced huge subsidies for the green transition, and attract companies to invest in technologies that will help to cut the country’s greenhouse emissions. It is for the next 10 years and will be an engine for growth.
This act is to counter the dominance of China in renewable energy development and this has alerted the allies in Europe also to subsidize investment domestically. But this ought to avoid from being led to any discrimination and protectionism blocks competition and innovation and would detrimental to climate change mitigation.
As the response from Europe, the European Commission President Ursula von der Leyen promised a relaxation of regulation and new funding to help the bloc to catch up. But Christine Lagarde, President of the European Central Bank, warned the government in Europe not to increase subsidies to business and consumers like what Von de Leyen had promised.
On the whole, the situation has eased off before the key players arrived at Davos as during then the situation was more bleak. Many had expected 2023 would bring a lasting hangover from Russia’s war in Ukraine, continued in China’s lockdown of its borders and the devastating effects of the high energy and food prices on the living standard across the world.
Orsted the Danish Wind Farm – FT, January 21, 2023
Renewable energy promise a better future for our planet. The offshore wind specialist, Orsted is caught with the market because its hedge policy has not been effective while the cost of the upcoming projects have picked up. In its updating of its trading, the Danish wind farm operator announced preliminary full-year 2022 results and offered a lower than expected outlook for 2023 profits. Its share price fell 8.7%, down from half from its peak of DKr1,351.
Orsted’s estimated EBITA at about 11.5 times is a fifth higher than London-listed utility SSE, who has a sizable renewable energy earnings.
Orsted owns half of New York offshore wind project – Sunrise, and it is entering into a surging installation cost. It won the project in 2019 for this 924-megawatt project and construction will only start next year. Power price agreements were agreed on lower cost assumptions, which has now risen by a quarter.
Orsted won six offshore projects on the East Coast of the U.S. including the ones in New Jersey and Maryland. They would perhaps all need impairments. This have taken a toll on its share prices.
European Delegates Changed Tone at the World Economic Forum Over the U.S.’s Inflation Reduction Act – FT, January 27, 2023
Delegates at the World Economic Forum at Davos were united to praise Biden’s Inflation Reduction Act. It is a package of $369 billion that includes subsidies aimed at luring companies to invest in technologies that would help cut the country’s greenhouse gas emissions.
Previously this would have attracted the scorn of pro-globalization activists in Davos, but this time knowing the subsidies are for everything from electrical vehicles to hydrogen power that can give the urgent need to tackle the challenges of climate change.
Obviously the world has seen the urgency and it would be too ideological when the governments would decide that the subsidies be unnecessary. Formerly everything would be taken by the market itself and it is anti-free trade and even discourage the globalization as it would pull manufacturing jobs and investment to the U.S. because of the lucrative subsidies. And furthermore, there is the market ready to take all this.
Furthermore, the director-general of the World Trade Organization, Ngozi Okonjo-Jweala, said that the aggrieved trading partners should speak directly to the U.S. government rather than to lodge the complains to the WTO.
This time it has encouraged the world to come together to address the climate challenges and to lift the bureaucracy in taking the matter forward. But it has been seen as a competition from the U.S. among its European counterparts.
Zambia is in the Middle of a Debt Crisis – FT, January 24, 2023
The Treasure Secretary of the U.S., Janet Yellen, is calling China to release Zambia from their debts. Yellen was in a ten-day visit in Africa and spoke in Lusaka, capital of Zambia. She said that the restructuring of the loans to Zambia from China took too long to resolve.
Zambia is Africa’s second-largest copper producer and defaulted on $17 billion of debt in 2020. The restructuring is depending on China, the biggest creditor to the African developing countries, and how would it respond.
Zambia needs the restructure to be in place before it can access to the IMF’s $1.3 billion bailout.
Analysts said that Zambia’s developing projects—hydropower dams, highways and airports—have been stalled due to the lack of experience and coordination among the Chinese state and development banks.
In fact, Zambia is not the only case. Countries like Sri Lanka and Ghana are facing defaults when they can no longer pay back debts as they owe also a big chunk of debts to China.
The U.S. is seeking to rebuild economic and trade relations in the region in the midst of the Russian war in Ukraine that has created inflation and Beijing’s lending that has inflicted debt crisis.
Japan’s Core Inflation Reaches 41-Year High – FT, January 21, 2023
Japan’s core inflation rate rose to a new 41-year high of 4% in December. This put pressure on the Bank of Japan to maintain its ultra-low interest rates. Its core inflation, including food price, and gas, reached its fastest pace since December 1981. And this 4% has exceeded the 2% inflation target the Bank of Japan target for the nine-consecutive month.
Price increase in Japan have been low in comparison with those in the U.S. and Europe. Inflation in Japan, the most advanced economy in Asia, is due to a weaker yen and a heavy exposure to the increasing cost of imported commodities.
Energy prices in December went up 15.2%, and even excluded energy, inflation was also up with 3%, hitting a 30-year high.
Retailer like Uniqlo, owned by Fast Retailing, and other big companies, announced plans to raise wages to deal with the situation of three decades of price stagnation.
Bank of Japan forecasted the core inflation outlook for the fiscal year ending March to 3%, from a previous forecast of 2.9%.
Rewriting the Supply Chain – WSJ, January 6, 2023
Global supply chain has beginning to come out from the characterized disruptions in 2021 and 2022. Entering into 2023, the rise of “green protectionism” and an accelerated effort to diversify from China. This is gaining tractions by the multinationals. The first one will mean a more livable planet for the future and the second one will recreate a supply chain more resilient. This will mean more costly and hopefully that this can be absorbed by the companies and consumers in the meantime.
China is currently in the center of the global supply chains and this gives China the significant geopolitical leverage. China is also the world’s largest energy user.
Europe has been crafting a carbon taxes mechanism for a while, and essentially it is going to levy on energy-intensive imports such as such as steel, and this is going to hit China very hard, But it will post the threat of U.S. exports to Europe too. With EU’s current Carbon Border Adjustment Mechanism (CBAM), anyone who is importing CBAM-listed goods into Europe will have to report the emissions associated with their products starting in October 2023. If those emissions exceed the equivalent products made in Europe would have to pay the tariffs.
The current list includes iron and steel, aluminum, cement, fertilizer, electricity and hydrogen. CBAM is used to put the restriction to export countries using the less stringent regulation and it is already getting complains from the Brazil, Russia, India and China (BRIC) who call in discrimination, unilateral and in violation of World Trade Organization (WTO) rules.
The U.S, who would also face the tariffs, it is not as emissions-ambitious as the EU, but it is emissions-competitive and will face lower or even no tariffs compared to rivals.
China is going to be hit the hardest, although its aluminum and polysilicon run on hydropower, but its power grid overall is far more reliant on coal than most of the other economies, including the U.S.
China has its carbon price, it is around 10% of those of the EU. After converting everything into the U.S. dollar, China is merely $8.42 per metric ton versus EU’s $84.84 per metric ton.
China’s dominance in electric vehicles and batteries is a clear target of the U.S. Inflation Reduction Act (IRA), where it has been mandated for the EVs to be assembled in the U.S. and batteries must contain a certain percentage of materials from the U.S. as its free-trade partners. This has ripped China’s near stranglehold on battery-material processing and its most competitive EVs it has developed for the market.
To wrestle the two major threats from China have gain the consciousness over the past few years for the U.S. and Europe. Both have found that the over concentration of key supply chains have created a rising geopolitical rival. Like everything else, it comes with a price. Coming out to lead the green manufacturing and to realign the key supply chains are worthy goals but they are pricy as well.
U.S. Greenhouse Gas Emissions in 2022 – New York Times, January 11, 2022
For the first time, renewable energy surpassed coal power nationwide in the U.S. The greenhouse gas emissions still ticked up 1.3% with wind, solar and hydropower generated 22% of the country’s need for electricity compared with coal with 20%. There is also the growth of natural gas power generation. This has put the U.S. back in line with the long-time goal after nearly two years of Covid-related disruption.
Two years ago the goal was set by President Biden to reduce the nation’s greenhouse gas emissions at least 50% below 2005 level by 2030. This will limit the global warming to 1.5 degrees Celsius above the preindustrial levels.
But the analysts from Rhodium Group is saying that the country is not on track to meet the target. Also the Inflation Reduction Act, a landmark climate and tax law is not going to help to achieve the goal.
The emissions were at the 2000 pandemic lows where the lockdowns and the reduce of energy use created an illusion for the U.S. energy use to its lowest level in decades. Very soon the emissions rebounded 6.2% in 2021as the activities bounced back. The continuous eruption in the supply chains and the new coronavirus variants dampened the recovery. This small rise of 1.3% in 2022 came amid the Russian’s war in Ukraine which triggered the global energy crisis and high inflation. Again, it is an illusion.
The electric power generation is coming from renewable energy and natural gas, but can replace coal.
Natural gas is less carbon-intensive than coal, but it gives out methane, which is a greenhouse gas.
In the U.S. the highest-emitting sectors are transportation and industry which accounted for roughly two-third of the country’s total greenhouse gas emissions. Industry emissions rose by 1.5% and transportation rose by 1.3%.
The Inflation reduction Act can help to speed decarbonization at industrial plants and reduce fossil fuel emissions in cement and steel production. The tax credit for EVs would create fewer emissions than gasoline-powered vehicles.
Agriculture contributes 11.2% of total greenhouse gas emissions in the U.S. in 2020. Wildfires that burn forests and grasslands are also causing gas emissions.
International Energy Agency estimated that renewables can overtake coal as the largest source of electric generation worldwide by 2050.
Hopes for China Economy to Come Back – FT, January 30, 2023
With China’s coming back, industrial metals—tin, copper and zinc—have their prices surges more than 20% in the last three months.
We have seen tin’s price surged almost 80% to $32,262 per ton. Copper raised by 10% to $9,329 a ton.
With zinc, China is a net exporter of refined zinc last year for the first time since 2007. It was trading at $3,500 per ton in zinc ingot in Tianjin in the beginning of February.
Chinese Consumers Are Back at This Time – WSJ, January 27, 2023
Since the pandemic hit in 2020, China depended on government-led investments and exports to drive the economy and its draconian virus controls—frequent Covid testing, mass quarantines and wide-spread lockdowns—took a heavy toll on consumer’s confidence.
But since the zero-Covid policy was lifted in early December, Chinese travelers are traveling to the tourism hotspots at home and during the week-long Lunar New Year holiday have brought more people flocked in the cinemas and restaurants. Trips have been booked for abroad and a revival of consumption will underpin China’s economy growth for 2023. We may not find spending on those big-ticket items, such as cars and apartments, but travel will sustain beyond the holiday.
An average of 26.8 million passengers travel each day since January 7, which was 50% higher than the same period in 2022.