Dragoman Digest
31 May 2024
Latin American countries put up Chinese steel tariffs in quick succession
Countries attempt to institute measures without disrupting wider trade with Beijing
Latin American countries are imposing significant tariffs on steel, as they respond to Chinese overcapacity - itself the result of China's weak construction sector and slower growth. Last month, three countries in the region announced provisional tariffs on steel products. Mexico will impose duties of 50 percent on products from countries with which it does not have a free trade agreement. Chile will introduce tariffs of 33.5 percent for steel balls and 24.9 percent on bars used to manufacture them. Brazil will increase duties from 11 to 25 percent on steel shipments with volumes larger than 30 percent of the 2020-2022 average. Meanwhile, some steelmakers in Colombia are anticipating new tariffs to be imposed on steel products this year. The measures aim to prevent a flood of cheap Chinese steel into Latin American markets and protect domestic industries. China has been able to produce steel at a much lower cost than Latin American countries due to large subsidies, a highly integrated supply chain, early mover’s advantage and economies of scale. Steel producers in Latin America collectively employ around 1.4 million people.
The tariffs will test the otherwise burgeoning trade relationships between Latin American countries and China. As diplomatic relationships between China and the region have become closer in the past few years, China has provided large markets for Latin American products ranging from wine to wood. China has also made significant investments in the countries, spending US$187.5 billion in Latin America and the Caribbean between 2003 and 2022. However, the tariffs risk retaliation from China, which has a history of responding in kind to restrictive trade measures. This risk is compounded by the fact that the steel industry is an important part of Latin America’s political economy and because China is the largest purchaser of Latin American steel products. That these countries acted quickly to head off cheap Chinese products is indicative of how Chinese overcapacity is impacting not only large and developed economies like the US and EU, but also developing countries such as those in Latin America that are building out manufacturing industries.
Increase in rolled steel imports in Latin American countries 2023 vs 2022
Source: Alacero, TDM, Bloomberg
China introduces series of measures to stimulate local chip manufacturing
Inferior quality of local supplies poses a significant hurdle
Beijing is progressively escalating its long-standing objective to be self-sufficient in semiconductors. The government has instituted a system that rewards domestic automakers such as BYD, GAC Motor, SAIC Motor, Dongfeng Motor and FAW Group for increasing their local procurement of automotive chips. Beijing has made a non-binding request for these companies to increase the local chip content to 20 percent or 25 percent by next year, with plans to scale up further. Currently, local companies only supply around 10 percent of automotive chips. Beijing is also going down into the weeds of supply chains in trying to totally excise foreign suppliers. Specifically, the central government is pushing chip manufactures to procure exclusively from Chinese manufacturers of chip materials and chemicals. Currently, this particular campaign targets the production of less advanced 55 and 40-nanometre chips but has the goal of targeting more advanced chips in the future. This policy has been given impetus by recent US sanctions, coordinated with European and East Asian allies, that have stymied China’s ability to make advanced semiconductors.
These policies have drawbacks. Chinese semiconductor material suppliers are known for producing lower quality products than leading foreign counterparts. Despite this, Chinese chipmakers are lowering their standards for verifying suppliers. Where chip manufacturers used to allow two attempts for suppliers to provide adequate samples, Chinese suppliers are now allowed virtually unlimited attempts. The success of this campaign will depend on the willingness of chip manufacturers and automakers to accept inferior products. So far, many companies seem to be having a bet each way as manufacturers are also ensuring that they maintain ties to Western suppliers. Given the intensity of domestic competition in China, significant advances in the sector should be expected.
Major European banks escalate climate commitments
BNP Paribas and Credit Agricole cease underwriting bonds for oil and gas producers
Two major French banks and Europe’s second and third largest by assets, BNP Paribas and Credit Agricole, have stopped underwriting bonds to upstream fossil fuel activities. The new policy is effective as of mid-May and will apply to upstream activities without dedicated carbon abatement or offset mechanisms. This decision marks an evolution of BNP Paribas and Credit Agricole’s existing policies. Both banks ceased providing direct project financing for new oil and gas fields in May and December 2023, respectively.
Traditionally, large European banks like BNP Paribas have been instrumental in providing underwriting services and direct funding to large fossil fuel projects. BNP Paribas and Credit Agricole underwrote more than US$270 billion in corporate bonds for fossil fuel companies last year alone. Between 2019 and 2023, BNP Paribas was the main financer of BP, Shell and TotalEnergies.
Other major banks are feeling the pressure to show greater commitment to decarbonisation. In early February, HSBC agreed to start disclose facilitated emissions in their annual reports. Facilitated emissions refers to emissions of projects where HSBC provides advice on capital raising. Although these policy changes will not prevent new fossil fuel projects, they may increase the complexity of project financing and the cost of capital. However, the effect could be limited by US banks, who are muscling in to a space that European banks are abandoning.
Thailand faces teething issues amidst supply chain shift
Meeting energy and water demands looms as key challenges as Thailand becomes a preferred alternative hub for printed circuit board production
The movement to diversify supply chains away from China has resulted in an influx of PCB investment into Thailand. PCBs are electronic boards that chips and electronic components are mounted on before a final product is assembled. If conflict were to breakout between China and Taiwan, the overconcentration of PCB production in these countries would severely disrupt supply chains. Tesla, among others, have told suppliers to start building components outside China and Taiwan due to rising geopolitical uncertainties. Thailand is an attractive alternative for PCB investment, given its small existing network of PCB production, sophisticated supply chains, low geopolitical risk, and competitive labour force.
Thailand’s industrial parks are not necessarily equipped for the proliferation of PCB investment. Between January 2023 and April 2024, 30 investments into PCBs have been announced in Thailand, mostly from Taiwanese companies. This should take Thailand’s global output to 4.7 percent by 2025, a 3.5 percent increase from 2022. There are specific concerns about whether Prachinburi and Ayutthaya province – where most PCB investment is located – have adequate supplies of reliable power and water. PCB factories run for 24 hours a day, there is a substantial risk of power shortages given the fragile nature of the electricity grid in these provinces. Furthermore, PCBs require purified water, with no positive or negative ions, to clear any residual chemicals from the PCBs. China and Taiwan faced similar challenges as their PCB production took off some three decades ago. Thailand faces near-term challenges but also a significant opportunity to upgrade its industrial base to facilitate more intensive manufacturing.
Number of PCB investments in Thailand by region
Source: Taiwan Printed Circuit Association
Jordan blocks weapon smuggling operation to Iran-backed proxy groups
Amman wary of Tehran’s ambitions to expand Axis of Resistance into its borders
Jordan has thwarted arms shipments to Iran-backed military proxy inside its borders, as it attempts to prevent the groups from gaining a foothold in the country. Over the past few months, authorities have carried out multiple raids against Iran-backed groups associated with the transnational Islamist movement, the Muslim Brotherhood, in the country’s northeast. These groups have attempted to smuggle arms across the Syrian border using groups sponsored by Iran. Most of the weapons are bound for the Palestinian West Bank to assist with uprisings against the Israeli Defence Force, but some are destined for use by the groups in Jordan. It is reported that some of the Jordanian-based groups planned acts of sabotage against the government, but none have yet been carried out. The groups also engage in drug smuggling to finance their operations.
Iran has long been attempting to establish a proxy group in Jordan as part of its so-called Axis of Resistance, a collection of Iran-aligned military groups across the Middle East. A Jordanian-based group would significantly help the alliance surround Israel, Iran’s main adversary. Other members of the axis include Lebanon’s Hezbollah, Yemen’s Houthis, Palestine’s Hamas and various other groups across Iraq, Syria and Bahrain.
Amman sees countering Iranian influence as key to its own security. Last month, Jordan also cooperated with the US, UK, France, Israel and a coalition of Arab countries to shoot down over 300 munitions fired from Iran towards Israel. Many of these passed over Jordan. However, these actions, although ostensibly important to ensuring the Kingdom’s security against outside influence, at the same time risk domestic discontent against the government. Amman is in the precarious position of trying to prevent Iranian escalation whilst also ensuring that its population, mostly of Palestinian descent, do not view the government as complicit in Israel’s campaign in Gaza.