The Brief: global value chains, real estate, coal power more expensive, global trade signposts, transcript mining
Trying to make sense of things
The highlight of the past week was Hyun Song Shin's BIS presentation "Global value chains under the shadow of Covid" (link) and twitter thread:
Shin shared a graph of the "Global Value Chain" that cuts straight through the platitudes around global trade. The complexity and interconnectedness of the global economy today shines through.
Here's the graph for countries:
And for industries:
The data consists of supply chain relationships based on a sample of firms. The data is also from before the Ukraine-Russia conflict.
Besides the actual value chain (linkages of working capital and production supply chains), there's the tax avoidance layer that Brad Setser explains in several twitter threads / tweets.
What we can say is value/supply chains spread beyond country borders and across industries. No country is its own “economy.” This means the old models of economics are severely lacking in our times. We are quite excited about this data that can help "look through" the aggregates and find the nuances of what's happening.
Real Estate: 70-City price changes & share of new loans
Transcript Mining (premium)
I. Real Estate
Summary: We caution against expecting a major rebound in China’s real estate market this year. Urban prices remain well above rents and median incomes. Consumer confidence is likely to improve in January & February with re-opening. The bullish scenario is employment sentiment recovers and we see incomes rise. Still, it’s a long way to reach Xi’s goal of housing affordability.
70-City price changes
China's new home prices (70-city average) stopped their 16-month long month-over-month decline in January 2023.
The next two charts look at the dispersion of price changes across 70 cities for existing and new home price changes. It shows:
1/ existing home price declines were broader (across more cities) than new home price declines;
2/ the number of cities experiencing existing home price declines flat-lined since Oct'22; and,
3/ the number of cities with declining new home prices increased again in Jan'23.
The broadness of existing home price declines, as opposed to new homes, may support our thesis that the rise in household deposits is linked to households selling 2nd/3rd+ homes and not re-investing in property.
Real Estate sector’s share of new loans fell to record low of 3.4%
3.4% of new loans went to real estate in 2022, far below the last 12 year range of 17% to 45%.
“Gradual improvement, not a rapid surge”
Pledges by the People's Bank of China and the government at its December economic meeting to support real-estate financing are likely to herald only a gradual improvement, not a rapid surge, in new bank lending to the sector in 2023. Although Chinese banks have extended 4.8 trillion yuan of credit lines to property developers since mid-November, these funds are likely uncommitted as lenders review the companies' loan requests on a case-by-case basis. - Bloomberg Intelligence
II. Coal power costs rise, far above renewables
China's coal power costs rose in 2022 to nearly $80 per megawatt-hour, according to BNEF. The cost fell for onshore wind (+ storage) and solar (+ storage).
At current market prices, the fuel cost alone of 5500kcal coal put through a supercritical generator should be north of $70 a megawatt hour — more than you’d pay for almost every zero-carbon alternative. The pressures engendered by bulletproofing coal supplies are gradually pricing it out of the market. China’s final coal boom is sowing the seeds of its own demise.
The issues driving this are explored by David Fickling in this Bloomberg Opinion piece. The main drivers are two-fold:
(1) Govt mandating production levels for mines, leading them to mine lower-quality coal.
Miners will typically prefer to dig up higher-grade coals that can be sold more profitably — but if the government sets stringent output targets, as Beijing did following an electricity crunch in the fall of 2021, they’ll be tempted to trade down to meet their quotas.
At China Shenhua Energy Co., the nation’s biggest coal miner, 70% of incremental production in the 12 months through last June came from lignite, a low-grade, peaty substance that most countries don’t even bother to dig.
(2) Spot prices far above govt pricing ranges for long-term contracts.
The outcome is coal miners are capturing a larger share of operating profits in the value chain.
III. Signposts: Global trade reordering
In this section, we touch on “signposts” that show we are still on the path of reordering global trade.
China no longer viable as world’s factory, says Kyocera (FT)
The FT’s Eri Sugiura piece with quotes from an interview with Hideo Tanimoto,, the president of Kyocera the JPY 2.5 trillion electronics components company. Some excerpts:
US curbs on China’s access to advanced technology are killing its viability as a manufacturing base for exports, according to the head of Japan’s Kyocera, as one of the world’s largest makers of chip components shifts its production elsewhere and invests heavily in facilities at home.
“It works as long as [products are] made in China and sold in China, but the business model of producing in China and exporting abroad is no longer viable,” Tanimoto told the Financial Times. “Not only have wages gone up, but obviously with all that’s happening between the US and China, it’s difficult to export from China to some regions.”
Of course, companies are being affected by US export controls.
The company holds a 70 per cent global market share in ceramic components for chip manufacturing equipment. Tanimoto said US export controls were part of the reason Kyocera cut its full-year operating profit forecast this month by 31 per cent.
Kyocera already moved some manufacturing to avoid tariffs.
In 2019, it relocated the manufacturing of its copiers for the US market from China to Vietnam to avoid tariffs on China imposed by the Trump administration. It also transferred the production of in-vehicle cameras for the US from China to Thailand.
China may have other advantages now in software and artificial intelligence.
Tanimoto said it would now be nearly impossible to produce hardware in China without access to the chips technology affected by the tightened regulations, although the country may still have a competitive edge in software and artificial intelligence.
Moving to a chart from The Economist comparing unit labor costs with neighboring countries. We think this shows China’s climb up the value chain is (was?) working.
On the other hand, some companies are having a very hard time shifting production away from China, the go-to example: Apple.
Apple’s manufacturing shift to India hits stumbling blocks (FT)
“China speed” is on another level.
In China, suppliers and government officials took a “whatever it takes” approach to win iPhone orders. Former Apple employees describe instances in which they would estimate a certain task might take several weeks, only to show up the next morning to find it already completed at inexplicable speed.
Operations in India are not running at that sort of pace, said a former Apple engineer briefed on the matter: “There just isn’t a sense of urgency.”
“It is happening.”
Jue Wang, consultant at Bain, said Apple is at the start of its expansion into India. “We’re not talking the same scale of the Zhengzhou factory” — a factory hub in China known as “iPhone City” that employs some 300,000 workers — “and everybody acknowledges there will be different efficiency, but it is happening”, she said.
Apple’s future (non-China) factories will be different. We’d guess new factories could become more productive by leveraging developments in technology, such as machine vision, materials printing, robotics, and, yes, artificial intelligence.
IV. Transcript Mining (premium content)
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