Rare Earths Wreck Havoc, Labour’s Tax Trap, Canola Clash with China, Inflation on Ice, Ireland Collects — Baker Ing Bulletin: 6th September 2024
Strap in for this week’s Baker Ing Bulletin, where we’re cutting through the noise and diving headfirst into the stories shaking up trade credit.
From industry tremors in rare earths to government tax traps and trade spats heating up, we’re here to connect the dots so you can stay ahead of the curve.
With markets in flux and credit risk on the rise, there’s no time to waste.
Let’s get straight to the good stuff…
China’s Antimony Power Play ???
As Beijing tightens its grip on rare earth materials, the global implications are stark, especially for those connected to antimony — a critical element in batteries, solar panels, and even nuclear weapons. With China announcing export licenses for antimony, effective from September 15th 2024, industries worldwide are bracing for impact. This move by China, which controls nearly half of the global antimony market, has seen prices soar to over $25,000 per tonne, more than doubling in a year.
Antimony is a linchpin in several industries, each facing its own set of challenges in light of these restrictions. The automotive sector, already grappling with disruptions from semiconductor shortages, now has to contend with potential shortages of lead-acid batteries, in which antimony plays a crucial role. Without sufficient supply, production delays are likely, leading to increased costs and longer delivery timelines. Brake pads, another essential car component that relies on antimony, may see a similar supply bottleneck.
The renewable energy sector is also on high alert. Solar panel manufacturers depend on antimony for the production of ultra-clear glass, which enhances the efficiency of solar cells. With antimony prices skyrocketing, solar companies could face significantly higher production costs, stalling new projects or forcing them to pass costs on to consumers. For an industry that’s already operating on tight margins, this could slow down the global push towards greener energy solutions.
Beyond the immediate impacts, the ripple effects of export controls could cascade through adjacent sectors. The electronics industry, for example, is likely to feel the pinch. Antimony is a vital material for certain types of semiconductors and fiber optics. As production costs rise due to scarce supplies, tech companies may face delays in the rollout of new products, especially those reliant on advanced chips. Consumer electronics, already contending with tight semiconductor supplies, could see prices rise and product releases delayed.
Finally, let's not forget that raw material scarcity often triggers a domino effect in logistics. The transportation sector may also face disruptions as shipping routes adjust to the changing flow of antimony supplies. With China holding the cards on global production, Western manufacturers may have to source antimony from smaller, less reliable suppliers, increasing lead times and complicating shipping logistics. Expect heightened costs in warehousing, insurance, and transportation fees as companies try to keep supply chains moving under strained conditions.
We expected companies in the impacted industries to resort to renegotiating credit terms as they seek to stretch their cash flow. This manifests in requests for extended payment deadlines or reduced payment instalments, in industries where antimony is critical to the production process. Credit managers should consider revising risk assessments to factor in the potential for delayed production, rising costs, and shifts in consumer demand across multiple industries.
Indirect risks could also emerge as supply chain delays compound across sectors. As companies grapple with longer lead times and increased costs, the ripple effect may impact sectors far removed from antimony production, such as logistics, retail, and construction. Firms in these industries may see disruptions in their own supply chains or struggle to pass on increased costs to consumers, leading to a rise in credit risk profiles.
As China flexes its muscles in the rare earths market, the global response will be key. Diversifying supply chains is no easy task when China dominates the market, but companies may start exploring alternative suppliers, albeit at a higher cost. In the meantime, we will need to remain vigilant, keeping a close watch on geopolitical developments, pricing trends, and the financial health of their clients.
Expect more turbulence ahead as businesses, governments, and credit professionals alike adjust to a new reality where access to critical materials like antimony can swing global trade dynamics.
Labour’s Tax Trap: UK Finance Feels the Squeeze ????
As the Labour government mulls over tax hikes, business leaders are sounding the alarm, warning that increases in capital gains tax, inheritance tax, National Insurance, and a possible raid on pension savings could spell disaster for the UK’s competitiveness.
The fear is clear; hobbling the UK’s status as a financial powerhouse could create a massive disadvantage in the global marketplace. Lloyd’s of London, a historic linchpin of the UK’s financial services sector, relies on Britain’s role as a gateway to the world. Their CEO has warned that overly aggressive tax policies could discourage international businesses from setting up shop in London. In an increasingly interconnected global economy, businesses can relocate to more tax-friendly environments with ease, leaving the UK high and dry.
This paints a worrying picture. The financial services sector plays a pivotal role in the UK’s economy, and the potential loss of investment could have significant knock-on effects. If firms start packing their bags for more welcoming shores, it won’t just be the City of London feeling the pinch—there could be ripple effects across sectors, from insurance to asset management, impacting credit conditions across the board. The prospect of businesses leaving the UK could lead to weakened balance sheets, delayed payments, and increased risk of default for firms that rely on these industries as clients.
Private equity is also deeply intertwined with many industries across the UK, and changes in tax policy could have broader implications for how capital flows into businesses. For credit managers, this poses a dilemma: as private equity play a crucial role in funding new ventures and expansions, any reduction in activity could dampen investment, leading to a tighter credit market and reduced liquidity. This, in turn, could place additional pressure on firms that rely on private equity backing for growth, leading to potential credit risks down the line.
Meanwhile, the UK’s energy sector is grappling with the fallout from the windfall tax on North Sea oil and gas, introduced in 2022 and now set to increase under Labour’s plans. The tax, which has lifted the overall tax rate on energy profits to a staggering 75%, is hitting oil and gas companies hard—taking ￡13bn out of the economy, according to industry body Offshore Energies UK. Labour’s proposed hike to 78% would only add salt to the wound.
The energy sector’s role as a cornerstone of the UK economy cannot be overstated, and any fiscal squeeze on oil and gas firms will reverberate far beyond the industry itself. For credit, the implications are stark. With companies like Enquest already paying significant sums in tax—￡61.5 million of their ￡84.6 million half-year profit went to the Treasury—the financial strain on energy firms could translate into delayed payments to suppliers, decreased liquidity, and heightened risk of default. Credit professionals dealing with clients in the energy sector should brace for potential turbulence, closely monitoring cash flow and adjusting credit terms to mitigate the risks associated with a heavier tax burden.
Labour’s proposed tax hikes, whether aimed at financial services, private equity, or energy, will reshape the landscape for businesses and credit managers alike. Increased tax burdens lead to decreased competitiveness, slower investment, and higher operational costs—all of which have the potential to affect creditworthiness and payment behaviours.
Monitoring sectors like finance, energy, and private equity for early signs of distress will be crucial in managing portfolios and adjusting credit strategies. The looming threat of firms relocating, decreased investment, and rising costs will require a proactive approach to mitigate credit risks, while at the same time ensuring that businesses maintain access to the capital they need to stay afloat.
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Canada and China Trade Punches ????
China’s decision to launch an anti-dumping probe into Canadian canola and chemicals marks the latest salvo in an escalating trade war. Canada, following in the footsteps of the U.S. and EU, had slapped a 100% tariff on Chinese electric vehicles, accusing Beijing of playing dirty on environmental and labour standards. In a retaliatory move, China is now taking aim at Canada’s canola, one of its major exports. For businesses dependent on Canadian exports, especially agriculture, this could lead to significant supply chain disruptions and heightened costs.
China’s retaliatory measures come at a crucial time for global trade. Canola, a versatile product used in cooking oils, animal feed, and biodiesel, plays a pivotal role in the food and energy sectors. A long-term blockade on this crop could lead to supply shortages and price hikes in multiple industries, especially in countries that rely on Canadian imports. More broadly, China’s move adds another layer of complexity to the already tense trade relationships between Western nations and Beijing, complicating credit terms, supplier contracts, and payment schedules for companies involved in the affected sectors.
The evolving trade spat demands heightened vigilance. Companies dependent on Canadian imports to China could face liquidity issues as tariffs make their goods less competitive. Similarly, the introduction of anti-dumping investigations means prolonged uncertainty for exporters, potentially impacting payment cycles and raising the risk of defaults. Monitoring the financial health of clients in the agricultural and chemical sectors will be critical in managing exposure to these geopolitical risks.
But it doesn’t end there...
China’s steel industry, already facing domestic challenges, is stepping into the fray with record-high exports to Europe and beyond, despite the retaliatory tariffs imposed by multiple countries. China’s steelmakers are in overdrive, compensating for falling domestic demand by flooding international markets. Europe, Southeast Asia, and North America are feeling the heat, with steel prices dipping due to oversupply.
The surge in Chinese steel exports is a double-edged sword. While it may lead to lower prices for steel consumers in the short term, it spells trouble for domestic producers who are unable to compete with China’s cutthroat prices. For industries reliant on steel—automotive, construction, and machinery—this presents a unique opportunity to capitalise on cheaper inputs, though the long-term viability of such pricing remains questionable. Chinese steelmakers are reportedly facing losses on a scale not seen since previous industry crises, raising concerns that this price war may not be sustainable.
For credit, this is a complex puzzle. While cheaper steel can improve margins for businesses in construction and manufacturing, the prolonged dumping of Chinese steel into global markets could weaken local industries, increasing default risks for domestic steel producers who can’t keep up. Supply chain volatility and potential political retaliation further complicate the landscape, making it crucial to keep a close eye on sector performance and adjust credit strategies accordingly.
As China continues to flex its trade muscles, global supply chains are being caught in the crossfire. The tension between Canada and China, combined with the flood of Chinese steel, presents a multifaceted challenge for trade credit professionals. On one hand, cheaper steel and competitive pricing offer short-term gains; on the other, retaliatory tariffs and dumping investigations heighten the risk of defaults and supply chain disruption. Navigating this environment requires a proactive approach, reassessing client portfolios and building in contingencies to mitigate the risks of an increasingly volatile trade landscape.
Inflation Cools, But Credit Heat Still Rising ????
Inflation numbers across the US and Europe are showing some welcome relief, setting the stage for policymakers in both regions to consider lowering interest rates in September. In the US, the Federal Reserve's preferred measure of underlying inflation advanced by just 1.7% in July, the slowest rate this year. Meanwhile, in Europe, consumer prices rose by 2.2% in August, a significant drop from July’s 2.6%, marking the lowest inflation rate since mid-2021. On the surface, this might seem like a breath of fresh air for businesses and consumers alike, but for trade credit, these developments signal a more complex story.
A potential rate cut in both the US and Europe should, in theory, make borrowing cheaper and stimulate investment. However, it may also exacerbate the looming challenges in cash flow management and credit risk, particularly for sectors with thinner margins. We must anticipate that while lower interest rates might reduce the cost of borrowing, they could also fuel an increase in corporate debt. The key question for trade credit is whether businesses will leverage this cheaper capital effectively or stumble under the weight of growing liabilities.
As inflation cools, spending behaviours may start to stabilise, but there are warning signs. In the US, for instance, household spending picked up in July, but slowing income growth and a dip in the savings rate raise questions about how durable this consumer spending will be. For credit managers, this poses a challenge: a temporary rise in consumer spending might boost short-term business revenues, but without a solid foundation in income growth, businesses could quickly find themselves unable to meet future obligations. Companies with exposure to consumer goods, retail, and sectors driven by discretionary spending may be particularly vulnerable to sudden downturns in consumer confidence.
Across the pond, Europe's inflation drop provides some respite, but it’s far from a complete picture. The ECB's potential rate cuts offer relief for businesses struggling with high borrowing costs, but core inflation — which excludes volatile sectors like energy and food — remains elevated at 2.8%. This suggests underlying price pressures are still present, particularly in services, which continue to rise. The takeaway is clear; the drop in headline inflation doesn’t mean that all is well beneath the surface. Credit terms and collections policies may need to be adjusted to account for continued price increases in sectors like hospitality, transport, and services, which could further squeeze margins.
Looking to Asia, Japan’s inflation is picking up again, with Tokyo’s consumer prices excluding fresh food rising by 2.4% in August. This suggests the Bank of Japan might continue its gradual rate hikes, in contrast to the easing expected in the US and Europe. The impact on trade credit is less direct but equally important. As Japan navigates its own inflationary pressures, businesses that rely on imports from or exports to Japan may need to brace for tighter credit conditions, as Japanese companies pass on the higher costs of borrowing to their clients.
The situation in China further complicates the global picture. China’s weakening property market and contracting mortgages have eroded confidence in the economy. For businesses with exposure to Chinese imports, the risk of credit defaults looms large as China’s property sector wobbles. Meanwhile, Beijing’s push for domestic traders to buy less foreign grain may lead to ripple effects in the agriculture and food sectors, particularly for exporters in the US and Australia, who rely on China’s demand for barley and sorghum.
The overall landscape is one of cautious optimism tempered by substantial risks. Whilst the prospect of lower interest rates in the US and Europe may provide short-term relief, deeper structural issues like slowing consumer income growth, persistent core inflation, and ongoing geopolitical uncertainties present real challenges. The divergent paths of inflation and monetary policy across the globe further muddy the waters. Japan’s potential rate hikes, China’s economic slowdown, and the knock-on effects of policy shifts in the US and Europe all contribute to a highly dynamic and uncertain environment.
In this complex global economic maelstrom, companies in sectors like consumer goods, real estate, and services, where credit risks could rise in the face of slower income growth and persistent inflation, will need more scrutiny. Moreover, monitoring the geopolitical landscape, especially trade relations with China, will be crucial. The headline inflation numbers may be improving, but the real story lies in the intricate, shifting dynamics underneath.
Debt Recovery: Irish Collection Game On Point ????
Navigating Ireland's debt recovery landscape demands more than just persistence—it requires precision, strategy, and expert insight. At Baker Ing, we go beyond solutions; we offer a roadmap that safeguards your financial interests and optimises your recovery process. For a deeper dive, visit CreditHub Ireland . In the meantime, here are five essential tactics that will give your collections the competitive edge:
For more tips and insights, visit our Ireland CreditHub or connect directly with Clare Berry for guidance.
And with that, we’ve untangled another web of market shifts and credit challenges. But before you log off and unwind, remember: staying ahead in this game means staying informed. Why not sharpen your edge? Explore our Global Outlook library or dive into the latest insights at CreditHubs — where every nugget of knowledge adds to your bottom line.
Until next time, keep your risks calculated, your strategies sharp, and your credit solid. See you at the top!
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