CHIPS, Pigs, Oil and the Week in Review
Reshoring. U.S. lawmakers introduced a bipartisan bill called the “Creating Helpful Incentives to Produce Semiconductors for America Act,” or CHIPS for short. The goal of the bill is to reshore American manufacturing capacity for semiconductors and aims to create incentives for companies to do so, including significant investment tax credits for qualified investments in manufacturing facilities and tens of billions of dollars of government funding for semiconductor research initiatives. Meanwhile, Bloomberg reported that U.S. companies that earn money as contractors for the U.S. government are engaged in a “lobbying frenzy” to modify Section 889 of the National Defense Authorization Act for Fiscal Year 2019 because the way the law is currently phrased, they could lose their contracts simply by virtue of being active in a country that uses Huawei equipment on its telecommunication network.
What it means: “Reshoring” is the big buzz word in supply chain circles these days: we’ve been asked about it four different times in the last month by clients or media. Usually we explain that “reshoring” per se is more wishful thinking than practical reality, what is really happening is economic decoupling and relocation of manufacturing to more politically reliable countries. The CHIPS bill however is a different story. That is reshoring, and it is the U.S. government putting a significant amount of political and economic force behind pushing for reshoring to happen. It is hard to exaggerate what a sea change that is: it is literally a complete reconceptualization of how global commerce is supposed to work and an explicit admission that the US wants semiconductors companies to come home irrespective of the bottom-line cost. As for the Section 889 rule, it is a demonstration of how Huawei and China have beat the US at their own game. The US may be able to enlist a number of allies to turn away from Huawei, but the fact of the matter is Huawei’s technology is good quality and often relatively cheap. The limits of “America First” become apparent when suddenly other countries have less incentive to follow American wishes – and American companies are going to suffer as a result.
A global food emergency? The Secretary-General of the United Nations, António Guterres, warned that “unless immediate action is taken, it is increasingly clear that there is an impending global food emergency that could have long term impacts on hundreds of millions of children and adults.” The Environmental Working Group published a study reporting 1,200 cases of COVID-19 in 60 different food processing facilities in the US. Bloomberg led with a headline earlier this week that “More Food Shortages Loom.” Nigeria’s largest co-operative farm reported an African Swine Fever outbreak that has already led to the culling of 300,000 pigs. The Pakistani government is paying farmers to collect locusts as feed for poultry.
What it means: On the bright side, the most recent reading for the UN’s Food and Agriculture Organization Food Price Index dropped to its lowest in 17 months, though that does not necessarily jibe with what most Americans are experiencing at grocery stores. The global food system is essentially having to deal with three separate but interlocking crises at the same time and the fact that these crises have not produced immediate impact should not lead one to conclude that they will not eventually cause significant problems, whether in terms of higher prices, shortages, or political unrest.
A resumption of the oil price war? Early in the week, OPEC+ finalized an agreement to extend oil output cuts to the end of July. Saudi Arabia’s energy minister said that Saudi Arabia, the United Arab Emirates, and Kuwait would not sign up for any additional voluntary cuts to overall oil production on top of their agreed-upon quotas in the OPEC+ deal. In addition, Kazakhstan, Iraq, Nigeria, and Angola were called out for not meeting their previous quotas and reportedly agreed to make compensatory cuts in future months in order to meet their previously missed quotas. Meanwhile, China is set to expand commercial oil storage capacity by almost 100 million barrels by the end of the year.
What it means: Don’t forget that before COVID-19 intervened, Saudi Arabia and Russia were in the middle of an oil price war that sent oil futures into unimaginable negative price super contango territory. The OPEC+ agreement to cut production should be understood as a temporary armistice, not as a peace treaty. Saudi Arabia, along with the UAE and Kuwait to a lesser extent, went above and beyond in their roughly 1 million barrels per day cuts on top of their OPEC+ quotas. The lone bright spots are that Libya cannot seem to keep production stable (bright for oil prices that is, not for Libya, which is looking grimmer by the day), and that China is making incredible progress at bringing new oil storage capacity online so it can reap the benefits of low prices and stock-up on future needs. One has to wonder what Russia has up its sleeve.
France, the “country of carbon-free aircraft.” France unveiled more details on a 15 billion euro bailout package for its struggling aerospace industry, which is responsible for 300,000 jobs and roughly 60 billion euros in annual revenue. Along with a previously announced 7 billion euros in loans for Air France, 1.5 billion euros are being set aside for the Council of Civil Aeronautical Research in order to boost research into clear aircraft technologies. Airlines will also enjoy a 1-year moratorium on reimbursement of export credit, while two funds worth roughly 1.3 billion euros will be established to support small and medium-sized enterprises in the aviation sector. According to French Finance Minister Bruno Le Maire, the French aerospace industry is critical to French “sovereignty,” as is accelerating a goal of developing carbon-neutral air travel to 2035 (the previous coal had been 2050). Separately, Air France KLM Martinair Cargo said it was resuming flights from its hubs in Amsterdam and Paris to increase much-needed air cargo capacity.
What it means: A number of airlines and aerospace companies are being bailed out. Cathay Pacific was the latest to join the expanding list of companies. As we noted a few months ago however when the details of France’s bailout plan were first being discussed, France is unique in that it is tying bail-out funds directly to environmental goals, wedding arguably its most powerful industry with the global political goal that its government is most publicly associated with – the Paris Climate Agreement. It is a radical move not just at a political level, as France is asking its own citizens to change their behavior as well (like by eliminating domestic flights less than 2.5 hours long if there is a rail alternative). Whether it turns out to be a successful formula for the future remains to be seen, but it is certainly audacious.
North Korea severed all communication with South Korea and said it will be treating Seoul as an “enemy” in the future.
Taiwan Semiconductor Manufacturing Co. (TSMC) Chairman Mark Lieu thinks that TSMC will be able to sell to Huawei by mid-July which seems awfully sanguine to us.
China and India have agreed to deescalate their recent border spat and both sides have begun withdrawing recent deployments of troops and materiel from the border.
U.S. President Donald Trump said he was withdrawing 9,500 troops from Germany without apparently telling anyone in Germany or in his own government.
“Fort Trump” in Poland is looking like a lost cause.
India is worried that hospital capacity in New Delhi will be exhausted by end of July if cases continue to increase at their current rate.
China says its African Swine Fever vaccine is performing well in current trials.
Taiwan scrambled fighter jets to intercept Chinese warplanes that flew into the Taiwan Strait and briefly approaching Taiwan hours after a U.S. transport plane flew over the island.