Manufacturing Weekly Economic Highlights | 8 July 2024

Welcome to our weekly manufacturing and economic newsletter, providing key insights and analysis on the latest developments in the global market. Stay updated and make informed decisions!

In this edition, we focus on the economic conditions in America, Europe, China, Thailand, as well as updates on the energy and logistics markets.

Americas

“USD closed moderately lower this week”

“USD set to rebound on political risks and persistent inflation”

“US trade deficit hits highest level since Oct 2022 on weak exports"?

“US unemployment rises to 4.1% as BLS again revises prior job gains downward”

The USD Index (DXY) finished moderately lower this past week, from 105.87 on 28 June 2024 to close at 104.88 on 5 July 2024. The DXY is down 0.94% for the week, down 0.01% for the month, up 3.50% YTD, and up 2.55% over the past 12 months.

The USD was down nearly 1% this week amid market concerns that the US services sector contracted in June at the fastest pace in four years, as reported on 3 July by Bloomberg. Investors believe that increasing signs of an economic slowdown will prompt the US Fed to cut rates before year end.

However, currency strategists believe that this week’s losses are just a temporary setback, as US political risk and persistent inflation trends continue to provide support for the USD, as reported by Bloomberg on 5 July. The US economy is slowing but not stalling, hence the Fed is maintaining a cautious stance.

Meanwhile, the US trade deficit in May expanded to the largest gap since October 2022 as merchandise exports declined by 0.7%, more than the 0.3% decline in imports, as reported by Bloomberg on 3 July.

The widening trade deficit is expected to be negative for 2Q24 GDP, as exports of industrial supplies, aircraft, and automobiles declined. The strong USD and weak economic fundamentals in overseas markets limited demand for US products.

The Wall Street Journal reported on 5 July that the US unemployment rate in June increased to 4.1% despite the addition of 206,000 new jobs. Average hourly earnings were up 3.9% YoY for the smallest gain since 2021.

Job growth continues to be driven by three sectors: healthcare, government, and leisure/hospitality. All three of these sectors remain low relative to pre-Covid as they were slower to rebound post-pandemic.

Goldman Sachs estimated that pre-pandemic, slowing population growth meant that the US economy only needed to add 70,000 to 80,000 jobs per month to maintain a steady unemployment rate. However, as a result of illegal immigration under the Biden administration, they now estimate that the US needs to generate 200,000 jobs per month to maintain a steady unemployment rate.

Omitted from most news articles this week concerning US employment was the revisions to the April and May employment statistics. The Bureau of Labor Statistics, in its publication “The Employment Situation – June 2024” dated 5 July 2024, noted that April employment was revised down by 57,000 jobs and May was revised down by 54,000 for a combined downward revision in US employment of 111,000. This is an ongoing trend of consistently overestimating monthly job growth, then quietly revising the statistics downward in subsequent months.

Europe

“EUR ended moderately higher this week relative to the USD”

“German 2025 budget to include measures to boost the economy”

“German industrial production down 6.7% YoY and 2.5% MoM”?

“Chemicals and metals up 3.5% amid falling energy prices”

The EUR finished moderately higher again this week, from $1.072 per EUR on 28 June 2024 to close at $1.084 per EUR on 5 July 2024. The EUR is up 1.16% for the week, up 0.20% for the month, down 1.79% YTD, and down 1.19% over the past 12 months.

Bloomberg reported on 5 July that the German Coalition government concluded a budget agreement following weeks of discussions. The new budget includes measures to boost the economy.

Negotiations were delayed amid discussions over restoring a strict limit on net new borrowing that had been suspended in response to the Covid and Ukraine energy crises.

The budget, which must be endorsed by the cabinet, includes investments in public infrastructure, expansion of tax write-offs for companies, easing of the corporate tax burden, elimination of red tape, and tax incentives to extend their working lives.

Meanwhile, German industrial production fell 2.5% MoM and was down 6.7% YoY in May led by a decline in auto manufacturing. Car production was down 5.2% MoM with machinery down 5.9% MoM, as reported on 5 July by The Wall Street Journal.

Chemicals and metals production was up 3.5% during the period March to May, suggesting that lower energy prices are finally enabling these energy-intensive industries to be competitive.

However, financial conditions including high interest rates have restrained investment.

On 7 July The Wall Street Journal published an article highlighting the “crushing debts” awaiting new European leaders.

France and the UK both elected new parliaments, currently have budget deficits which are significantly above pre-pandemic levels on both an absolute basis and as a percentage of GDP. France’s 2024 public deficit is estimated at 5% of GDP with the UK just behind at 4.5%, both of which are significantly above the EU’s benchmark of not exceeding 3% of GDP.

Standard & Poor’s cut France’s sovereign debt rating to AA- in May over concerns of France’s excessive borrowing.

France’s public debt has grown from 65% in 2007 and 97% in 2019 to 112% in 2024. UK’s public debt has grown from 43% in 2007 to 86% in 2019 and 104% in 2024.

The article notes that though France and the UK are struggling with deficits and debt, the US is in worse shape. The US’ public debt has grown from 108% in 2019 to 123% of GDP in 2024, with projections of the US 2024 deficit at 6.5% of GDP. However, the US “gets away with unsustainable fiscal policies for longer than anyone else would,” due to the USD’s status as the Reserve Currency.

China

“The CNY closed sideways this week”

“Services PMI plummets amid rising competition and weak economic conditions”

“Small Chinese banks with NPL’s up to 40% are being absorbed into larger banks”?

“Are foreign investors still welcome in China?”

The CNY ended sideways this week, from 7.267 per USD on 28 June 2024 to close at 7.269 per USD on 5 July 2024. The CNY is down 0.02% for the week, down 0.29% for the month, down 2.19% YTD, and down 0.66% over the past 12 months.

The Caixin China Services Purchasing Managers Index (PMI) fell from 54 in May to 51.2 in June, the lowest level in eight months and worse than economists’ predictions, as reported on 2 July by Bloomberg.

The slowing services sector raises worries about the prospects for the Chinese economy. Service provider confidence fell to the lowest level since March 2020 amid rising competition and expectations of weaker economic conditions.

Meanwhile, The Economist on 3 July published an article about Chinese small banks being absorbed by larger banks as the buckle under the weight of non-performing loans.

China has 3,800 small banks with a combined $7.5 trillion USD of assets equivalent to 13% of the total banking system. Many of these banks have excessive exposure to real-estate developers and are mired with up to 40% non-performing loans. In the week ending 24 June 40 Chinese banks were absorbed into larger banks.

Chinese regulators are forcing banks to consolidate because they lack mechanisms to allow banks to fail.

Bloomberg reported on 3 July that Chinese officials are flying overseas in a quest to attract foreign investment. However, policies promoted by President Xi are causing prospective investors to question whether China really welcomes foreign investment.

As reported last week, Chinese FDI in May fell to its lowest monthly level since mid-2018. Sun Yun, director of the China Program at the Stimson Center in Washington DC said, “once investor confidence is lost, it is not that easy to restore.”

Investors are also wary of the pending US election that could see the new administration hiking tariff rates on Chinese goods.

Chinese companies are also seeking overseas investment opportunities amid sluggish domestic demand. Chinese firms invested $60.2 billion USD in overseas FDI in the first five months of 2024, an increase of 16% YoY.

China has stopped publishing data on its solar energy utilization as grid limitations are causing some solar farms to cease production during daytime hours, as reported on 30 June by Bloomberg.

For the first four months of 2024 the average Chinese solar panel generated electricity for 373 hours, down 10% YoY as production was curtailed due to grid limitations.

China has vowed to continuous supporting both rooftop and large-scale solar projects and plans to construct more power lines and energy storage facilities.

Thailand

“The THB ended moderately higher this week”

“May exports up 7.2% YoY”

“Manufacturing Production Index down 1.54% YoY”

“BYD opens $490 million EV factory in Thailand”

The THB ended moderately higher this week, from 36.74 per USD on 28 June 2024 to close at 36.46 per USD on 5 July 2024. The THB is up 0.76% for the week, up 0.98% over the past month, down 6.05% YTD, and down 3.87% over the past 12 months.

Thailand’s Manufacturing Production Index (MPI) declined 1.54% YoY to 98.34 in May, indicating that the industrial sector continues to struggle with household debt issues, high interest rates, and rising energy costs, as reported on 30 June by the Pattaya Mail.

Industries including palm oil, animal feed, and steel expanded in May, with automotive, electronic components and circuit boards, concrete, cement, and plaster industries declining in May compared to 2023.

Meanwhile, May exports grew 7.2% YoY supported by demand for computers, equipment products, machinery and aluminum products.

In related news, The Nation reported on 30 June that industries where the number of factory openings exceeded closures include the food industry, the chemical and chemical-products industry, the textile industry, the wood-processing and wood-products industry, paper and paper-products manufacturing, the beverage industry, the petroleum-products industry, the plastic-products industry, the non-metallic products industry, the basic metal industry, the metal-products industry, the machinery and mechanical equipment industry, and the electrical appliances and equipment industry.

Products from these factories are in demand both domestically and internationally and have future growth potential supporting medium and large-sized factories.

China’s BYD opened its first SE Asian EV factory in Thailand, as reported on 4 July by Reuters. The factory cost $490 million USD and has a capacity of 150,000 vehicles per year including plug-in hybrids. The facility will also assemble batteries and other parts.

Chinese EV makers have invested more than $1.44 billion USD in Thailand, benefiting from government subsidies and tax incentives. Thailand aspires to produce 2.5 million vehicles per year by 2030 with 30% of total production being EV’s.

Commodities

“Special Segment: Half Year Commodities Review”

“Base metal prices, energy, and food prices 40% above pre-pandemic levels”

“Cobalt and Lithium prices crash amid excess supply and weaker than expected EV demand”

“Can Norway disrupt China’s stranglehold on Rare Earth Elements?”

Commodity prices remain high despite tepid global growth, with energy, food, and base metals prices predicted to stay near 40% above 2015 – 2019 levels over the coming year, as reported on 5 July by MoneyWeek.

The article notes that oil supplies remain tight, with the OPEC+ cartel withholding more than six million bpd of supply equivalent to nearly 7% of global demand. Geopolitical shocks and risks are also supporting commodity ricing, including the disruption to energy and grain markets arising out of Russia’s illegal invasion of Ukraine. Demand for metals to support the energy transition is also underpinning commodity prices.

The SP GSCI Index, which tracks 24 major raw materials, fell 12% in 2023 but has rebounded more than 10% in 1H24. Copper is up 14.5% YTD, with gold up 13% YTD. Despite the slowdown in the China property sector, industrial metals will continue to strengthen in 2H24.

Bloomberg reported on 1 July that hedge funds are “hoarding” cobalt amid a slump in batter metals pricing. Cobalt prices have fallen to their lowest level in seven years as production from the Democratic Republic of Congo and Indonesia floods the market. The CME Group’s Comex exchange is now trading cobalt futures, enabling traders to hedge their physical positions.

Weaker-than-expected EV sales combined with surging cobalt supply have led to a record surplus of cobalt. The rising popularity of lithium-iron phosphate batteries, which do not require cobalt, also pose a threat to cobalt demand.

In related news, The Wall Street Journal reported on 5 July that lithium prices have fallen to a three-year low amid surging demand with no sign of a bottom yet. Despite falling prices and weak demand, lithium producers have maintained production levels and have sought to cut costs and delay expansion projects to “ride out” the downturn.

Citi analysts predict that lithium futures could fall 15% to 20% before rebounding sometime in 2025 if demand for EV’s improves.

Rare Earths Norway reported that it has found “a truly transformative asset that can underpin a secure rare earths value chain for Europe,” as reported in the 12 July edition of Newsweek.

The company plans to supply 10% of European demand for magnet-related Rare Earth Elements (REE) in the first phase of its operation. China currently produces 60% of global REE and processes 98% of global demand, accounting for 98% of European and 80% of US REE imports.

The company expects to supply 30% of European REE demand by 2045.

Energy

“Crude ended modestly higher again this week”

“Henry Hub and EU Natural Gas ended moderately lower this week.

“Brent crude expected to hit $90 in 3Q24”

“US natural gas down 11% this week on weak demand"

Brent Crude finished modestly higher again this week, from $86.40 on 28 June 2024 to close at $86.86 on 5 July 2024.

Henry Hub finished moderately lower again this week, from $2.60 USD per MMBTU on 28 June 2024 to close at $2.33 USD per MMBTU on 5 July 2024.

EU Natural Gas finished moderately lower this week, from €34.51 per MWh on 28 June 2024 to close at €33.02 per MWh, equivalent to $8.93 USD per MMBTU. EU Natural Gas is up 2.0% YTD.

Crude oil posted another weekly gain on a solid demand outlook, with UBS and JPMorgan forecasting Brent crude to hit $90 during 3Q24, as reported on 5 July by CNBC.

Analysts are forecasting a tighter oil market as demand rises during the summer season. US inventory data appears to align with these forecasts, with crude and gasoline stocks both dropping last week.

UBS is forecasting global oil demand to grow by 1.5 million bpd this year, more than the long-term growth rate trend of 1.2 million bpd. This will continue to pressure inventories and provide support for pricing.

The number of supertankers delivering crude oil to China has dropped to its lowest level since August 2022, as reported on 5 July by Bloomberg.

This both highlights softness in Chinese oil demand and also presages downward pressure on oil prices.

Natural gas futures dropped nearly 11% this past week on a slowdown in demand ahead of the Fourth of July holiday, and hurricane Beryl could further impact demand in the coming weeks if it hits Texas as expected and disrupts refinery production, as reported on 5 July by MarketWatch.

The 11% weekly drop was the largest drop since February 2024, with prices down for four consecutive weeks.

Logistics

“BDI closed moderately lower this week”

“The CFI finished moderately higher again this week, more than doubling since late April”

“Houthi Red Sea attacks continue to disrupt ocean logistics”

“Maersk bails out of bidding for Schenker”

Baltic Dry?Index finished moderately lower this week, from 2,050 on 28 June 2024 to close at 1,966 on 5 July 2024. The BDI is down 6.11% YTD. Trading Economics has raised its BDI forecast this week to 2,151 by the end of 3Q24 and 2,484 in 12 months.

The Containerized Freight?Index finished moderately higher again this week, from 3,714 on 28 June 2024 to close at 3,734 on 5 July 2024. This index tracks the current freight prices for containerized transport from the most important Chinese ports. The CFI is up 112% YTD. Trading Economics has raised its CFI forecast this week to 3,875 by the end of 3Q24 and 4,401 in 12 months.

Houthi attacks in the Red Sea are continuing to impact the global chemical shipping industry, as reported on 5 July by Freightwaves. The ocean freight rates for 40-foot containers from Asia to North Europe are currently over $8,760.

ICIS chemicals expert and deputy editor Al Greenwood said, “The chemical industry uses containers to ship plastics such as polyethylene and polypropylene which are in pellets, put it in bags and ship it out. Some of the liquids are shipped in ISO tanks. We’ve seen for container ships and tankers a combination of higher rates, port congestion, vessels having to take longer routes — it’s causing all kinds of delays.”

Approximately 15% of the world’s ocean carrier traffic normally passes through the Red Sea according to the IMF. However, ships transiting between Europe and Asia are now going around the Cape of Good Hope on the southern tip of Africa, adding from 10 days to a month of travel time to each voyage.

A.P. Moller-Maersk A/S withdrew its bid for DB Schenker, the logistics unit of Deutsche Bahn AG, following participation in an in-depth due diligence review, as reported by Bloomberg on 1 July. DB Schenker has been valued at more than $16.1 billion USD.

Remaining bidders for DB Schenker include a consortium led by CVC Capital Partners Plc and Carlyle Group Inc., DSV A/S, and MSC Mediterranean Shipping Co.

Some analysts consider DSV to be the front-runner to acquire DB Schenker, based on its reputation as a “master integrator of its acquisition targets, often raising the group’s combined profit margin one the takeover has been digested.”

Maersk CEO Vincent Clerc said, “The in-depth review also identified areas of challenges from an integration perspective and ultimately, we concluded that acquiring DB Schenker would not be the right thing to do for our business at this time.”

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