Christophe Barraud – Interview: Around the world of tensions


What are the elements that crystallize tensions in supply chains?

There are currently four parameters which, together, are pushing supply chain tensions to a fever pitch.

The war in ukraine, first, has direct and indirect effects on supply chains. Activities in the country are at a standstill, which creates a break in exports, in particular of manufactured goods and mainly to Europe. German automakers, which source much of their supplies from Ukraine, are bearing the brunt of the impact.

These shortages have a ricochet effect on foodstuffs. Ukraine has massively reduced its exports, the supply is therefore drastically reduced on several products, in particular wheat. These shortages push other countries such as Egypt, Turkey, Argentina, or even on the margins, Bulgaria and Romania, to cut their exports, by advocating food protectionism, thus accentuating the scarcity of offer for countries that are net importers of agricultural commodities.

Sanctions and counter-sanctions, both on Russia and Belarus, have a significant impact on the whole shipping (sending by boat). Russian ships are no longer allowed to anchor in European and UK ports. Russia has, in response, banned the export of 200 products, including fertilizers, cars and electronic products for example, which adds a difficulty to the global supply. As a reminder, Belarus is also one of the world’s major producers and exporters of fertilizers, particularly potash.

Ditto for the problem of airspace, which again leads to lengthening in the delivery circuits, and consequently causes an increase in logistics prices, already increased by the soaring price of gasoline.

Finally, gas and oil are the culmination of tensions. On oil, probably, Europe is doing what it can to set up an embargo. It remains to be seen how many countries will be exempt, such as Hungary and Slovenia. But the continent will not necessarily have the capacity to import the equivalent of what it will not take from Russia, unless it reaches a nuclear deal with Iran and the latter resumes exports. .

For its part, Russia will probably not have the capacity to reallocate this oil elsewhere. China has already taken a large part of it, and India, a candidate for the purchase, will be constrained by logistical reasons. Indeed, Russian ports have reduced capacity: only Aframax can dock there, and they are already in short supply globally.

Finally, if the Kremlin cuts gas exports, many countries could find themselves in a situation of shortage, in particular those which are crossed by one of the gas pipelines. And again, we would observe a ripple effect on all supply chains, goods, agricultural products or energy.

The second parameter to take into account is, unsurprisingly, the resurgence of Covid in China. Currently, 30 to 40% of the country is under strict confinement and air traffic is down 75% at the beginning of May on an annual basis. All ports are filled to the brim and this situation is creating huge delays in all supply chains, for anything going to or coming from China.

The third parameter is that of the demand and supply of semiconductors. Despite the slowdown in growth, demand keep exploding. Graphics cards, operating systems and automobiles, for example, are always demanding more power and capacity, and the supply cannot keep up.

There is also a problem of “geopolitical storage”. Some countries, such as China, stockpile semiconductors but do not use them, or buy components on behalf of Russia, deliberately increasing scarcity. Here, the combination of parameters worsens the situation: the blockages in China also affect several Chinese component producers.

At last, difficulties in the energy sector darken the picture. Energy producers have been reducing their capex for several years, and in some sectors, particularly fossil fuels, operating capacity is reaching its maximum levels.

These 4 parameters combined, added to other marginal factors, greatly complicate the environment.

How to explain the decorrelation between the industrial raw materials and oil?

On oil, there is an ongoing speculation phenomenon on the European embargo on the one hand, and on the restart in China on the other. Today, the country is at a standstill, but as soon as the Covid normalizes, demand should rise very suddenly. China has set aside large tax revenues to be able to spend massively once the epidemic is under control again. His needs are going to be massive.

The United States had also put large strategic reserves on the market, they are announcing today that they are going to buy back some of them. Finally, oil supply remains tightly controlled, and OPEC is making little effort to produce more. Overall, the supply is confined and a very strong potential demand could pick up again at any time.

How do you assess the food situation?

Here again, the factors are multiple. The climatic conditions are very unfavorable: the United States last year, China this winter, the Maghreb at the beginning of the year, or even Europe in the spring, experienced episodes of intense drought. Harvest qualities and densities are at their lowest.

Some countries are particularly worth watching. Turkey, which is facing both a wheat import problem and an oil problem, intensified by a violent fall in its national currency, should suffer a double scissor blow. Egypt, which is already in a complex economic situation, is facing food shortages.

Second, soaring food prices in some countries are expected to exacerbate social tensions, in Sri Lanka and Peru, among others. It should be kept in mind that the current price increase is greater than that which took place before the Arab Springs of 2011.

The situation is not expected to resolve itself quickly, as prices are expected to continue to rise, as some producers have not yet passed on the cost increases.

Are we at risk of stagflation?

From the point of view of real growth, at the global level, we have a very marked slowdown compared to last year. In 2021, global growth was close to 6%, this year it should be around 2.9%, therefore divided by 2. We are indeed approaching zero or negative real growth, say in quarterly sequential terms.

Some countries are likely to fear a recession. The United States posted a negative first quarter and the second will be very close to zero. In China and Europe, a sharp contraction is expected in the second quarter. But the situation is different in these regions: while the United States is probably close to the peak of inflation, or even has exceeded it, Europe will have to wait to reach this peak. The inflation outlook remains high and may still surprise slightly on the upside, the outlook for real growth will continue to be revised downwards.

Which sectors will remain under pressure?

In construction, the impact of gas and oil is particularly palpable, but other factors also come into play. Delivery difficulties are felt in all regions of the globe, deadlines are extended, and some players prefer to postpone projects, which accentuates the discrepancies. Apart from the heavy work, it is always difficult to obtain supplies of materials and small elements (such as furniture, radiators, etc.).

When China loosens its grip, it will want to make up for lost growth. 2022 is a crucial year for the regime with the re-election of President Xi Jinping. The country will therefore spend massively on infrastructure, and thus drive up all prices, whether for cement, copper, steel, iron ore, etc. Inflation should therefore remain strong in the third quarter.

Christophe Barrault joined Market Securities in 2011 and currently serves as Chief Economist and Strategist in Paris. He has been ranked by Bloomberg as Top U.S. Statistics Forecaster since 2012, Top Eurozone Statistics Forecaster (2015-2019) and Top China Statistics Forecaster since 2017. MarketWatch also awarded him the title of Top Forecaster on US statistics in 2020. Its research is aimed at a wide category of institutional investors all over the world (banks, insurance companies, management companies, hedge funds, pension funds, etc.), but also at public bodies (States, central banks, etc.).



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