October 25, 2020 - Home | Custer Consulting Group



October 25, 2020Markit’s Flash PMIs came out last week. The upshot the manufacturing sector continues to do well, but the overall global economy appears to be flattening in Q4 as COVID cases spike, and political uncertainty increases. U.S. economy's 'trudge' continues as virus counts surge (Chart 5-7)Notebook demand still sound in 4Q20 before waning in 2021 (Chart 8)India’s smartphone market rebounds in Q3 20202 to record 50 million units (Chart 9-10) How Apple’s shift is supply chains is creating boomtowns in VietnamElectric vehicles will make up 80% of cars sold in 2050Semiconductor equipment post $2.75 billion 3-mo M.A. September billings, up 40.3% y/y (Chart 11)Three unstoppable forces set to drive silver prices (Chart 12)Stronger demand x/ China needed to sustain recent copper price rally (Chart 13) Flash Manufacturing PMIs continue to improve (Chart 2-4)Custer NotesMarkit’s flash PMIs came out last week. The upshot of the new data is the manufacturing sector continues to do well. Still, the global economy seems to be hesitating in Q4 as COVID cases spike, and political uncertainty is peaking. The U.S. appears to be doing a bit better as the October Flash Manufacturing PMI came in at 53.3, a 21-month high. Composite growth in the U.S. also expanded, with even the services PMI hitting a 20-month high at 56.0 The Eurozone flash manufacturing PMI hit a 32-month high at 57.8 (57.1 in September) Overall, business activity fell back into a slight contraction, with the Eurozone Composite PMI posting a 4-month low at 49.4Germany’s manufacturing PMI also came in strong at 58.0. HYPERLINK "" . economy's 'trudge' continues as virus counts surge (Chart 5-7)Weekly data on the U.S. recovery remained tepid as the coronavirus pandemic continued a fall surge across much of the United States.Estimates of retail foot traffic from Safegraph here and Unacast here, based on cell phone data gathered by the company, both turned higher over the past week.But visits to restaurants fell, according to data from reservations site OpenTable here, and employment estimates from time management firms Homebase data and UKG here both declined.Chmura blog Economics estimates showed job openings at about three fourths of their predicted level absent the pandemic, unchanged from the week before.An Oxford here Economics broad index of the economic recovery fell slightly, and has remained at about 80% since late August, evidence that shoppers and business owners may have found their balance - for now - between commerce and the risks posed by the pandemic. demand still sound in 4Q20 before waning in 2021 (Chart 8)Notebook vendors saw strong shipment gains in the second and third quarter of 2020 with the momentum remaining robust in the fourth quarter, but they may see demand for their computer products begin to wane in the 2021, industry observers have warned.Although there is a resurge of reported COVID-19 cases in Europe and the U.S. recently, the buying sentiment of end-market devices such as notebooks is not strong as that at the early stage of the pandemic, with stocks being piled up at channel operators, said the observers.Additionally, the shipment decline rate would be quite apparent in 2021 due to a high base built up a year earlier, the sources added.Shipments of related notebook products will stay flat or edge down slightly in fourth-quarter 2020 as compared to a quarter earlier, bolstered in part by the purchases of Chromebook models financed by various governments, noted the sources.Thanks to Chromebooks, Acer and Asustek Computer both have reported staggering sales gains for third-quarter 2020, with the former seeing its revenues hit a 23-quarter high and the latter enjoying a hefty 40% annual gains.However, demand for business-use Chromebook models may pick up in 2021, which will benefit vendors including Lenovo, Dell and H.P. who have been focusing more on this segment, said the sources.Meanwhile, demand for mid- to high-end gaming notebooks will also stay flat in the fourth quarter after reaching a peak in the third quarter, and it will see a significant retreat in first-quarter 2021, said the sources.’s smartphone market rebounds in Q3 20202 to record 50 million unit (Chart 9-10) Smartphone shipments in India recovered in Q3 2020, posting 8% growth to 50 million units.?This is an all-time record for smartphone shipments in a single quarter in India. Xiaomi remained the market leader, growing 9% to ship 13.1 million units. Samsung regained second place from Vivo, with 10.2 million units, up 7%. Samsung’s aggressive product portfolio and pricing strategy in the low-end paid off. Vivo stood third, growing 19% to ship 8.8 million smartphones, while Realme breathed down its neck with 8.7 million units shipped. Oppo completed the top five, shipping 6.1 million units.“Smartphone vendors are definitely bullish,” said Canalys Analyst, Adwait Mardikar. “The government, slowly but surely reducing restrictions on movement after a three month lockdown, has created the perfect atmosphere for sustained growth. While almost all vendors have shown positive shipment growth, the true winners are the online channels, who have been buoyed with a huge influx of devices ahead of the festive season. Ongoing sales at Amazon and Flipkart are a clear indication that despite the economic downturn, India’s penchant for a good smartphone, and a good bargain, remains intact.”“Ongoing tension between India and China has been a hot topic in the past few months, but we have yet to see a significant impact on purchase decisions of mass market customers,” said Canalys Research Analyst, Varun Kannan. Collectively, Chinese vendors comprised 76% of total smartphone shipments this quarter, which has grown from 74% a year ago. “However, the tensions have caused Chinese smartphone brands to act more conservatively in recent months, reducing their marketing spend, and carefully trying to project the image that they are important contributors to, and stakeholders in, the economic future of IndiaApple regained momentum in India in Q3, with double-digit growth to nearly 800 thousand units. “Apple is finally paying attention to India,” said Canalys Research Director, Rushabh Doshi. “It has opened a direct online store, giving it several new angles in its go-to-market strategy, such as utilizing device trade-ins to provide purchase incentives, or bundling AirPods with iPhones to make them more appealing. However, its new iPhone 12 family will be a tough sell in India this year, as network operators do not yet have the infrastructure for mass market 5G deployment, erasing a key feature of the devices. Not to forget, Apple’s pricing strategy for its new iPhones in India needs serious consideration.” Apple’s shift is supply chains is creating boomtowns in VietnamGrowth in foreign investment in Vietnam's Bac Giang province is almost doubling every year and the province forecasts exports value to reach $11 billion, a tenfold leap in 6 years.Hanoi:? Not long ago Vietnam’s Bac Giang province was one of the nation’s poorest regions, known for producing rice, lychees and poultry dubbed “running chicken.” That was before the global tech supply chain shifted its way.Now officials in the rural area north of Hanoi host representatives from Apple Inc. and Hon Hai Precision Industry Co. The growth in foreign investment is almost doubling every year — even during the coronavirus pandemic — and the province forecasts the value of exports this year will reach $11 billion, a tenfold leap in six years. Residents have swapped loud, dirty motorbikes for new Honda two-wheelers while others drive Toyota SUVs and Mercedes sedans on freshly paved roads.“Life is heaven now and it’s thanks to the factories,” said Nguyen Van Lanh, 64. His family, which once couldn’t afford to buy meat, runs boarding rooms for workers built with their factory salary savings. One relative with a loan business for plant employees drives a red Mercedes-Benz.The boom in Bac Giang highlights how the shift in the world’s supply chains is touching regions previously left behind. Vietnam’s ability to attract more sophisticated manufacturing is accelerating with rising Chinese labor costs, the U.S.-China trade war and logistics vulnerabilities amid the epidemic, which the nation’s Communist leaders have so far successfully curtailed. vehicles will make up 80% of cars sold in 2050Electric vehicles will make up as many as 8 out of 10 new cars sold in 2050, but it will still be a long road before they dislodge gasoline as the predominant fuel in transportation, IHS Markit Vice Chairman Daniel Yergin writes in his new book, The New Map: Energy, Climate and the Clash ofNations.IHS Markit projects that electric vehicles (including battery, plug-in hybrid and fuel cell electric) will comprise 60-80% of all new car sales in 2050. That increased market share (from 2.2% of new car sales in 2020, according to IHS Markit data) will be driven by greater scale in manufacturing, as well as the continued improvement of batteriesIHS Markit now projects that the average lithium-ion cell cost will fall below $100 per kilowatt hour by 2023.Nevertheless, gasoline-powered vehicles will still comprise two-thirds of the 1.9 billion cars on the road in 2050 owing to the time it takes for the fleet to turn over. The average car in the United States remains on the roadfor almost 12 years."At least for now, the demand for electric vehicles is largely coming not from consumers, but from governments whose evolving policies are shaped by climate concerns as well as by urban pollution and congestion," Yergin observes in The New Map. equipment post $2.75 billion 3-mo M.A. September billings, up 40.3% y/y (Chart 11) North America-based manufacturers of semiconductor equipment posted $2.75 billion in billings worldwide in September 2020 (three-month average basis), according to the September?Equipment Market Data Subscription?(EMDS) Billings Report published today by?SEMI. The billings figure is 3.6 percent higher than the final August 2020 level of 2.65 billion, and is 40.3 percent higher than the September 2019 billings level of $1.96 billion."September billings of North America-based semiconductor equipment manufacturers mark another month of growth,” said Ajit Manocha, SEMI president and CEO. “The semiconductor industry remains resilient despite challenges posed by the pandemic and geopolitical tensions.” unstoppable forces set to drive silver prices (Chart 12) The threat of economically crippling lockdowns, the promise of unending monetary stimulus, and the uncertainty of game-changing political outcomes – this is the “new normal” for investors.The COVID pandemic won’t be eradicated anytime soon. And even when it finally is, the economic and social costs will continue to be borne for years to come.In such an environment, all conventional asset classes carry heightened risk. Certain types of assets, though, may now be well positioned to shine.Among them is silver.With politicians and central bankers desperately trying to paper over real economic losses with artificial stimulus, the outlook for the value of the U.S. dollar looks bleak.A record $3.1 trillion federal budget deficit combined with an explicit new inflation-raising campaign by the Federal Reserve puts holders of dollar-denominated paper assets in jeopardy.Hard assets in general and precious metals in particular act as a natural countermeasure to currency depreciation.Some commodities, such as crude oil, have suffered greatly in recent years amid the push for “green” alternatives to fossil fuels. Dramatic growth in electric vehicles and solar energy installations is likely to continue, regardless of the upcoming election outcome.The upshot is that all viable alternatives to fossil fuels require massive amounts of metals – from copper to nickel to silver to rare earths.“Silver is found in virtually every electronic device. If it has an on/off button, it’s likely that silver is inside,” according to the Silver Institute. “Silver’s excellent electrical conductivity makes it a natural choice for everything from printed circuit boards to switches and T.V. screens.”As cars become more technologically advanced and more likely to be powered by batteries, they will require larger quantities of strategic metals including silver. The motor vehicle industry already consumes over 36 million ounces of silver per year – and that number will surely grow as global demand picks back up.The trend toward more metals-intensive energy development could accelerate if Joe Biden wins the presidency and Democrats take over the Senate.Biden now says he rejects the most extreme planks of AOC’s “Green New Deal” platform, including a ban on fracking. But he is still vowing to push through a multi-trillion-dollar green energy program of his own.Regardless of the election outcome, most of America’s largest corporations will continue to pursue environmental, social, and governance (ESG) targets. In recent years, shareholder activists including government pension funds have successfully foisted their ESG demands upon corporate America.It’s why today fast-food companies feel compelled to virtue signal their support for everything from reducing their carbon footprint to implementing critical race theory to celebrating transgenderism. What does any of this have to do with selling burgers?It has to do with the fact that taking up politically fashionable causes is nearly a prerequisite for doing business as a publicly traded company. A low ESG score means being protested by activists and shunned by institutional investors.A company can score ESG points by making commitments to “diversity” or capital investments in solar panels, for example. This means that demand for green technologies can far exceed the actual utility they deliver.Demand for photovoltaic solar systems is expected to explode in the years ahead. This year solar-related stocks have been among the hottest performers in the market.But as demand continues to grow, the solar industry could soon run into a serious supply problem in critical metals including silver.Photovoltaics are one of the fastest growing sources of industrial demand for the white metal. Silver saw a 7% increase in such demand last year to over 85 million ounces.Meanwhile, investment demand for silver bullion has been surging in recent months at the same time as mining supply is contracting due to adverse economic and political (lockdown) conditions.Silver often trades in a volatile manner. That volatility could be amplified depending on how the election turns out and how much of a toll the virus takes in the coming weeks.Regardless of whether the futures market reads a particular development as “good” or “bad” on any given day, three major long-term drivers of silver price appreciation appear unstoppable:The Fed will continue to pursue inflationary stimulus regardless of the election outcome.Insatiable demand for solar energy and various electronic applications will continue to use up more silver.A mining supply deficit in silver will contribute to market tightness and possible bottlenecks that render refined silver products difficult to obtain by investors and industrial users alike.At some point, higher silver prices will send market signals that alleviate the supply and demand crunch. But that point may be years away – and multiples of price appreciation ahead. Stronger demand x/China needed to sustain run-up in Copper price (Chart 13)Stronger demand is needed from outside China to hold up copper prices or push them higher, participants at the London Metal Exchange China Focus webinar said October 22.While a strong Chinese demand recovery has boosted the red metal's price from its late March COVID-19 doldrums, the sustainability of this recovery is now being questioned, they said.The LME copper cash price stood at $6,886/mt October 22, down $67/mt from the previous day, but still nearly 50% higher its late-March levels. Some analysts forecast earlier this week it could reach $7,500/mt next year on short supplies, despite signs that China's economic recovery"We do acknowledge that recently China's credit impulse seems to have peaked," said Citibank commodities strategist Tracy Liao on the October 22 LME panel, noting there has been a recent slight shifting from the country's earlier monetary easing policy to a more conservative, hawkish monetary stance.China's GDP growth is seen slowing to 2.1 % this year, she said. Last year it grew 6.1%, according to World Bank and International Monetary Fund data."Apparent demand for copper (in China) rose very strongly for the first eight months on restocking but actually slowed a bit in September with some restocking coming to an end, and maybe we may see some destocking: we also saw State Reserve Bureau stepping in to buy some copper," Liao said. The SRB "bought a good 300,000 mt cathode from the import market", she said.Good news on China already 'priced in'Caroline Bain, chief commodities economist from Capital Economics, considered that "the good news about China is pretty much priced into metal markets.... to have another leg-up in (metals) prices we need to see some sort of recovery in the rest of the world which.... could occur only towards the end of next year, when there could be another price recovery as the U.S. and E.U. economies pick up," she said.This year the U.S. economy is set to fall nearly 6% on-year, with falls of close to 10% in France, Spain and the U.K., and this is unlikely to lend further support to metals, according to Bain."With the second wave of virus infections we think growth in Europe has stalled at a lower level than it was pre-virus," she said, noting that growing unemployment in the western world will reduce disposable incomes which could impact copper consumption......"and it will take longer for developing nations to bounce back given that they don't have the fiscal policy support provision that the developed economies have been able to roll out." Bain's sentiment was echoed by Sucden Financial's Geordie Wilkes. "The strength at the moment is in China: to really cement the recovery we need more from Europe and the U.S.," Wilkes said. "If we see more restrictions in Europe and going into 2021 we're looking at softer consumer demand from the Western world."The current scenario in the U.S. and Europe means that copper's recent upwards price trend — which pushed the metal close to $7,000/mt this week — is unlikely to be sustained, he said. The rally had occurred on improving risk appetite in late Q2 and Q3, combined with a tightness of supplies caused by mine restrictions related to the COVID-19 pandemic, and the impact of a weaker dollar, the Sucden analyst said.China's next 5-year economic plan, to be announced next year, should nonetheless boost copper-intensive infrastructure developments in China, Wilkes noted.Construction accounts for 30% of China's copper consumption and there should also be an upside in metals demand as China proceeds with some aggressive new targets announced for windpower, electric vehicles and energy storage, the analysts said.Giu Liangmin, deputy managing director of Minmetals U.K. Ltd., noted that China accounts for 30% of Tesla's overall E.V.s production, which he described as "very copper intensive." ................
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