Week in Review

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Week in Review

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April 19, 2021

Brexit’s tab as banks leave for Europe: $1.2 trillion and counting. In the wake of Brexit, at least 440 banks and financial services companies are moving some part of their operations and managed assets from London to cities in Europe, according to an analysis by New Financial, a London think-tank. (Quartz)

Higher shipping costs are here to stay, sparking price increases. Stubbornly high shipping expenses for businesses are getting sealed into contracts for the next 12 months, forcing companies to pass the extra costs on to consumers. (AJOT)

Insurers warn of ‘zombie company’ debt time bomb. Unsustainable corporate and government debt racked up during the coronavirus pandemic is emerging as a major credit risk to the global economy and trade. (Global Trade Review)

Russia and Ukraine 'on doorstep of war with half a million troops on move.' Vladimir Putin has ordered the biggest troop movement for nearly 50 years, since the height of the Cold War, and is said to be ready to go to war with the US. (UK Mirror)

China backs away as Philippines and U.S. send impressive fleet to West Philippine Sea. China's pulled out most of its ships at Julian Felipe Reef after the Philippines, in a surprising move, sent its strongest response yet against China’s expansion into the West Philippine Sea. (Esquire)

US expels Russian diplomats, imposes sanctions for hacking. The Biden administration announced Thursday the U.S. is expelling 10 Russian diplomats and imposing sanctions against several dozen people and companies, holding the Kremlin accountable for interference in last year’s presidential election and the hacking of federal agencies. (AP News)

Nigeria to halt foreign currency for sugar, wheat imports—central bank. Nigeria will no longer provide foreign currency for importers of sugar and wheat, the central bank said on Twitter on Friday, as the country tries to conserve national dollar reserves. (Reuters)

Fed sees supply-chain issues growing despite better U.S. outlook. The Federal Reserve is seeing both labor and material shortages mounting up across several sectors of the U.S. economy, which may have consumers paying even more for everything from fuel to new homes. (Bloomberg)

‘It’s a foller-coaster ride’: Global chip shortage is making industries sweat. The internet-connected world is completely dependent on the production of semiconductors. That’s become a problem now that supplies are running short. (NY Times)

Sanctioning Russia for SolarWinds: What normative line did Russia cross? The United States has sanctioned various Russian entities in express response to the SolarWinds Orion exploit campaign. But what normative line, if any, is the U.S. saying the Russians crossed? (Lawfare)

European Parliament gives initial backing to UK trade deal. The European Parliament’s committees on relations with Britain on Thursday (15 April) voted overwhelmingly in favour of the post-Brexit trade and cooperation agreement, clearing the path to its final ratification. (EurActiv)

Venezuelans try to beat hyperinflation with cryptocurrency revolution. With Venezuela's official currency plummeting for years, both the government and cryptocreators are trying to stem the rot with digital tokens. For ordinary Venezuelans, the cryptoboom also means regaining freedom. (DW)

 

 

New Articles

Credendo:

Euler Hermes:

Wells Fargo:

Will Oil Demand Continue to Recover?

Chris Kuehl, Ph.D., NACM economist

Oil demand is not the perfect indicator of overall economic activity, but it comes pretty close. Oil is the classic inelastic good—a term economists use to describe products that are not price sensitive. As much as people complain about and comment on the price of fuel, one would not expect oil to be insensitive to price, but it is.

The vast amount of fuel is used to commute to work and school, haul freight and fly people to destinations they need to get to. If the price at the pump is lower, we do not decide to lengthen our commute by dozens of miles because we saved a few bucks when filling up. Likewise, we don’t decide to quit our jobs because gas prices went up.

Long-term price hikes might convince us to buy a more fuel-efficient car or move closer to work, but even these reactions are rare. We use what we use, and that demand is what propels the price of oil. There are production factors of course, and every year we see the impact of storms, accidents, geopolitics and regulatory actions but the primary motivator for prices remains demand.

The International Energy Agency assesses and predicts the oil market. It looks at demand, supply and pricing. For the last year, the IEA has asserted that demand would drop to levels not seen in several years. This was based on an assessment of economic growth. The expectation has been that people would not return to work commutes, that travel for work or play would remain subdued, and that freight shipments would be down. The latest assertion is that much of this consumption will resume faster than had been anticipated only a month or so ago.

As with every other commodity, the 2020 economic collapse caused a major inventory crisis. A great deal of oil had no place to go; it took the bulk of the year to work that surplus off. The demand for oil fell off last year by 8.7 million barrels a day. The prediction for this year is that demand will ratchet up to 5.7 million barrels per day (bpd) with total consumption of 96.7 bpd.

This is an upward expansion of more than 230,000 bpd. The price per barrel of oil hit astounding lows last year, falling as far as $18 a barrel for a short time. For the bulk of the year, the price per barrel was between $40 and $50. That is far lower than many oil producers can sustain for long.

The U.S. oil producers need prices above $50 consistently and closer to $60 would be far better. The oil producers in the Middle East can make money on oil prices below $30, but not for long. As the price fell, many of the major oil producing nations tried to restrict production so that prices would start to rise again, but with mixed success. The price per barrel is now in the mid-$60s; this is the level in which prices have been hovering.

The price at the pump has been going up as well—a gain of almost 22% in the last year. We must put this price hike into some context, however. The absolute cratering of the fuel price last year was part of the stunning recession that accompanied the pandemic and lockdown. The “real” price hikes have come this year because there has been push and pull between production and demand. The estimates that have come from the IEA are based on solid growth expectations for the year, but there have been some cautionary notes sent as well.

The growth that has propelled the U.S. economy and the world thus far has been predicated on solving the pandemic crisis. Thus far, this process has been proceeding better than many expected, but there is plenty of time for glitches to upset the plan. Just in the last week, questions about the Johnson & Johnson vaccine, and there are still issues surrounding the offering from Astra Zeneca. Will this create a shortage? Will there be more resistance to getting vaccinated? To reach some level of herd immunity, there has to be a significant percentage of the population in a protected state—either from the vaccine, or because they have had the disease or some level of natural immunity. It is estimated that roughly 30% of the U.S. population is “protected,” and that is not enough. Analysts point out that at least 80% must be made immune for the virus to fade as a threat. The timing of this herd immunity is what has the IEA cautious regarding oil consumption this year.

 

 

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June 18
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Container Availability: Positive Trends are Starting to Show,
but the Crisis isn’t Over Yet

Amanda Callahan, ShipLilly

 

Following a particularly difficult period, there are indications that the severe container shortage that hit the shipping industry is beginning to wane. This comes on the back of several optimistic reports and opinion pieces about the state of the industry. Container availability is a key component of ocean freight rates.

These rates hit records in recent months. Finally, they may be beginning to subside. One particular index indicates positive trends. However, experts recommend caution because there are many factors at play that could influence the availability of containers.

Container Problems

This has been an ongoing issue since the beginning of the COVID19 pandemic. The outbreak led to significant labor shortages which meant that there were insufficient staff levels to deal with the volume. At the same time, demand was uncertain as the consumer patterns were changing in response to the lockdowns and social distancing involved.

Later on, the trade volumes started picking up on the back of increased ordering online and the purchase of personal protective equipment. The holiday season increased demand for shipping services, while the Chinese New Year meant that a new wave of labor shortages was being experienced in Asia.

The market rebounded much faster and more significantly than had been anticipated. That means that containers were once again in severely short supply. Those consumers that were importing goods from far-flung locations faced significant delays and there was a new premium service that catered for those that could not wait but were willing to pay significantly higher costs for quick service.

As the problem deepened, factories were struggling to cope with equipment requirements. The price of manufacturing increased and yet the demand for new products and shipping space was increasing. U.S. exporters were severely hampered, and they complained to the Federal Maritime Commission.

One of the key complaints was that carriers were declining hinterland pickups. This was done to quickly get to Asia and deal with more profitable cargo. The beginning of 2021 was greeted with a wave of optimism. It seems that that optimism was justified. However, a lot of monitoring will be necessary to prevent the crisis from returning.

The Container Index

Since the end of 2019, the shipping industry has been referencing the Container Availability Index. This is a predictor of available equipment. The estimates are based on existing container moves and expectations for trends in the industry.

Source: Container xChange

According to the index, anything above 0.5 shows a surplus of equipment, while anything below indicates a shortage. Currently, the index is predicting a surplus. There are positive trends in Shanghai, from January, for two types of containers that are popular. First is the 20-foot dry container with an index ranking of 0.34. Second is the 40-foot dry container with an index ranking of 0.37.

Recently the index has been even higher for these two vessel types. Because Shanghai is taken to be a bellwether market, this is great news for the shipping industry as a whole. The only and significant caveat is that availability in one port will be replicated in all other parts. Moreover, the inflows and outflows for each port may complicate and diversify the exact availability.

Certainly, some experts are cautious at the moment. One possibility is that there is a relatively softer market following the Chinese New Year celebration. This tends to free up container space for a limited time before trade picks up again.

Wrapping Up

Experts predict demand to remain fairly strong throughout March and April 2021. The situation is only likely to subside after a few months of adjustments. The index masks a very complex and unpredictable market. Improvements are therefore likely to trickle in lane by lane and week by week rather than an entire industry improvement. Industry players will need to be alert for any changes in the market.

Reprinted with permission by ShipLilly.

 

Election Guide

Islamic Republic of Iran, President, June 18

Armenia, Armenian National Assembly, June 20

Report Finds ‘Grey Swan’ Events Costly

 

Like their better-known Black Swan event cousins, Grey Swan events can greatly impact firms; unlike Black Swans, which seem inconceivable before they happen, Grey Swans are known beforehand.

They are long-tail risks, known but thought highly unlikely. As a result, firms often neglect to invest resources to prepare for them, according to a new report by Aon plc and Pentland Analytics. Respecting the Grey Swan: 40 Years of Reputation Crises details the impact crises have on reputation and shareholder value, and emphasizes the need for organizations to recalibrate their approach to risk and crisis in a highly volatile world.

Many extreme events such as the 9/11 attacks, the 2008 financial crisis and, most recently, the COVID-19 pandemic are considered Grey Swan events because of the size of the impact and the many warning signs that were ignored, the report says. Other types of reputation Grey Swans come from within an organization, including governance crises or product failures.

For most organizations, the likelihood of a Grey Swan event occurring is greater than preparation for it, the report finds. Key findings that emerged in the creation of the report include the following:

  • Limited, ambiguous and uncomfortable data are easy to ignore: We neglect preparing for low probability, high severity events.
  • The impact of Grey Swan events is substantial and enduring: In over 10% of reputation crises, over 50% of shareholder value is destroyed.
  • Value recovery is a function of critical pre- and post-loss decisions: Grey Swans require focused attention and investment.

Evidence from the research suggests three areas in which organizations should focus to build resilience:

  • Reimagining the risk landscape through a broader risk assessment.
  • Acknowledging the seriousness of impact with a focused investment in risk preparedness and crisis management.
  • Translating understanding into action.

The report highlights how crises remain a major risk for organizations globally and analyzes data from 300 corporate crises from the last 40 years, and finds the average impact reflects a total of USD $1.2 trillion in destroyed value.

Source: Aon plc

 


 

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 Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations