Newsletter - March 21, 2022
Oil / Commodities
- Saudi Aramco will increase spending and issue bonus shares as oil’s surge to more than $100 a barrel bolsters the company’s plan to boost production. Many oil producers have experienced a sharp turnaround from 2020, when the pandemic hammered energy demand and forced them to shelve several projects. Aramco, the world’s biggest energy exporter, forecasts more growth in investment until the middle of the decade. That makes it stand out from many competitors who are cutting back on fossil fuels to reduce carbon emissions. Aramco has said oil and gas consumption will remain strong for decades and that the run up in prices underscores the need for more exploration. The company wants to raise crude production capacity to 13 million barrels a day from 12 million by 2027, a project that will cost billions of dollars. And it is trying to increase gas output by more than 50% by 2030.
- Aluminum prices jumped at the open in London after Australia banned alumina shipments to Russia, another threat to global supply chains that will also fan global inflation. Used in everything from cans to window frames, aluminum has risen around 25% this year.
- Nickel dropped by the maximum allowed for a third day in another glitchy opening in London, as the price continues to retreat from an unprecedented short squeeze last week. The latest error compounds an embarrassing week for the 145-year-old exchange which already faced harsh criticism for its handling of the squeeze, when prices surged by 250% before the exchange moved to close the market and cancel several hours of trades. While the continued snafus will be frustrating for traders, Friday’s drop is the latest sign that the massive short squeeze in nickel that roiled the metals industry last week is easing following a controversial series of interventions by the exchange.
o https://www.bloomberg.com/news/articles/2022-03-18/nickel-drops-12-in-another-glitchy-start-to-london-trading?srnd=hyperdrive
Tech
- Apple’s newest lower-priced monitor is not getting off to a particularly strong start. Some are suggesting the return of WiFi routers to bolster the brand’s Mac line-up. The company backed way from the WiFi routers and external monitors business about five years ago and have only recently brought back the external monitors. The company was one of the first major proponents of consumer-grade wireless internet, launching the AirPort Base Station in 1999 alongside the iBook laptop. The concept behind the first AirPort WiFi router was simple: instead of plugging the Ethernet cable into the computer, you attach it to the AirPort and the device provides WiFi for your home. Apple released additional AirPort models for about 15 years, including a low-end version called the AirPort Express and a high-end model named the AirPort Extreme, as well as the AirPort Time Capsule, which embedded a hard drive in the router for wireless Mac backups. The AirPort team disbanded in 2016 and the product discontinued in 2018. While Apple currently sells Linksys mesh routers, the firm should develop its own modern mesh network version of the AirPort Extreme instead. A mesh network is a router system that includes several small WiFi hubs to be placed around a home. The approach ensures you have reliable connection in the various spots of your house. An Apple-branded mesh router would enable seamless integration with iPhones and other Apple Products, as the AirPort does with the Apple’s AirPort Utility app. It could make a hot seller and keep people away from rival Google and Amazon products.
- Google has landed a submarine cable in Togo, the first nation in West Africa to introduce commercial fifth-generation mobile services. The Equiano subsea internet cable, part of Google’s $1 billion program to build digital capacity on the continent was connected to the nation of 8 million people on Friday. The conduit will land in Nigeria, Namibia and South Africa later this year, linking Africa to Europe via Portugal. The new cablae is expected to help Togo double internet speeds by 2025 and reduce internet prices by about 14%. Once operational, the cable will offer 20x more bandwidth than any other country in West Africa, and help create almost 37,000 new jobs by 2025. By increasing internet speeds, Togo also hopes to attract new businesses, such as data centers, and help grow the country’s start-up industry. Togo also became the first country in West Africa to launch a 5G network in 2020. Internet penetration in Togo almost tripled in recent years, from about 7% in 2017 to about 20% in 2020.
o https://www.bloomberg.com/news/articles/2022-03-18/google-lands-first-subsea-cable-in-africa-to-spur-digital-access?srnd=technology-vp
Electric Vehicles
- Toyota aims to produce about 800,000 vehicles globally on average per month in the April-June quarter, up from a year earlier but short of the carmaker’s plans to make up for lost production due to the pandemic and chip shortages. Factories are operating at normal levels but not to an extent that will let the automaker recover lost output over the past year. The carmaker manufacture red an average of about 750,000 vehicles per month during the April-June period in 2021. The world’s no. 1 carmaker has faced a wave of challenges and supply chain disruptions in recent months, brought on by everything from the COVID pandemic to cyberattacks, bad weather and Russia’s invasion of Ukraine. An earthquake in Fukushima last week also halted several of Toyota’s plants in north Japan. Toyota was also forced to halt its plant in China’s Changchun city earlier this week in response to lockdowns imposed to stem the omicron outbreak.
- CATL is considering sites across North America for a massive $5 billion plant to supply customers including Tesla. The company aims to build a factory capable of producing as much as 80 gWh of batteries a year. The facility would eventually employ as many as 10,000 workers. Backed by China’s strategic push into EVs, CATL is riding a boom in demand worldwide as countries work to reduce carbon emissions and consumers embrace cleaner cars. The company currently commands about a 30% share of the global EV battery market. A manufacturing footprint in North America would be crucial for CATL to avoid costly trade tariffs while supplying Tesla and other carmakers. The company has used its massive scale in China, which has the most cell manufacturing and metal refining capacity in the world, to lower costs for customers globally while spending heavily on research and development. Global automakers from Ford to VW are electrifying their vehicle line-ups, creating unprecedented demand for batteries. Carmakers’ production plans have helped send prices of metals like nickel, cobalt and lithium soring, prompting Tesla to announce last October it was switching to lithium iron phosphate batteries, which are cheaper, for short-range vehicles to offset pricing pressures. Panasonic is also scouting for a U.S. manufacturing site, as it prepares to make 4680 cells for Tesla. As for CATL, the battery leader has 145 gWh of battery manufacturing capacity online and has announced or is in the process of building about 579 gWh by 2026.
- GM has bought out SoftBank’s stake in its self-driving start-up Cruise for $2.1 billion, giving the Detroit automaker 80% ownership in the venture. GM said Friday it will also invest another $1.35 billion in Cruise, which makes up for the amount that SoftBank had pledged to invest in the start-up once the company deploys vehicles in a ride-sharing business. The deal effectively consolidates GM’s ownership and control over Cruise. When Cruise started offering free rides to the public without a safety driver in late January, it triggered SoftBank’s second investment requirement, in which it did not fulfil, prompting GM to buy out its stake. Outside owners of Cruise’ remaining 20% stake include Honda, which is helping GM develop the Cruise Origin autonomous vehicle, Microsoft, Walmart, and T. Rowe Price Group.
- Stellantis and LG Energy Solution will build their new planned battery plant in Ontario, Canada. The Canadian government’s incentives for clean energy businesses had helped lure the companies. LG Energy and Stellantis said in October they were planning a battery cell making factory in North America, as Stellantis looks to expand its EV line-up with a goal of raising U.S. EV sales to 40% of deliveries by the end of the decade. The pair said construction of the plant is due to begin next quarter, with production slated to kick off in early 2024. LG’s rival Samsung SDI also signed a memo of understanding with Stellantis in October to construct a plant in the U.S. that should have an annual output of around 23 gWh by the first half of 2025.
- Despite the hype for EVs, dealers are recognizing that many American consumers live paycheque to paycheque and bargain for every dollar of their monthly car payment. EVs on the market are well beyond the means of most consumers and get more expensive all the time. Tesla and Rivian have both hiked their prices this month. The cheapest Tesla, a Model 3, now costs $47,000 to start. Ford’s Mach-E has a similar base price if you include the delivery charge and taxes. Cadillac’s Lyriq will start at around $60,000 when it goes into production next week. The average monthly payment for a vehicle of any kind these day si $691. Consumers are estimated to have spent 10% of their take-home pay a month on their cars. This means car buyers need to net about $7,000 a month to afford just the average new vehicle these days. That assumes a gross income of about $110,000 a year, which is well above the $65,000 average household income in the U.S. About 1/3 of American households make more than $100,000 a year and about 15% make between that and $150,000. If they spent sensibly, they would buy one EV and nothing else. Since most households own two or more vehicles, that lowers the number of families that can afford EVs at today’s prices to even fewer. Because for a household to buy two EVs, they would need two people making more than $100,000. Most EVs are priced well above the average car, making the economic assessment even tougher for most Americans. Less than 15% of U.S. drivers can afford an EV based on the above figures. And if they do have the cash to spend on an EV, they would have to be convinced that the battery can go far enough and chargers are plentiful to make it worth spending the extra money to buy a battery-powered vehicle. Lowering EV prices will be key to pushing it to the masses.
- Battery producer Northvolt announced plans to build a factory near Heide, Germany with annual capacity to make 60 gWh of cells, enough for around 1 million EVs. The plant is scheduled to start production in 2025 and create as many as 3,000 jobs. The project will be a boon to Germany, which is slowly but surely turning into a major hub for supplying and producing EVs. Last week, Intel dropped more good news for Germany as well, after pledging to invest a staggering 17 billion euros to build a semiconductor production site in the eastern city of Magdeburg, the start of an ambitious European campaign to win back global chipmakers. Germany has been a prime selection for many based on their attractive ESG offerings. For instance, Heide, in which Northvolt will be building its factory, offers plenty of renewable energy from on- and offshore windfarms. The German government has also spearheaded EU-backed aid programs for battery and chipmakers.
o https://www.bloomberg.com/news/articles/2022-03-17/intel-and-northvolt-add-to-the-billions-flowing-to-germany-inc?srnd=hyperdrive
- The ongoing Russia-Ukraine war has placed an impact on the broader EV industry. Resulting spikes in oil prices across the U.S. and Europe, especially, are buoying demand for EVs. But the elephant in the room here is that the most popular EV models are supply-constrained. Many have wait lists of six months or longer. In the meantime, electricity prices are also spiking, highlighting the interdependence of the global energy system. There will be an impact of the ongoing Ukraine-Russia crisis, but the gap in refuelling costs between an EV and an ICE is so large that it is hard to see that rise in electricity prices would put off EV buyer behaviour. While surging commodity prices, like in nickel last week, is also adding pressure to EV prices. The BNEF expects an increase in the average price this year instead of unprecedented surges, which will buck the trend of decades of falling prices and likely push EV price parity with ICEs back by a couple years. But technology has added flexibility in the battery market now. For instance, lithium iron phosphate batteries – which use no cobalt or nickel – will get a boost from the recent price spike and take a greater share of the battery market again this year. On the other hand, damp consumer sentiment ahead of uncertainties over the global economic growth outlook might also drag on the global EV sales numbers. However, worldwide auto sales are still expected to rise this year. In the meantime, EV sales have also held up much better than ICE sales during the acute period of the pandemic partially because higher income households were largely spared from the economic downturn and stock markets soared on unprecedented financial stimulus. EVs will probably still hold up better again in another downturn, but the gap may not be as large.
o https://www.bloomberg.com/news/articles/2022-03-15/electric-vehicles-will-be-pulled-in-different-directions-by-war?srnd=hyperdrive
Consumer / Retail
China Market
- Shanghai reported a surge in COVID infections after expanding its mass testing program, sparking concern the virus may be more widespread in the financial center than previously thought. The latest omicron outbreak has added challenges facing China’s COVID Zero strategy. While the city ruled out imposing a broad lockdown last week, officials are now saying that some areas will remain locked down for further testing.
- China’s tech hub Shenzhen has lifted its week-long lockdown while keeping some restrictions in place, as the municipal government said the spread of the virus is under control. The city will allow government agencies and companies to resume normal operations and production. Public transportation will also resume.
- Embattled Chinese real estate developer China Evergrande Group along with its other units suspended trading in Hong Kong Monday without detail on the underlying reason. The pause comes after Evergrande said in January that it aimed to present a preliminary restructuring proposal in the next six months. The company has been at the center of a cash crisis among Chinese property developers following Beijing’s crackdown. On Sunday, local media reported that Evergrande’s onshore unit will sell its 30% stake in a Nanjing property company to Avic Trust for an undisclosed sum. Meanwhile, the company’s onshore unit has separately said it received bondholders’ approval to delay coupon payments on its four billion yuan note, meaning the delay will not trigger a default on the bond.
- The Chinese government has called in a range of participants along the EV battery supply chain last week to discuss a rational return for lithium prices. Lithium prices have soared nearly 500% in the past year, adding to cost pressures for EV producers. The meeting underscores how Beijing is getting nervous about lithium’s prolonged surge, and it is also in line with a broader push to manage soaring commodity prices. Earlier, some manufacturers were also summoned for a meeting after prices of rare earths jumped. China’s burgeoning EV industry is now grappling with growing risks around cost inflation, with some carmakers starting to feel the pain and raising their own price tags. Domestic EV brands, including Li Auto, have highlighted how runaway raw material costs are fuelling a ridiculous increase in the price of batteries for EVs. Li Auto cited that the cost of batteries in the quarter rose by a very ridiculous amount. Carmakers that have yet to raise prices will likely have to once their battery suppliers start charging more. The Chinese EV market is currently trying to lure more customers just as government subsidies for cleaner vehicles fall away. CATL, the world’s largest battery marker, has also noted the higher commodity costs, saying they are applying pressures on cell and automakers alike.
- China Huarong Asset Management said it returned to profit last year after revamping its sprawling businesses and receiving a $6.6 billion government-orchestrated bailout. The firm is expected to release audited full year results next week. Huarong said its proactive adjustment of business strategy and accelerated cash recovery helped boost revenue last year, while significant losses from fair value changes in its legacy assets and credit impairment losses were already booked in 2020.
- Chinese developer Ronshine China Holdings is delaying the release of its audited full-year report following the sudden resignation of its auditor. Ronshine said it will not file audited results by the end of March deadline as PWC was unable to complete its audit work partly because the supply of requested information had fallen behind schedule. Transparency and governance concerns have cropped up alongside worries about developers’ ability to repay debt following a record number of defaults last year. At least four auditors have resigned or been replaced by builders since the start of this year, and global ratings firms have also pulled some assessments on property bonds due to insufficient information. The latest resignation of Ronshine’s auditor is expected to pose a further hit to investor sentiment in the wake of debt-servicing concerns. In the meantime, Ronshine plans to finalize and release unaudited 2021 figures on March 31st, while the hiring of a new auditor is in process. Firms listed on the Hong Kong Stock Exchange typically see their shares halted if they are unable to release audited annual figures three months after their fiscal year ends.
o https://www.bloomberg.com/news/articles/2022-03-21/ronshine-china-says-auditor-resigns-won-t-issue-audited-report-l0zyqsi1?srnd=premium-asia
Russia-Ukraine Development
- Ukraine has rejected Russia’s demand that its forces lay down their weapons and leave Mariupol on Monday. The southern city has been under heavy shelling and Ukraine has accused Russian troops of blocking humanitarian aid. Moscow had delivered the ultimatum with a morning deadline, in return for which food and medicine could be sent into the city, and potentially safe passage arranged for civilians. It is unclear what action might following the refusal to surrender. More direct talks are expected Monday between officials from both counties, with some signs of progress on a cease-fire and broader peace agreement, though significant differences remain.
- China said it will do everything to de-escalate the war in Ukraine, but refused to condemn Russia’s attack and branded such requests from Washington as naïve. The nation said it is not sending weapons and ammunitions to any party, calling Beijing’s common interests with Russia an asset that could help peace talks. In President Xi and President Biden’s call last week, China assured the U.S. that it did not want the war. China continues to walk a diplomatic tightrope as the Biden administration steps up international pressure on President Putin to end the attacks. While Beijing has said it opposes the war, it has stopped short of blaming President Putin for the invasion. China has warned the U.S. that if Washington carries out extreme strategic coercion against the Asian nation, with Russia as a partner, China will not be afraid of the U.S. imposing an energy blockade, citing that its food supply is more secure, as are other raw materials.
- Russia’s use of hypersonic missiles against Ukraine appears to mark a shift in strategy in response to its losses on the battlefield, one that may signal a new phase of the war while serving to show the world its abundant firepower. Western military analysts point to President Putin’s ground campaign getting bogged down, with Russian troops failing to achieve their initial objectives and underestimating the scale of Ukraine’s resistance. This could further increase Russia’s use of artillery bombardments and cause even more civilian casualties. Satellite images are also showing Russia troops digging in around Kyiv and elsewhere, which suggests a stalemate that will likely be very violent and bloody, especially if it protracts. This comes shortly after the U.S. has agreed to supply Ukraine with drones, stinger anti-aircraft missiles, anti-tank missiles, small arms and ammunition, adding to weapons that have already helped inflict dramatic losses on Russian forces. Ukrainian cities are now being targeted with more destructive artillery, including the Kinzhal, or dagger missiles. Increased civilian casualties are now expected, along with further destruction of Ukrainian infrastructure, intensifying the humanitarian crisis.
- Debt markets are showing that some vulnerable nations are suffering from additional stress to their already-fragile economies amidst an ongoing Russia-Ukraine crisis. Worries over whether Russia would deliver on its interest payments this month are leading investors to consider who else is at risk of failing to pay. that has pushed up the cost of insuring against default in emerging market nations to the highest since the pandemic turmoil of 2020. Many investors, including funds, have dumped bonds from developing countries this year, with outflows reaching $14.3 billion as of March 16th. The first big question is whether Russia, cut off from international payments and facing a deep recession, can avoid default. Some holders of Russia’s two Eurobonds with coupons due last week said they received payment in dollars, a relief to investors who feared the nation would resort to settling the debt in rubles. Still, Russian credit swaps on Friday implied a 48% chance of default within a year. In Belarus, a default is also increasingly likely, as Moody’s Investors Service cuts its rating this month by four levels to Ca, its second lowest grade. Yet, bonds of emerging market commodity producers have rallied in the past month thanks to the surge in energy prices, with Angola and South Africa topping the list of winners. The debt of junk-rated Middle Eastern oil producers Oman and Bahrain followed. Latin American has fewer direct links to Russia and Eastern Europe, and in some ways also stands to benefit from the surging commodity and food prices spurred by the crisis.
o https://www.bloomberg.com/news/articles/2022-03-21/russia-s-war-lifts-default-risk-for-world-s-distressed-economies?srnd=premium-asia
Market Update
- U.S. equity futures and stocks slipped Monday in Asia trading as crude oil climbed for a third day and investors monitored diplomatic efforts to restore peace between Russia and Ukraine; trends in S&P 500 and Nasdaq 100 contracts are pointing to a pause in global equities after their best weekly performance since 2020
- WTI crude oil rose past $108 a barrel as investors reassessed the war as well as Middle East tensions; Australia’s ban on exports of aluminum to Russia sparked an advance in the metal’s prices
- The ongoing Russia-Ukraine crisis continues to intensify, which has stoked inflation by pushing up the price of key commodities such as oil and wheat
- The bond market is also flashing caution about risks from the war and rising U.S. interest rates; the Treasury yield curve is flattening and portions are inverted, which for some is an indicator of a looming economic downturn
- Market uncertainty remains elevated, as markets continue to wait on improvements to ongoing peace talks between Russia and Ukraine, and look for evidence on the sustainability of China’s vow last week to support its markets and economy
- Investors are also awaiting a speech later Monday by Federal Reserve Chair Jerome Powell, less than a week after he and his colleagues kicked off a campaign of interest rate hikes to fight the highest inflation in a generation; while markets expect the Fed to lift its target rate to around 2% by the end of the year, there is concern that the Fed is tightening into an economic slowdown as it prioritizes reining in high inflation
- S&P 500 futures fell 0.4%, while the S&P 500 rose 1.2% on Friday 4,463.12
- Nasdaq 100 futures shed 0.6%, while the Nasdaq 100 rose 2.1% on Friday to 14,420.08
- 10-year Treasury yield declined 2 bps to 2.15% on Friday
- WTI cruse rose 3.5% to $108.39 a barrel
- Gold was at $1,923.97 an ounce, up 0.1%
Summary
- Micro – Global equities are looking at another turbulent week ahead following last week’s rally, as equity future prices scale back. Peace talks between Russia and Ukraine remain uncertain, as the former escalates their attacks, which military experts are expecting to yield further civilian casualties. On these considerations, oil has rebounded above $108 a barrel, stoking concerns of further price pressures ahead which would dampen the global economic growth outlook and hamper market performance. Investors are also beginning to mull on whether Beijing’s earlier claims for supporting market sustainability, which partially buoyed last week’s rally, are sustainable, especially after China Evergrande Group halts trading in Hong Kong on Monday (Asia time) and Ronshine, another Chinese developer, announced the resignation of their auditor and delays to its release of full-year financial results.
- Macro – Oil rose above $1.8 a barrel as Russia-Ukraine tensions continue to escalate. Aluminum prices also soared following Australia’s decision to ban alumina shipments to Russia, adding further price pressures and threat to the global economic growth outlook. In the meantime, nickel prices are beginning to moderate following last week’s short squeeze. From a broader macroeconomic view, investors remain concerned about how the Federal Reserve could tame the hottest level of inflation in four decades from further runaway momentum, without tightening the economy into a recession. The Treasury yield curve continues to flatten following the Fed’s rate cycle lift-off last week, and portions are inverted, which for some is an indicator of a looming economic downturn.