MARKET REPORT
SHORT READ PART 3
2022 APRIL QUARTERLY ISSUE
Written by : Andrew Sia
This part’s main highlight is the war in Ukraine. Once again, it is telling us how fragile is our globalization and the supply chain that has been supported. We found that we are heavily relying on one another. The more we look into it, we can see that almost everyone is indispensable. It has its good and its bad, but in today’s geopolitical situation, we have to admit that it is very challenging.
We have seen that Omicron is raging in China, but it is China’s zero-covid policy that has driven the country into this situation. We have already noticed most of the countries in the western world have decided to co-exist with the coronavirus, and their businesses have begun to return to normal.
Contents:
Shenzhen Began Its Week-Long Lockdown
China’s 2022 GDP Target is Set for 5.5%
China’s Textile Industry Recorded Double-Digit Growth in 2021
Global Chips Supply
France’s Plan for New Nuclear Reactors
Putin is Causing the Great Supply Chain Disruption
Chinese Companies Listed in the New York Stock Exchange Have Asked for Compliance
Seafarers Are Threatened by the Conflict Between Russia and Ukraine
China Ordered Shutdown on Several Chinese Cities
Another Virus is Surging in Western Europe
Recession’s Prediction
Oligarchs in Russia
Shanghai is in the Lockdown Mode
Sri Lanka’s Economy has Collapsed
Softbank Suffering from Turmoil in Chinese Technology Shares in Nasdaq
Sovereign Debt Crisis in Developing Countries
Battery Cost for the Battery-Powered Truck
Shenzhen Began Its Week-Long Lockdown – BOF, March 15, 2022
Shenzhen and its 17.5 million inhabitants have begun a week-long lockdown. This tech-hub will have impacts on its local shopping malls, manufacturing facility and shipping ports. Subways and buses are closed and non-essential stores are ordered to close, except supermarkets and pharmacies.
Shenzhen is home to one of the world’s largest port, the lockdown will cause further constrain the global supply chain.
China’s 2022 GDP Target is Set for 5.5% – BOF, March 15, 2022
The Chinese Politburo Standing Committee met on March 7 in their annual “two sessions” announced their goal of reaching 5.5% of their GDP for 2022. It is said to be their lowest annual target, and yet it remains an ambitious target. We have to consider that the macroeconomic for the global situation is extremely challenging, considering the Russian’s war in Ukraine, and the pandemic is not yet over, this growth of China will come largely from their state-support construction projects.
China’s Textile Industry Recorded Double-Digit Growth in 2021 – BOF, March 15, 2022
China’s Ministry of Industry and Information Technology recorded textile industry’s double-digit growth last year. Total operating revenue of the firms surveyed increased by 12.3% year-on-year to have reached $817 billion with profits of $42.3 billion.
Global Chips Supply
The world has been talking about the chip supply crisis based on demand of semiconductors for instance. Structurally we have the electrification, such as the mass production of electric vehicles, and semiconductors for digitalization which all require high-end chips. This rapid increase in demand, which is hindered by the supply chain constrain, has made the supply more tight.
To respond to this rapid increase in demand, the players in the free world would build production facilities which involve capital expenditure. The world’s largest foundry, Taiwan Semiconductor Manufacturing Co., (TSMC) in Taiwan has raised its capital expenditure from $30 billion in 2021 to $44 billion in 2022. They are betting that such an increase can justify by the expectation that the global demand for semiconductors will continue.
Also governments in several major economies have implemented huge spending programs to try to boost local chip production. This can be in the form of land grant, tax benefit, financial aid, governmental support in other means.
In the U.S., Biden called on Congress to pass the CHIPS Act specifically during his State of the Union speech on March 9, to provide chipmakers with $52 billion in subsidies to advance semiconductor manufacturing in the U.S. It has been announced that Intel would invest $20 billion for two new chip facilities in Columbus, Ohio. It will plan to invest a further $100 billion to build the Ohio “megafab” over the next decade.
China started this race already in 2014 with the establishment of two consecutive big funds to support indigenous innovation in the semiconductor industry. It is one of Beijing’s most important industrial segments to help the country to have a position in the tech area. It has set aside $50 billion for the scheme but very possibly that it will only for less advanced semiconductors.
China has 35% of the global semiconductor demand, but only produce 6% of its requirement. The U.S. sanctions on key Chinese companies have caused many of the semiconductors in the crossfire.
We have not to leave out Europe in this arena, with the entering of their production in countries like Germany and Czech Republic, this may result in long term oversupply, especially at the lower end of the industry. But one has not to forget that those low end chips are used in our everyday electronic appliances.
France’s Plan for New Nuclear Reactors
French President Emmanuel Macron announced a plan to build 6 reactors that produce electricity with zero greenhouse emissions but the question is the high cost of the new projects if it is feasible. This decision can be the most ambitious after the 2011 nuclear accident in Fukushima, Japan.
France relies on nuclear power to generate more than 70% of its electricity already. But the problem is the average age of these nuclear reactors which is 37 years old
Putin is Causing the Great Supply Chain Disruption – FT, March 14, 2022
President Vladimir Putin unleashed his war on Ukraine triggered a series of sanctions and oil is one of those. Price of petroleum products like plastic, even the recycled plastic, has gone up. This has intensified the strains on economic growth and it triggers inflation.
Natural gas, which is another big Russian export, is also a key ingredient for nitrogen fertilizers. Cost for producing grains like soybeans, corn and wheat will rise, the meat of those animals feed on grain, where the cost will rise as well. The price of bread on the breakfast table will also rise.
We can see the war, even if it is a regional war, is the fresh trouble atop the Great Supply Chain Disruption.
Already it is threatening the spring planting season for the agricultural supply chains. And Ukraine is known to be important agricultural country. It can meet the food needs of 600 million people.
- 1st in Europe in terms of arable land area;
- 3rd place in the world by the area of black soil (25% of world’s volume);
- 1st place in the world in exports of sunflower and sunflower oil;
- 2nd place in the world in barley production and 4th place in barley exports;
- 3rd largest producer and 4th largest exporter of corn in the world;
- 4th largest producer of potatoes in the world;
- 5th largest rye producer in the world;
- 5th place in the world in bee production (75,000 tons);
- 8th place in the world in wheat exports;
- 9th place in the world in the production of chicken eggs;
- 16th place in the world in cheese exports.
This war has brought an enormous impact on Ukraine and Russian’s ability to supply the world.
Already the prices of the commodities soared after Russia’s invasion, and wheat has at one point hitting an all-time high. In fact, the prices of wheat, corn and other commodities were rising before the war due to droughts and high demand as economy has started to emerge from the pandemic.
Spain has flagged a serious problem with the animal feed with 22% of the corn fed to livestock in Spain are coming from Ukraine.
The UN Food & Agriculture Organization has warned that up to 30% of crop areas in Ukraine will either not be planted or go unharvested this year because of the military conflict.
Russia’s ability to export will be cutback because of the sanction.
The EU receives half of its corn from Ukraine and a third of its fertilizers from Russia.
The supply chains from Ukraine and Russia are now disrupted by the virtual closure of the Black Sea ports.
Chinese Companies Listed in the New York Stock Exchange Have Asked for Compliance – FT, March 11, 2022
China’s fast-food group, Yum China, biotechs—BeiGene, Zai Lab and HutchMed, and tech business ACM Research faced delisting from the New York Stock Exchange and Nasdaq as mentioned by the Securities and Exchange Commission.
It was already in December 2020 the U.S. passed a law stated those Chinese groups listed in the U.S. would need to disclose their audits for the current year together with their three-year audit records.
Beijing has blocked domestic groups and their Chinese auditors from complying with such requests. China blamed this as a political act and this can threaten trading of US-listed shares worth more than $2 trillion and have paralyzed a once vibrant market for China listings in New York.
Seafarers Are Threatened by the Conflict Between Russia and Ukraine – FT, March 12, 2022
For the global shipping industry, together Ukraine and Russia account for 275,000 of the world’s 19 million commercial seafarers. Still, as the single country, the Philippines has the largest supply of maritime workers.
Ukraine on its own provides 5.4% of the officers that head crews on 74,000 plus ships servicing in the international waters.
There are two different woes with today’s situation. First of all, the Ukrainians are trying to get back to Ukraine and fight the Russian invasion. An estimate of 20% of them have went home to fight. This has created a shortage immediately.
Russian’s invasion of Ukraine has already causing significant supply chain problems. The biggest container shipping lines have suspended new bookings to Russia for fear of carrying any sanctioned cargo. This has already caused the congestion in the European ports created by customs check to comply with the sanctions. Also the Black Sea has been classified as a high risk war zone by the Joint War Committee, an advisory body that guides insurers, and stopping grain, iron ore and oil exports.
The shipping industry in the past two years have struggled with the pandemic, and already 400,000 seafarers were stuck on land or at sea, and the more recent outbreaks of Omicron on board of ships have caused enough havocs. With this war and the isolation of Russia is adding burdens on this industry.
There are talks whether to load and unload those Russian ships. But the access to SWIFT as the major international payment network, has been severely causing damage to the Russian seafarers. It leads to one’s thought whether the normal hardworking people should be punished by the deed of one dictator—Putin.
China Ordered Shutdown on Several Chinese Cities – FT, March 12, 2022
Xi Jinping’s zero-tolerance strategy for covid resulted the risk to put Shanghai into lockdown. Already Changchun, capital of north-east Jilin province, a city with 9 million people has been shut down after 23 new cases being reported. Changchun is an important manufacturing base.
Health authority reported that daily case numbers have tripled in the past week, adding up more than 1,100 cases across 17 regions and forcing officials in several cities to erect emergency makeshift hospitals.
Xi’s decision has resulted tightly sealed borders, citywide lockdowns, mass testing and meticulous contact tracing.
Premier Li Keqiang didn’t respond to how much longer the government intend to stick with this zero-covid strategy, except to mention that the response will continue to be scientific and targeted to protect people’s lives, maintain normal life and work and ensure security of industrial and supply chains.
This is in contrast with the rest of the world as everyone is rapidly reopening.
The zero-covid strategy has brought the city of Hong Kong on its knees. It has already recorded 760,000 cases at this writing and the cases quickly picked up in the middle of February. Comparing with China’s 120,000 cases during the entire pandemic, not to forget that it was China who started the outbreak in Wuhan in December 2019, and these numbers with only 4,636 deaths were very admiring and not to say aweing.
Now Hong Kong’s hospitals have been overwhelmed, mortuaries are at capacity and coffins for burial are running out. Already 4,568 deaths were recorded with a daily report of almost 300, mostly are elderly and unvaccinated residents from the elderly homes. It is being analyzed as world’s highest daily per capita death rate.
The Hong Kong government has been forced by Beijing to adopt a “dynamic zero-covid” strategy which is at the standstill. The only thing left for the city is to announce the lockdowns like the other Chinese cities which have comparatively less cases, 23 new cases from Changchun versus Hong Kong’s 27,765 which already came down from more than 55,000 cases a week ago.
Another Virus is Surging in Western Europe – Washington Post, March 16, 2022
Already the health authorities are on alert on another wave of the pandemic even when many countries have done away with the restrictions after a sharp decline in cases.
Infectious-disease experts are closely watching the subvariant of Omicron known as BA.2 which appears to be more transmissible than the origin strain, BA.1 and already Germany, on Tuesday with 225,000 new cases and 287 deaths, has called the nation’s situation critical.
About 12 countries are seeing spikes in coronavirus infections caused by BA.2 from the BA.1 that has been with us over the past three months.
In the U.S. there are about 35,000 cases of BA.2 have been found to date. It is said that the vaccines we have, the mRNA vaccines, are all effective against the virus.
In the U.S. just 65.3% of the population, 216.8 million, are fully vaccinated, and only 96.1 million have received a booster shot. In Germany, nearly 76% are fully vaccinated. In the U.K. 73.6% are fully vaccinated.
Vaccine-makers, Pfizer and BioNTech as suggested by the FDA for emergency authorization to offer the fourth shot to people 65 and over.
Recession’s Prediction
The metrics that have been used to predict the economy’s booms and busts, such as at the time when a new sky scraper breaks the world’s tallest; the Empire State Building (2007), the Sears Tower (2005), and the Burj Khalifa (2009) in Dubai were finished in time for downturns.
But nothing can be stranger that Alan Greenspan’s “men’s underwear index”, which said when the men’s underwear sales dip, the economy dips as well. He was referring to 2017 to 2019 and it was reflected when men were more careful and decided not to replace their underwear. Perhaps Alan Greenspan has forgotten that it is either the wife or the mother who buys the underwear for men.
Oligarchs in Russia
During this time the oligarchs are often brought up during the sanctions on the Russians from the Western powers. First of all, “oligarch” was coined by Aristotle, the Greek philosopher, and being picked up again to describe the ultrawealthy Russians who schemed and swindled their way to control Russia’s most lucrative industries. It is like the “princelings” from China.
This group of entrepreneurs and hustlers took advantage of the sudden privatization of the Soviet economy in 1990s to snatch the natural resources, which were formally state-controlled assets, using rigged auctions, false documents and became the power-brokers for Russia. The most prominent ones are Roman Abramovich, Mikhail Khodorkovsky, Boris Berezovsky, just to name a few. They supported Boris Yelsin’s election and made him president in 1996, and later let Vladimir Putin to be the successor in 2000.
Already in 2017, the U.S. based National Bureau of Economic Research reported that the wealthiest Russian’s elites had at least $800 billion stashed abroad. This is roughly the total wealth of the Russian’s 144 million people.
To seize the oligarch’s wealth can almost be impossible, as the oligarchs conceal their holdings in layers upon layers of shell companies scattered across the world. The sanctions would not be effective to make Putin to change the course of his invasion in Ukraine.
The more prominent assets, such as the superyachts, can be seen by everyone. But they are only a small fraction that is visible.
It is said that Putin personally has $200 billion assets but his attitude in according to the Russians who exiled, said that for anything belongs to the Russian Federation, Putin considers to be his. You can see that his greed is bottomless.
Shanghai is in the Lockdown Mode – The Week, April 8, 2022
Shanghai, the largest and wealthiest city of China, has the city lockdown first in Pudong, the financial district, for five days. And then the vast residential area in Puxi, across the Huangpu River, for another five days. The situation continues to get worse, and now the lockdown continues in phases for all its 26 million residents, and it is the largest lockdown in China since 2020, when the authority closed Wuhan for 76 days.
A record of 3,500 cases reported in a single day triggered the significant challenge for China’s zero-covid strategy. While the western world has chosen to co-exist with the virus and applied a normal life now.
Sri Lanka’s Economy has Collapsed – The Week, April 8, 2022
The country is said to rationalizing its food and fuel and has asked India for help for an additional $1 billion credit line to ease its worst economy crisis in decades. The pandemic has devastated the country from its foreign remittances and their tourist industry. The country has just $2.3 billion reserve to pay about $4 billion in debts.
It is asking the International Monetary Fund for bailout. Food price shot up 25% in January alone due to the lack of foreign currency reserve.
Softbank Suffering from Turmoil in Chinese Technology Shares in Nasdaq – WSJ, March 28, 2022
Nasdaq Golden Dragon China Index of U.S.-listed Chinese stocks dropped 52% over the 12 months by Beijing’s clampdown on the sector of Chinese tech companies. Alibaba alone fell 49%, Didi Global fell 70% from its offering price of $14 last summer.
Softbank, the Japanese tech investors, might have to sell its stake in Alibaba to settle its margin loans used to finance its new investments. Softbank is known for being the single largest investor of Alibaba. Its share in Tokyo-listed stock dropped 40%.
Sovereign Debt Crisis in Developing Countries – FT, March 28, 2022
IMF has not been able to find an effective way to confront this crisis which has been building for years and we have already seen defaults by countries like Argentina, Ecuador, Lebanon, Sri Lanka and Zambia.
Take for instance, Argentina has defaulted nine times and right now it cannot repay more than $44 billion that it owes to IMF. The defaults have always been caused by very high level of corruptions.
Banks have always willing to float new bonds for countries in the full knowledge that if they default, then the fund would always willing to do a bailout. But call for greater transparency in every aspect of the sovereign debt market is necessary. It is known that many banks and financial institutes are managing sovereign bonds for Russia, Belarus and other governments that not only have exceptionally high levels of perceived corruptions, but that pursue policies threatening to western democracy and security.
Sovereign bond transparency is needed for IMF to stop corruption and illicit financial flows.
Battery Cost for the Battery-Powered Truck – FT, March 28, 2022
So that you know the making of a battery-powered truck is more expensive than a combustion engine equivalent. It cost about €25,000 for materials inside the combustion engine, but about €24,000 for the battery cells inside the battery-powered truck.
For the battery-powered truck, the cost of battery cells is at roughly €60 per kilowatt hour, and for 400 kilowatt hours, the battery cell alone will cost €24,000 in a single truck.
The key raw materials for the modern battery are cobalt and lithium which have almost double lately. The nickel has increased by 40%.
The way I look at it is different, although the report from the newspaper stopped when they have brought up the increased cost and asked for government subsidy and called for tax on carbon to narrow the cost disparity.
We have seen the increase of the fuel price, the use of the engine oil and the other cost for the manufacturing of the combustion engine, these are all the continuous running cost of the combustion engine truck.
Not to mention that the cost of the combustion engine on the assembly line which can take up more manufacturing hours due to its complexity.