Our daily snippet from around the world

we answer:

  • What’s going on?
  • What does this mean?
  • What’s the context for me?

We’d sincerely appreciate you sharing this with your friends, if you think its appropriate.

Sing up here
1st April 2022 Ni Hao! Shanghai is a bustling and vibrant city that gives you goosebumps as you approach from the airport and energy as you walk the streets, comparable to the adrenaline at a music concert. The daily breadth and variety of tastes, smells and culture are intercepted by the flow of freight down The Bund, which intersects landmarks representing east and west. Yet, there are ShangHigh and ShangLow days for Shanghainese. Today, the city of 26 million people find themselves in lockdown – for one month. We’ve spent significant time in Shanghai over the past 15 years and have spoken to friends and companies on the ground. Here is what we’ve learnt:
  • Lockdown is now referred by authorities as “static management” and is bigger than any previous experience
  • Food is delivered to people (see photos below), as shops are closed and supply chains fragmented
  • The fastest growing emojis being used are… vegetables!
  • Roads, transport and highways are empty
  • Aviation travel in major cities has fallen 70% compared to 2019 levels (see flight radar Shanghai vs Beijing taken now)
  • Hotel occupancy through the second half of March fell 50% compared to 2019
  • Central Government control from Beijing is calling the shots, overruling Shanghai city. The press is filled with comments such as: “Under the leadership of President Xi and the Central Committee of the Communist Party of China, we firmly believe we will overcome all difficulties”

The Bund is a ghost town

Highways and roads that are congested 24/7 are empty

Food is delivered to people (see photos below), as shops are closed and supply chain fragmented

The translation is “Where is the meat?!”

Those in markets are searching for pattern recognition

Semitrailers are delivering the food to logistics hubs, before apartment drop off occur

Aviation and in around Shanghai has plummeted. The majority of flights are cancelled. Beijing has also seen volumes fall, but the flow of aircraft still occurs.

What is the business impact?
  • 300 ships are sitting off the coast of Shanghai awaiting to load or discharge (exceeding previous pandemic highs). The Port of Shanghai is the busiest globally. Supply chain tightness may be back
    • Last time the number of “blank sailors” (i.e. stalled vessels rose sharply)
    • Vessel reliability rates fell from 90% to 35% (i.e. does it turn up & deliver on time)
    • 90% of cargo that moves in & out of Australia comes on plane. The largest share is from China
    • Unclear if volumes can be shifted to other ports, with a city wide lockdown, as products can’t be physically moved
  • People are sleeping in offices, so work is not disrupted
  • Factory impact is mixed, with many western operations closing, but domestic producers continuing
What the Vax? Zeroism.
  • China uses locally sourced vaccines to fight the virus
  • Debate about the efficacy of these vaccines has raged (within a controlled context), yet Xi has said he is more open to living with the virus
  • Despite the talk, China has not adopted a partnership with a western manufacturer
The Chinese economy is in a fragile position. The escalation in Shanghai is a setback, but it may justify more government spending from Beijing. Could it be the west that is most impacted as shipping delays intensify and inflationary pressures rage, with the number two economy isolating? We continue to monitor closely, as domestic Chinese manifestations have global consequences.

What an exciting time to be alive!

31st March 2022


During times of extreme stress, the US President can mobilise resources to control and influence domestic industries. The Defence Production Act (1950) has been used in periods of war and tremendous challenge (Trump used it during the peak of Covid to secure PPP equipment), giving the White House incredible reach and power.

President Biden is expected to announce today that battery materials will be added to the list. This is hugely significant as the White House recognises the importance of the security of supply in enabling technologies and industries of the future. We estimate the green revolution will be a $50 trillion opportunity over the next 15 years.

Buckle up and let’s speed into it:

The shift towards electric vehicles is difficult to ignore:

  • Fastest growing share of auto sales at 3x the rate of internal combustion engine cars
  • By 2030, 55% of car sales will have some type of electric element (see chart)
  • The overwhelming majority of auto R&D spend is focused on electrification (eg Volkswagen has committed to spend $50 billion!)
  • 90% of car leasing inquiries are for EVs (corporates just want EVs)

Yet, it is the sourcing of inputs that is the challenge for producers:

  • The Ukrainian war has amplified the fragile nature of global commodity markets and supply chains (Biden is planning a 1mln/day strategic petroleum reserve release – ask for our note from yesterday on why we think Vlad may be the winner)
  • Mining capital expenditure has collapsed since the peak levels of 2012/13 (see chart). During this time, commodity consumption has accelerated and ESG factors have reduced funding for mining projects
  • In a battery, there are three main commodities used: lithium, cobalt and nickel. Collectively, the prices of these resources in the last year have increased 65%
  • Interestingly (but not surprisingly), the head of trucks at Mercedes Daimler said this week that the cost of building a battery for power trucks will be indefinitely higher compared to a combustion engine

This all sounds too hard (and expensive)…it worth it?!

Two groups have nailed the sourcing of materials – Tesla and China. Why? They were prepared and invested early.

  • China doubled down during the commodity bear market and invested in many key commodities when westerns turned away. There are 22 companies in China who have ambitions to develop EVs. 40% of EV sales are in China
  • Tesla went directly to commodity producers to secure offtake, from around the world. European OEMs have been asleep at the wheel

Why now Joe Biden?

Three reasons:

  1. Jobs – The auto industry employs 2 million people. Many of these jobs are in swing states and the employers do not have the resources to develop the EV supply chain.
  2. Environment – Biden ran and has been committed to a green agenda. Like many western leaders, he has been vocal on reducing dependence on fossil fuels and Russian energy.
  3. China – China is strategically very well positioned relative to the US and years ahead. The fightback is on.

What does the implementation of Defence Production Act mean in reality?

  • Extensive capital and resources to develop industries involved in battery materials will be provided. The Treasury would provide funding and we expect this to be open ended, subject to demand. Debt financing would be available beyond the Government’s initial contribution. The multiplier effect would be substantial – we estimate about 5% of national R&D spend.
  • (Start to) address security of supply: The US currently imports 50% of nickel and lithium from outside of North America. It imports 100% of rare earth products from China – used in magnets, that enable EV’s to function. This mix is unsustainable.
  • Accelerate (Government and corporate) funding and approvals for projects in select commodities and associated supply chains. This will be provided to new and current projects

If enacted, expect investment to be multi-faceted and extended. America is fighting back and the intended and unintended consequences are extensive.

What an exciting time to be alive!

30th March 2022


Wisdom of crowds

  • The Australian Government has followed other nations (UK, Germany, New Zealand, Italy, Sweden, Japan and more) in reducing taxes on petrol in response to cost of living pressures
  • Petrol prices have increased by about 40% in Australia since the Ukrainian conflict bega Politicians are blaming Vlad for the parabolic move in oil. Let’s drill into the detail to see if this is true, or are we cutting off our nose to spite our face?


Fact – The oil market was tight before Russia invaded Ukraine:

  • Since June 2020 demand has exceeded supply
  • Demand has been stronger than anticipated, with the reopening of economies
    • Road transportation is at pre-pandemic levels
    • Jet demand is 25% below 2019 levels, but creeping back
    • Households are cashed up through stimulus packages and spending
  • Emerging markets have been accelerating imports and inventories are falling

Why don’t we have the supply?

  • Investors have been punishing companies for investing in future fossil fuel projects. The green movement has seen share prices of oil companies collapse. Tens of trillions of dollars has turned away from fossil fuel energy.
  • Funding markets have been closed for western companies looking to develop new oil projects.
  • Energy investment is down 35% in the last five years in Europe (whilst demand has been accelerating). Global oil capital investment is 65% below the 20 year average (see chart).

Supply growth has been limited

  • Oil majors have been returning cash to shareholders, instead of investing
  • US shale production growth had been non-existent. The US rig count is slowly recovering
  • Little spare capacity from OPEC (group representing major producing oil nations). Saudi Arabia adds 2% to global supply in 2026/27

We don’t have enough supply in 2023

How will this change?

We need one of two things:

  • Higher prices (and demand) to drive investment. This takes time and a cultural shift would be needed in an ESG friendly world
  • Demand to slow because people can’t afford the price (aka demand destruction)

What does it mean for households?

  • The poorest 20% spend approximately 20% of their income on energy
  • A lower petrol price is clearly beneficial for households in the short term, but it doesn’t fix the supply tightness and underinvestment over the past decade. The junkie still gets his fix – we are kicking the can down the road, but unlike monetary stimulus, we can’t print oil.
  • By artificially supressing petrol prices, demand can stay resilient – which could see global oil prices move much higher, given the already tight supply. The fear of demand destruction, shifts to demand construction – funded by western Governments. History unambiguously illustrates that those countries with subsidies have the highest oil consumption.

Governments’ have Strategic Petroleum Reserves (SPR), which are used for a rainy day when there is a supply outage, or prices soar. We have been hacking into these. At the beginning of March, members of the International Energy Agency (incl Australia) released 60 million barrels of oil. One must ask, when oil prices were half of what they were today, only a year ago, why weren’t western Governments building reserves (such as Australia which has no consequential green agenda)? The Chinese who are the largest investors and operators of renewable and green technologies were buying oil for their reserves when prices were at depressed prices. Biden is pleading with them to release some of this.

Short term (artificial) gains for households (and politicians) may lead to much longer term pain. Ironically, the winner may be Russia.

This short term dislocation creates opportunities in other areas and where we have been deploying capital.

What an exciting time to be alive!

29th March 2022

Bakers Depressed

Last time you went to the supermarket, did you notice the bare shelves, lack of produce and a much more expensive basket?! The Russian-Ukrainian war is blamed for much of this, but there is more. How long will this last? Is there any slack in the system? What does the future hold? Let’s dig into the detail.

It is hard to overstate Russia and Ukraine’s contribution to food and farming materials:

Logistics are also a challenge:

  • 80% of Ukraine’s wheat exports head through southwestern ports and occur predominantly in the beginning of the year. These southwestern ports are shut.
  • Insurance has been pulled for freight operators in the region
  • Dry bulk freight rates (cost of shipping) falling 30% in the past week – there is no product to move, or sanctions have restricted trade
  • Ships moving grain from Russia have fallen 60% (the USDA has reduced volumes from Russia by 12% from pre-war levels)

What is happening in the rest of world? It isn’t all bad

  • US plantings of corn and soybeans are expected to exceed 2021 record levels.
  • Brazil’s second corn crop is almost done – smashing last year’s levels. Export volumes could be double the prior year, yet soybean plantings have been revised down 5%
  • China is the largest consumer of wheat. Heavy rain delayed planting and it’s winter crop is expected to be the worst in history, with yields falling 20%. The Government has provided $7bln in food subsidies. China holds 50% of wheat inventories (equivalent to 18 months of demand). Imports have been the highest in a decade.

There should be enough grain supply this year, as production in other areas offsets some of Vlad’s antics.

Record commodity prices

What are farmers doing? The future looks more challenged

It is the later parts of the year where we are focused and how farmers will utilise their land. Margins may be tight as feedstock prices (fertilisers) have surged.

  • Nitrogen fertiliser prices have increased 4x since 2020
  • Ammonia, a key input needed to grow food has gone parabolic. Natural gas is needed to create ammonia.
  • Australia had a record planting season in 21/22, yet there will be a 5% fall in 22/23, eclipsing 30% of the surplus from the prior year. Livestock is offering better returns, with lower input prices, compared to Urea which has surged 3x.
  • In the US, wheat prices have exceeded 2008 records, yet access to fertiliser at reasonable prices is a concern for future plantings.
  • Brazilian fertiliser prices (see chart) have increased 6x since the prior year.
  • The massive moves in inputs is a significant risk for future grain production

farmers will do what is best for them and maximises profitability. This may not be best for consumers

The Middle East & North African region is most at risk

  • Rising food prices has often been correlated with famine and war. See chart on food as share of disposable income.
  • Egypt (world’s largest wheat importer) receives 80% of its wheat from Russia & Ukraine. Bread is up 25% since the war began. Egypt has had more wars than any country, over food.
  • Food prices in many countries are at the highest levels in a decade and this is culminating with energy prices spiking. The cost of living challenges haven’t been greater since the 1970s.

We will continue to monitor the situation closely and engage with experts in the field across geographies and supply chains

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