MARKET REPORT
SHORT READ PART 2
2022 OCTOBER QUARTERLY ISSUE
Written by : Andrew Sia
In this report we featured a wide spectrum of subjects but you will find that the sustainability is the hottest topic. Although you may also find subjects of your interest.
But we can find that the world is getting more challenging with threats coming from all directions. We hope that you can find subjects that can be useful for you.
Contents:
Sustainability Requirements for Fashion Industry Will Get Started Next Year for France
Climate Change Versus Human Rights in China
The U.S. Recession at This Time
China and the World’s Economy Challenges
Updates on Clean Hydrogen Projects
Germany Retail Sales Plunged the Most
Amazon Reported Its Carbon Emissions
Bangladesh Clothing Business Drops Due to Power Shortage
Belt & Road Initiative or Road to Financial Disasters?
Nitrogen Emissions Has Caused Concerns Over the Farmers in the Netherlands
Shipping Lines Are Falling From the Sky
Kenya’s Railway Funded by China and Its Presidential Election
Obstacles for the Electric Vehicles
U.S. Legislation in Climate Change
Softbank’s Latest Financial Report
Sustainability Requirements for Fashion Industry Will Get Started Next Year for France – Wion, July 22, 2202
Next year onward, for all clothing items sold in France would require a label containing information about precisely everything the clothing is containing, like: where and how the materials were grown, dye-stuffs being use, how was the factory being powered, even how far it traveled to arrive the market. The French Agency for Ecological Transition is currently using eleven proposals for how to collect and to compare data.
The goal is to make the products traceable and to give the lowest impact to achieve sustainability. It is already recognized that the fashion industry is responsible for 10% of the global carbon emissions. It is also responsible for a significant portion of water consumption and waste material management.
It is expected that a similar rule would come into effect in the European Union by 2026.
Climate Change Versus Human Rights in China – WSJ, July 5, 2022
Under the Uyghur Forced Labor Prevention Act goods made with forced labor in the Xinjiang Uyghur Autonomous Region of China cannot enter into the United States market. This can take effect on the Xinjiang cotton but when it comes to the use of the solar energy, batteries and electrical vehicles, for Biden and his administration to take the same stand is becoming difficult.
China has already dominated the solar energy and they are in control of 90% of a critical material for solar panels—polysilicon, a highly purified polycrystalline form of silicon that has to produce through an energy-intensive metallurgical. Using its economies of scale with the coal-fired electrical plants to produce the metallurgical-grade silicon, and the labor, the cost of the solar panels has been driven to a very low level.
Biden administration is likely to suspend the tariffs on Chinese solar panels for two years in order to be more inline with the commitments taken during the last COP 26 in Glasgow.
There is also the batteries and electrical vehicles to meet with the carbon emissions limit set under Glasgow Climate Pact. The lithium-based battery is the only known technology that is available today that can allow early electrification of transportation at scale.
China is vertically integrated with its supply chain to produce the lithium battery. It is the dominant producer of cobalt after it has acquired mines in the Democratic Republic of Congo which produces 60% of the world’s supply. Congo is known for its notorious for the use of child labor in the cobalt mining.
China is the lead supplier of the batteries and also the manufacturing of the electric vehicles.
Biden and his administration has directed that 50% of the U.S. car sales must be electric by 2030 and that leaves the car industry without alternative technologies or suppliers except to look forward to China. Also a high subsidies from federal government, state and local, to drive down the cost to consumers to enable the switch over in 2030. It is going to affect the employment of the car industry and the electric vehicle business is also immature.
Unlike Europe, their car industry is working closely with China already and they have expected the net loss of employment in this sector is going to be 500,000 jobs by 2035.
In front of the Western world, they have to struggle with the climate change or the human rights issues in China, it is difficult to win in both areas.
Climate Change Versus Human Rights in China – WSJ, July 5, 2022
The U.S. economy has experienced twelve recessions since World War Two. Each one of them included two basic features: economic output contraction and unemployment surged.
This time, something highly unusual is happening. Economic output fell in the first quarter of the year and signs suggested that it would do so in the second quarter. But the job market showed little sign of faltering during the first half of the year. In fact, the unemployment fell from 4% last December to 3.6% in May.
After this pandemic is finished, I think that it will put the economy back into a new perspective. The Second World War is approaching its 80th year and we would probably be looking at the world’s new order.
China and the World’s Economy Challenges – WSJ, July 5, 2022
Earlier on during the year, China announced the annual growth of 5.5% is very unlikely to be achieved due to many reasons. A weak year for China would hold back the global economy at a time when the U.S. and other advanced economies are also slowing. With the inflation caused by Russia’s invasion of Ukraine has drove up the energy and the food prices. This has squeezed consumers’ desire to spend. This has also caused the banks to increase the interest rates.
Annual inflation hit 8.6% in the U.S. in May which was a 40-year high. The short-term interest target will be raised to 3.5% at the end of the year. We are looking at current interest rate of 2.25-2.5% as of August 1, 2022.
The European Central Bank has plans to raise the interest rate.
The Bank of England has raised its benchmark rate five times since December 2021.
The Reserve Bank of India lifted its policy rate for the second time in two months in June.
The Reserve Bank of Australia raised rates for the first time in decade in May and followed by another one in June.
China’s relaxation of lockdown restrictions in Shanghai and other big cities in China recently has helped to loosen some of the supply chain bottlenecks contributing to global inflation. Shipping volumes to the U.S. from China at the end of June surpasses the level of March when public-restrictions were tightened in Shenzhen and Shanghai. The cost of shipping a container to the U.S. West Coast from China fell 15% in recent weeks, and is around 13% lower than a year ago.
While China’s bottlenecks ease, there are also weak indication for demands from the U.S. because of the inflation rate gets into household income and consumers shifted to service instead. That has caused excess inventory of goods consumers can no longer spend like before. The U.S. retailers like Target and Bed Bath & Beyond have issued their earning warnings.
Faced with sagging demand at home and overseas, manufacturers of goods in China may cut prices as their stocks are piling up as well.
But China’s influence of the world doesn’t stop only at inflation. Beijing’s zero-tolerance approach to Covid-19 can lead to bottlenecks in the global supply chain. This can cause inflation.
China’s slowdown in infrastructure has already caused the global prices for the commodities on iron ore, copper and other raw materials used in its construction. If its recovery beats expectation then it would turn the demand of oil and coal for instance.
But its construction would be stalled by the heavy debts because the meltdown of its huge real-estate market and the disheartened borrowers without the coordination of the local banks.
It is the year of woes as China is concerned.
On the other hand, the world is not much better with the suffering from the global pandemic and also the war in Ukraine. It may not be too unrealistic to say that the world has also the potential of entering into a disinflationary scenario when the supply and demand are out of the equation.
Updates on Clean Hydrogen Projects – WSJ, July 15, 2022
The newcomer is a company known as Monolith, a Nebraska startup who is processing clean hydrogen. Instead of splitting water, it is using renewable electricity to heat natural gas and turn it into clean hydrogen and carbon black. This material can be used in everyday products like rubber and paints. The two products can be produced power efficiently and cost effectively. Generally carbon would have to be captured and buried underground which is both costly and impractical.
It attracted Black-Rock and NextEra Energy to invest in Monolith. But around the world there are investment in this energy, the green hydrogen, and we have noted Indian billionaire Gautam Adani’s partnering with TotalEnergies for $50 billion; BP PLC put $30 billion in Australia; Shell said that it will build the largest renewable hydrogen plant in Europe; BASF is investing the same technology. Other investments in Singapore’s Temasek Holdings; South Korean’s SK Group and Mitsubishi Heavy Industries have also invested in the startups.
Talking about storage of green hydrogen in caverns in Utah to stabilize the electricity grid in the Western U.S. where wind isn’t blowing and sun isn’t shining.
German Retail Sales Plunged the Most – BOF, August 1, 2022
German retail sales plummeted in June as consumers cut spending on non-essentials to cope with record inflation. Sales were down 9.8% from the previous year, which was the most since 1980. Non-food items—shoes, clothing, furniture, household appliances, recorded steeper decline.
Europe’s largest economy is suffering from the result of the war in Ukraine, supply chain disruptions, and the energy crisis in the winter months.
Inflation accelerated to 8.5% in June and it will get worse when temporary fuel-tax rebates and subsidized public-transport tickets expire.
Amazon Reported Its Carbon Emissions – BOF, August 2, 2022
For 2021, Amazon reported that its carbon footprint grew 18%. This was due to its rapid growth during the pandemic. The world’s largest online retailer emitted 71.54 million metric tons of carbon-dioxide last year. The increase is about 40% since the company first disclosed the figure using data from 2019.
But its carbon intensity, which is a measure that divides its emission by gross merchandise sales, fell 19%, is an indication that the company successfully in delivering products, running its warehouses, data centers and offices more efficiently.
It committed the company to become a “net-zero” emitter of greenhouse gases by 2040. Amazon operates a cargo airline, a growing retail and logistic business, grocery stores and data centers.
Bangladesh Clothing Business Drops Due to Power Shortage – BOF, August 2, 2022
The world’s number 2 exporter after China, is facing both the slowing global demand and the power crisis at home.
With both European and U.S. customers deferring shipments of clothing or delaying orders, it is hurting Bangladesh.
The garment export makes up more than 10% of the country’s gross domestic product and employs 4.4 million workers. The power cut is the measure taken by the country to preserve the fuel reservation caused by the war in Ukraine.
During this energy crisis, the use of generators is three times the cost from the national grid. The dyeing and washing units would need to run on the continuous supply of power due to the nature of the operation.
In the early stage of the pandemic, Bangladesh saw the garment exports fell to $27.95 billion in 2020, This time the exports climbed back to $42.6 billion in the year ended June and accounted for 82% of the total export.
In the region, Pakistan’s export gained because of its weak currency. The weak euro currency is hurting the export of Bangladesh to the European market as well.
Foreign exchange reserves in Bangladesh slipped from $45.33 billion a year ago to $39.79 billion as of June 13. That is enough to cover four months of imports, which is slightly higher than IMF’s recommendation for three-month cover. Bangladesh has sought for a loan from the IMF to deal with the costlier oil prices.
Belt & Road Initiative or Road to Financial Disasters? – Nikkei Asia, August 10, 2022
“The BRI is an audacious program of lending, aid and infrastructure contracts totally over 880 billion, according to the American Enterprise Institute”, as quoted by Nikkei Asia. This was first announced by Chinese President Xi Jinping in 2013, and in the beginning it was only known as the “Silk Road.” In April 2015, BRI was launched and at the same instance the announcement of the China-Pakistan Economic Corridor (CPEC) which stretches from Gwadar to the Chinese city of Kashgar in Xinjiang. It showcased the friendship between China and Pakistan with $46 billion in pledged funds that has since grown to $50 billion. It lays the backbone of the Belt & Road Initiative. It is also been often seen as the bellwether of the project. The Pakistani government claimed that Gwadar’s gross domestic product would increase from an estimated $430 million in 2017 to $30 billion by 2050. It was also said that it would produce a 1.2 million jobs but currently it stands at 90,000 only.
From Karachi, Pakistan’s most populous city, to its port of Gwadar, located on the Indian Ocean coast, connected by the 600-km highway. It is deserted without restaurants, restrooms or even fuel stations and the traffic is very light.
When arrive at Gwadar port, the flags for the two nations, China and Pakistan, are ubiquitous with Chinese-financed construction projects booming. But there is the lack of economic activities. It has not been what would have expected and as first announced.
The CPEC is on the verge of crisis as it is going to default in its interest payment. This is the accumulation of various challenges—mismanagement, high interest rate and corruption.
This is not going to look good for Xi Jinping at the coming 20th Chinese Communist Party Congress in November.
Nitrogen Emissions Has Caused Concerns Over the Farmers in the Netherlands – FT, August 4, 2022
The Netherlands is known for its agricultural export—over the year, millions of cows, pigs and chicken contribute €105 billion to farm exports. But something less desirable comes along, nitrogen, which contributes to the nitrogen emissions to the atmosphere that has exceeded the safety limit.
As the result, the Dutch government wants to cut back livestock numbers by a third, and they are buying our farmers to close down their production as part of the plans to halve the emissions by 2030.
This act angered the farmers when it was announced in June. They picketed supermarket distribution centers, blockaded roads, airport and train stations.
Dutch farms contribute about 41% of the country’s nitrogen emissions and has 15.2 million pigs and cows, almost as many as people. Although the Dutch government set aside €24.3 billion to help the farmers and it is asking the farming industry to cut one-third of its farm. Holland has a farmers’ organization of 30,000 members who are fourth-, fifth- and sixth-generations in this business. The central government has given the provincial governments one year to put their acts together.
There are investments that can cut the herd’s emissions by 70% by stopping cow faeces and urine from mixing. Using the robots to sweep up dung and store it and let it scrubbed by a filter. The waste can be used as fertilizer. In this way, it is better than taking the farmers’ business away but support them for investment in the longer run.
Now we are starting to hear that the nitrogen emissions can be as bad as the carbon emissions.
The EU published anti-pollution legislation in April to tackle emissions of oxygen, nitrogen, sulphur and other gases and by 2050, greenhouse emissions in the EU should reach net zero.
Belgium is also doing the same to the smaller farms. And Ireland is going to cut the agricultural emissions by a quarter in 2030.
Shipping Lines Are Falling From the Sky – WSJ, August 4, 2022
A.P. Moller-Maersk moves 17% of the world’s shipping containers, has raised its profit forecast for the second quarter this year by expecting earnings of around $22 billion in 2022. A smaller peer, Hapag-Lloyd AG, the world’s fifth-largest operator also raised its profit forecast.
Maersk gives its outlook for the fourth-quarter as container shipments will ease and more capacity can be made available. Long-term shipping contracts are at the rates below spot levels, but still significantly above contract levels in the past.
Maersk is saying that it has 71% of its business on contract and the average contract rate for 2022 is around $1,900 per 40-footer container which is still higher than in 2021.
The overall demand has softened as global growth has slowed down. The past two years’ strong profit has now becoming more normalized.
Kenya’s Railway Funded by China and its Presidential Election – New York Times, August 8, 2022
Five years ago during Kenya’s President Uhuru Kenyatta’s inauguration of the railway, fireworks popped and confetti rained down in the seaside city of Mombasa. At that time the country’s new railway designed, funded and built by China was planned to connect port in Mombasa to its neighboring country, Uganda. It would create jobs, and help transform Kenya into an industrialized, middle-income nation.
The railway has since turned into a fiasco for lawsuits, criminal investigations over corruption, target by the environmentalists and displaced workers in the trucking industry.
Kenya is going through the time for reelection for its president and contests of the election would touch sensitive subjects as how to deal with China’s request to expand their role in Kenya, suggestions to depot the Chinese workers taking away the jobs from the local workers, and renegotiate the heavy debts with China. In the eyes of the Kenyans, this $4.7 billion project provided the sugarcoating for governmental corruption and greed among its political elite.
China financed this railway as part of its trillion-dollar Belt and Road Initiative which China used to build up its economic and political clout. It built new ports, roads and railroads around the globe. But lately China pulled back its investment in Kenya as they saw some of the African countries are struggling to repay their debts.
Railway track runs 367 miles from Mombasa through its capital Nairobi and it ends abruptly in the empty field in the Rift Valley, more than 200 miles from Uganda. According to the economist that this is an economic, social and fiscal disrupter for many years to come.
Kenya is a country with a gross domestic product of something slightly over $100 billion and has a total $36.7 billion as the country’s public debt. China is the top lender and to service the debt from China costs 3% of Kenya’s GDP.
The two presidential candidates have both vowed to overhaul the railroad project by renegotiation with China.
The railway’s financier, Exim Bank of China, demanded reimbursements. Unlike other creditors like France and Japan, gave Kenya the chance to service their loans during the time of the pandemic. Kenyan government introduced taxes that angered the public, who have to deal with the rising food and fuel cost.
Kenya’s train system was built by the British colonists in a century ago, and the World Bank made the recommendations to upgrade the existing railway network, which was a cheaper option. But Kenya chose to turn to China to build a newer version—one with a standard-gauge that can allow the freight trains to run at 50 miles per hour, and the passenger trains at 74 miles per hour.
The project’s feasible study was done by the Chinese contractor and there was no state-owned firms to find a more favorable terms for consideration.
The project raised the question from the environmentalists why the government routed the railway through the Nairobi National Park which was one of the few wildlife parks anywhere near to a capital city.
Soon a year after the operation, it was found that the operating cost doubled the amount for transportation of goods on the road. The government made it as the rule for the importer to send cargoes by railway instead of by road to make it profitable. This added the disgruntle for the people of Kenya as this measure has threatened the employment of the truck drivers.
On the other hand, China also lent to Kenya for their first public-private partnership road project which is a $588 million highway in Nairobi.
Meantime, China is reviewing its projects in the African continent as it is facing the growing backlash for allocating loans to shaky borrowers.
Obstacles for the Electric Vehicles – New York Times, August 9, 2022
Although the policymakers in Washington are promoting electric vehicles, but the vast majority of Americans found that the EVs are too expensive. In order to promote it to address the climate change, the Inflation Reduction Act would give buyers the tax credit. But because of the conditions, as a very large percentage of local sourcing requirements, this has made the deal unattractive.
High prices are caused by the shortages of batteries, and raw materials like lithium and semiconductors, caused the car factories to produce higher-price models. For those low- and middle-income families, the lack of garages or drivers to set up the recharge docks, not to mention that there is the shortage of enough public facilities to recharge.
According to the Environmental Protection Agency, transportation accounts for 27% of greenhouse gas emissions in the U.S.
To solve the problems of batteries and chips, car makers and suppliers must build new factories. This will take years to realize. New mines for lithium and cobalt will need to be opened and new refineries have to come along for the production.
The Inflation Reduction Act would be very likely to get pass and the tax credit of $7,500 for new electrical vehicles allowed the car makers to sell 200,000 new EVs in the U.S. from April through June. In order to get qualify for this $7,500 tax credit, batteries must be made in the U.S. with raw materials from trade allies.
The Department of Energy has the grants of $45 million to companies and researchers working on batteries. According to the Advanced Research Projects Agency-Energy, under the Department of Energy, that it is the goal for a cheaper battery that can charge faster and work better in the winter.
Few of the car manufacturers are aiming at the customers from the low-income bracket to meet their need. After all, it was only a few years ago that the analysts were predicting that EVs would soon be cheaper to buy than a gasoline car. Given the saving on fuels and maintenance, it is correct for this statement.
The industry has already invested more than $100 billion to increase the production of the EVs in North America according to Alliance for Automotive Innovation
U.S. Legislation on Climate Change – New York Times, August 8, 2022
On August 7, the U.S. Senate passed the most significant federal investment in history to counter climate change and other bills. It is agreed to inject $370 billion into climate and energy programs. This bill will allow the U.S. to cut greenhouse emissions about 40% below 2005 level by the end of this decade.
The bills would be paid by substantial tax increases, mostly from large corporations.
Originally it was named as “Build Back Better” and later it changed to the Inflation Reduction Act and projected to lower the federal deficit by $300 billion over the decade.
This bill was the response to the five decades in making when under President Richard Nixon, his advisor Danial Patrick Moynihan described a very bleak future with the increase of carbon dioxide in the atmosphere as the result of burning of oil, gas and coal. It would melt the glaciers and caused the sea to rise.This $370 billion bill will allow the country to move away from fossil fuels and move towards wind, solar and other renewable energies.
Passing of this bill has set the milestone.
Softbank’s Latest Financial Report – New York Times, August 9, 2022
Its founder, Masayoshi Son, for the first time remorsefully appeared in the press conference, to report s loss of more than $23.4 billion after a series of unprecedented levels of investment on start-ups across the world. Especially at this time it was hit by the global tech rout during the past quarter.
Softbank is going for a group-wide cost-cutting exercise after he has lost an entire investment gain at the two Vision Funds.
In the meantime the yen has suffered a foreign exchange loss against the U.S. dollar in a 24-year low in July. In this he loss $6 billion. He also blamed to the macro-economic environment, inflation, central bank policy and geographical tensions in the face of worsening conditions.
In 2019, SoftBank investment plunged in value, especially after its investment in the office-space company WeWork. Despite its heavy loss, its stock has held up quite well with shares up more than 3% in the beginning of the year. A very large part was its buyback as SoftBank has reduced its long-held large stacks in older tech companies like Alibaba, and used the money to help to push up its share price. Shares of Alibaba was pledged to get cash either to be settled later from its lenders, or with Alibaba shares.
Masayoshi Son has been an aggressive investor in startups and in 2017 he raised $100 billion Vision Fund, with over half of the money coming from Saudi Arabia and Abu Dhabi wealth funds. With that money he invested lavishly into Didi, Uber and WeWork.
Then he launched Vision Fund 2 which the foreign investors passed, instead SoftBank funded it by itself and put $56 billion into the fund.
At the conference, he kept his eccentricity by making reference to Ieyasu Tokugawa, the 17-century shogun and Japan’s national unifier, who suffered huge losses in battle but tried not to lose face with his enemies. The story ended and he came back from the defect in battle and became shogun who controlled all Japan.
Tokugawa had a number of qualities that enabled him to rise to power. He was both careful and bold, and always at the right times and at the right places.
At one point, Masayoshi Son boasted to lay the foundations of a 300-year plan through his Vision Fund.
