Week 4th
Image Ref: Economic crisis concept. Spread in the world; iStock by Getty Images
Financial Risks: Negative trend for unemployment causing high volatility
Weak US economic activity and a reported move to con
traction territory were followed by another setback as hiring fell sharply and the unemployment rate rose for the fourth straight month ( now at 4.3%, t
he highest since October 2021). Persistent inflation and high interest rates have been impacting both businesses and consumers.
Potentially, these trends combined with Japan rate hike on July 31st, resulted in major volatility in stock exchanges: The S&P 500 sank 1.8%, The Dow Jones Industrial Average dropped 610 points, or 1.5%, and the Nasdaq composite fell 2.4% as of August 2nd and continued on August 5th.
Impact Notes: The sell-off had a global impact as well. According to reports, Japan’s Nikkei shed 12% to hit nine-month lows, entering bear market territory and marking its biggest one-day percentage drop since October 1987. Europe’s broad STOXX 600 index fell 3%. CBOE Volatility Index (Image on the right), expectation of volatility based on S&P 500 index options, or known as ‘fear gauge’, spiked to 38% on August 5th.
On a positive note, U.S. stock futures rebounded on Tuesday, August 6th, following positive remarks from the Federal Reserve regarding interest rate policy.
Technology Risks: Divergence in Semiconductor Sector
The disparity between Intel (INTC) and Nvidia (NVDA) highlights a significant risk within the technology sector. Nvidia, under the leadership of Jensen Huang, is currently the standout performer in the S&P 500 Index ($SPX), with impressive YTD gains exceeding 114%. In stark contrast, Intel has become the worst performer in the index, experiencing a dramatic decline of over 60% in market cap. This sharp contrast underscores a broader trend of declining investor confidence in Intel, particularly following a dismal Q2 earnings report that led to its worst stock performance in fifty years.
Vertaeon View on Impact: Intel’s severe underperformance illustrates ongoing technology sector risks, especially within the semiconductor industry. The company’s inability to keep pace with rivals like Nvidia may be indicative of deeper structural issues or strategic missteps. This divergence could signal broader vulnerabilities within technology investments, particularly for companies struggling to adapt to rapidly changing market conditions and competitive pressures.
Macroeconomic Risks: Construction Trending Downward
Reinforcement bar — or rebar, a benchmark for China’s traditional steel markets due to its use in strengthening concrete in buildings and infrastructure, is hitting the lowest level since 2017. Spot prices have come under heavy pressure due to China’s prolonged real estate crisis.
Spot rebar was at 3,621 yuan ($501) a ton on Thursday, down about 13% this year, according to researcher Antaike. It needs to fall just 6 yuan to reach the weakest point since April 2017.
Vertaeon View on Impact: The weakness in domestic markets and lower uses for steel can prompt significant hikes in exports resulting in increased competition and price impact in global markets. The slowdown in demand has triggered a price rout in recent months. Rebar used in construction is at its cheapest since 2017, while hot-rolled coil used in cars and home appliances is at its lowest in four years. Many higher-cost producers are making a loss on every ton produced. The steel slowdown has had an impact on iron ore prices this year, affecting earnings at mining giants like BHP Group Ltd. and Rio Tinto Group. This can in turn result in more trade disputes and tariff hikes.
Climate Risks: ‘Megaquake’
A powerful earthquake (7.1M) struck off the coast of Japan on August 8th, triggering a tsunami advisory for several regions. The Japan Meteorological Agency (JMA) issued an advisory late Aug. 8, noting that there was a higher-than-usual possibility of a large-scale earthquake: first-ever “megaquake advisory.” for the Nankai Trough. A moderate earthquake (5.3M) struck near Bakersfield, California, which prompted concerns about potential aftershocks and damage.
Vertaeon View on Impact: According to reports, if a megaquake were to happen near Japan, the Philippine Sea Plate would lurch, perhaps as much as 30 to 100 feet, near the country’s southeast coast, producing intense shaking. The vertical displacement of the seafloor would cause a tsunami and push waves toward the coast of Japan.
Considering the impact of a Tsunami in 2011 to the nuclear and other industries, companies should run scenarios of increased probability of such a risk occurring again. Key materials sourced (Tier 1 and below), operations in the area and more importantly, employee and family impact should be assessed. From a business continuity point of view, the contingency plans should be ready. Vertaeon can support in all these areas.
Geopolitical Risks: Resin dumping
South Korea has opened an anti-dumping investigation into hydrocarbon resin imports from China and Taiwan after a local company, Kolon Industries Inc., claimed cheap imports from the countries were damaging the local industry. According to sources, the Korea Trade Commission of the Ministry of Trade, Industry and Energy has recently begun the investigation into four Chinese companies and three Taiwanese companies.
Kolon Industries alleged that the dumping margins for Chinese and Taiwanese companies stood at 15.52 percent and 18.52 percent, respectively. Hydrocarbon resin is used in products like paints and adhesives and serves as a key raw material for both industrial and general consumer goods.
Vertaeon View on Impact: Potential tariff hikes following the investigation are possible. In that scenario the cost of resins can increase affecting company profitability. Timeline estimate for a decision is 5-12 months.
Week August 12th
Financial Risks:
The price of a key Chinese steel product used in construction is on the cusp of hitting its lowest level in more than seven years, underscoring the protracted downturn that’s spooking the industry in the rest of the world. The over construction in residential buildings fuelled by government spending without enough real market demand has led to a significant slow-down in this sector, impacting directly the internal demand for Chinese steel.
While rebar is not the main steel export, broad weakness in China’s steel market has worldwide implications as traders ship more overseas instead. Spot rebar was at 3,621 yuan ($501) a ton on Thursday, down about 13% this year, according to researcher Antaike. It needs to fall just 6 yuan to reach the weakest point since April 2017.
Vertaeon View: This is sending shock-waves across the entire industry worldwide, with a pressure on prices from massive Chinese exports as a result of the internal market demand shrinking. Opportunities may arise for industrial companies to take advantage of this price drop and reevaluate their current supply chain. In addition, we anticipate a reinforcement of tariffs.
Geopolitical Risks: Global Port Strategies, Anti-Dumping Moves
The U.S. and China have taken notice of Punta Arenas, a port in southern Chile, due to its strategic location at the intersection of changing shipping routes. The Strait of Magellan, where Punta Arenas is situated, has become an important waterway as wars choke vital shipping lanes in the Middle East and Europe, and climate change affects the Panama Canal. The strait’s increased traffic, with a 25% surge in January-February 2024 compared to the same period in 2023, makes it an attractive hub for global shipping.
S. Korea opens anti-dumping probe into hydrocarbon resin imports from China, Taiwan – According to the sources, the Korea Trade Commission of the Ministry of Trade, Industry and Energy has recently begun the investigation into four Chinese companies and three Taiwanese companies, following a petition from Kolon Industries Inc. The South Korean industrial materials firm claimed that it had suffered damages due to the supply of low-priced products from Chinese and Taiwanese companies. Kolon Industries alleged that the dumping margins for Chinese and Taiwanese companies stood at 15.52% and 18.52%, respectively. Hydrocarbon resin is used in products like paints and adhesives and serves as a key raw material for both industrial and consumer goods.
Vertaeon View: A strategic shift for new ports and other access is happening due to realigned supply chains, climate risks (drought) and constraints in shipping via other routes. The longer routes can affect logistics costs, lead times and overall profitability. The reliance of our clients’ suppliers to geopolitical events outside of their controls makes it very relevant for them to closely monitor those events who have the potential to impact them indirectly.
Macroeconomic Risks:
It’s not just real estate and spending — another pillar of China’s economy looks like it’s heading for trouble, according to Business Insider. China’s export growth, a crucial pillar of its economy, is showing signs of slowing down. According to recent data, China’s July exports grew only 7% year-over-year, falling short of the expected 9.7% increase. This marks the slowest expansion pace in three months. Additionally, the July export figures fell below the explosive 8.6% growth rate seen in June, which was the fastest in 15 months.
In the US, the Fed is indicating upcoming rate cuts in an attempt to revive the economy, despite looming inflation and high real-estate prices.
Vertaeon View: This could be the canary in the coal mine indicating elevated risks for recession in 2025 and decrease in consumer confidence. The direction of China’s consumption and trade can have a big impact on export and commodity prices as we have noted in the case of steel. Corporate fiscal policies will have a big impact on macroeconomic and supply chain risk levels.
Climate Risks:
A powerful earthquake struck off the coast of Japan, triggering a tsunami advisory for several regions as authorities urged residents to seek higher ground and brace for potential waves. Japan issued its first warning Thursday about the possibility of a long-feared “megaquake” after a powerful 7.1-magnitude temblor struck off its southern coast, sparking a tsunami advisory but no immediate reports of serious damage or injuries. The earthquake occurred off the coast of Miyazaki Prefecture on the main island of Kyushu.
The Nuclear Regulation Authority said all 12 nuclear reactors on Kyushu and Shikoku remain safe. Earthquakes in areas with nuclear power plants have been a major concern since a massive 9.0-magnitude earthquake and ensuing tsunami triggered the Fukushima nuclear disaster in March 2011. Japan sits on the Pacific ‘Ring of Fire’ — a line of seismic faults encircling the Pacific Ocean — and is one of the world’s most earthquake-prone countries.
Vertaeon View: While unrelated to climate change, earthquakes can have a devastating impact not only on the impacted production sites, but also on the demand from regional economies such as construction and tourism. While this had relatively limited impact, companies should be prepared for earthquakes in the region and should have both critical suppliers and sourcing mapped.
Week of 19th
Geopolitical Risks:
India launches anti-dumping probe into some steel imports from Vietnam – India has initiated an anti-dumping investigation on certain steel products imported from Vietnam, per the Ministry of Commerce.
Vertaeon View: While the impact could be limited in this instance, it could be an indicator of future foreign policy actions from the Indian government towards “supplier countries” with even lower labor cost.
Macroeconomic Risks:
The U.S. S&P Global Purchasing Managers’ Index (PMI) for August is expected to show little change, signaling moderate economic expansion. S&P Global Flash U.S. Composite PMI, which fell to 54.1 from 54.3 in July. The US Manufacturing PMI declined to 48 from 49.6 in July. The US Services Business Activity Index rose to 55.2 from 55 in July.
The indexes are the result of surveys of the senior executives in the private sector and are meant to indicate the overall health of an economy, providing insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment, and inventories.
Vertaeon View: Continued decline of Manufacturing PMI indicates pressure on the manufacturing sector and its supply chains. This can impact financials especially for SMEs, future expansion plans and even an impact on R&D spending and innovation.
Supply Chain Risks: Rail Strike Risk Mitigated
The Canada Industrial Relations Board ordered on Saturday a halt to work stoppages at the country’s largest railways, signaling an end to an unprecedented service disruption at both main freight rail carriers that threatened to hammer Canada’s export-driven economy. The independent labor tribunal made the decision after Canada asked it on Thursday to end an impasse in separate talks between more than 9,000 Teamsters members, and Canadian National Railway and Canadian Pacific Kansas City.
All rail traffic in Canada and all shipments crossing the U.S. border have stopped, although CPKC and CN’s trains will continue to operate in the U.S. and Mexico.
Vertaeon View: While the worst has been avoided, it is a reminder of the reliance of the global logistic chain on any local foreign social climate which could result in a strike and a lock-down of an entire economic sector with potential global impact. That is why having an eye on global turmoil (social indicators including strikes) can give you the heads-up on potential preemptive action to limit the risk of disruption.
Technology Risks:
South Korean AI chip makers Rebellions Inc and Sapeon Korea Inc have signed a definitive merger agreement. The deal is the latest attempt by South Korean companies to challenge global AI chip leaders such as Nvidia. Sapeon’s shareholders include South Korea’s largest telecom company SK Teleco, and the world’s second-largest memory chipmaker SK Hynix. Rebellions received a $15 million investment from Wa’ed Ventures, a VC arm of Saudi Aramco, in July, bringing its total funding to more than $225 Mn.
Vertaeon View: The reliance on Taiwan’s chip manufacturing in light of the Chinese threat appears to be slowly decreasing with the emergence of new players and larger groups forming elsewhere. This merger also attempts to balance the market power of current AI chip leaders such as NVidia delivering alternate options and resilience for buyers and consumers alike.
Climate Risks: A season of wildfires
Several wildfires have been affecting northern Manitoba province of Canada, in particular the Oxford House community, in central Canada, since 13 August, resulting in evacuations and damage. According to Politico, Climate Change Made 2023’s Wildfire Season So Much Worse. Global warming made hot, dry weather that fuels wildfires more likely in places such as Canada, Greece, and the Amazon rainforest last year, new research says.
Vertaeon View: Climate has been changing and will continue to change in the foreseeable future, making it increasingly relevant for companies to map local operations of interest and anticipate potential risks to better prepare for contingency plans. Vertaeon is tracking the climate risks at the company level and at facility level for 10,000s locations.
Week of August 26th
Geopolitical Risks: Canada’s foray into EV tariffs
Canada said on Monday it would impose a 100% tariff on imports of Chinese electric vehicles and announced a 25% tariff on imported steel and aluminum from China. The duties apply to all EVs shipped from China, which would include those made by Tesla, whose shares closed down 3.2%. Canadian imports of automobiles from China to its largest port, Vancouver, jumped 460% year over year to 44,356 in 2023, when Tesla started shipping Shanghai-made EVs to Canada.
Canada’s decision to impose tariffs on electric vehicles imported from China has sparked a sharp response from Beijing, per AP News. The Chinese government has accused Canada of violating international trade rules and engaging in protectionism. The tariffs are part of Canada’s broader strategy to support its domestic auto industry. China’s solar cell plants and steel and aluminum mills have enough capacity to meet much of the world’s demand. Chinese officials argue their production keeps prices low and would aid a transition to a green economy.
Vertaeon View: Protectionism is a double-edged sword. It protects domestic markets in the short term, but will increase the risk of domestic production and R & D becoming out of sync with the global market demand overtime. It can put a “protection blanket” on innovation and competitiveness. However, short term tariffs can have a significant strategic benefit to safe-guard key industry sectors, such as automotive and micro-processor. Europe is in the process of losing the EV car battle against Chinese imports on its domestic market. This could be as a result of strongly anchored green oriented policies mandating, for the time being, EV cars in 2035 for instance.
Supply Chain Risks: Semiconductor risk Mitigation
According to a report from UDN, TSMC held a groundbreaking ceremony yesterday for its Dresden, Germany plant. The EU has approved a EUR 5 billion subsidy for the Dresden plant. TSMC announced last August that it would partner with Bosch, Infineon, and NXP Semiconductors to establish the European Semiconductor Manufacturing Company (ESMC) in Germany.
The joint venture will construct a 12-inch wafer plant, with TSMC holding a 70% stake, while Bosch, Infineon, and NXP each hold 10%. Construction is planned to start in the second half of this year, with mass production expected by the end of 2027. The Dresden facility is set to become one of the largest and most advanced semiconductor manufacturing plants in Europe. With an expected production capacity of 40,000 wafers per month, the plant will initially focus on producing mature technology nodes like 28nm, 22nm, and 16/12nm. These nodes are crucial for automotive, industrial, and consumer electronics applications, which are experiencing robust demand in Europe.
Vertaeon View: Two remarks – (i) TSMC expansion in Europe in partnership with European players, gives the region an advantage in the ongoing semiconductor resilience building. (ii) Identifying and utilizing subsidies for expansion ahead of selecting a new production site can be very rewarding. Having data collected for you to identify these opportunities by sectors and regions is a decisive decision making tool.
Climate Risks: Week of Typhoons
Climate change turbocharged the winds and rain of Typhoon Gaemi, which killed dozens of people across the Philippines, Taiwan and China earlier this year, a group of scientists said.
In the meantime, Japan has issued an emergency warning as Typhoon Shanshan approaches, with Toyota Motor Corporation suspending operations at all of its domestic factories. The powerful storm is expected to bring heavy rain and strong winds to much of the country and cause airline & rail cancellations and large-scale evacuations.
“Toyota will suspend operations of all 14 plants in Japan from Wednesday evening through Thursday morning,” it said. Typhoon Shanshan is the latest harsh weather to hit Japan following last week’s Typhoon Ampil, which also led to blackouts and evacuations.
Vertaeon View: The effects of climate related impacts, whether they are temporary events or lasting trends, are increasingly raising in public awareness and are becoming a risk factor that requires not only monitoring, but adaptation and mitigation for the vast majority of global economic players. An unscheduled production shutdown can have a huge impact on not only delivery but also on profitability. Scenario planning and contingency preparation will be key.
Financial Risks: Cost of disaster risks
The economic impact of the 2023 wildfire season has been devastating, with billions of dollars in losses reported across affected regions. The wildfires have destroyed homes, businesses, and infrastructure, leading to widespread displacement. Economists are warning that the long-term costs of recovery could be even higher. Bloomberg reported that wildfires cost Europe €4.1 billion (£3.46 billion) in damages last year, with Greece, Spain, and Italy facing the majority of the impact.
Google Maps now also warns of forest fires in a number of European countries, including many popular holiday destinations such as Italy, Greece and Croatia. In addition to previous countries like the US, Brazil and Australia, areas in Europe hit by wildfires are now being identified using AI analysis of various data sources. They then appear as warnings in Google Maps, in Google Search and in location-based push notifications.
Vertaeon View: Wildfires and floods are affecting Canada and Europe in a major way in recent years. From a risk perspective, even if you are not directly impacted by the event itself, your supplier network or your customer base might. In any case, insurance premiums will trend upwards or may not even be available to cover selected risks in the future. Monitoring and mitigating these risk factors are critical for many organizations.
Vertaeon’s risk platforms have been tracking multiple disasters and other risks mentioned above for the last three years. Contact Us for more detailed analysis.
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