Commercial Awareness for the Unaware

…amidst food security concerns which threaten unrest.

Sales of meat substitute products increase by 200% in the US amid government mandated closures of slaughterhouse facilities. Bruce Friedrich from the Good Food Institute credits the pandemic with accelerating the trend.

The automated nature of alternative meat product production removes supply chain problems faced by much of the food industry.

In context:

1)   US meat production has seen a massive fall as capacity cannot be met. The retail price of meat has significantly risen in comparison to the major price drop for livestock. Ron Prestage of Prestage farms warns of “tight supplies at grocery stores” for an extended period of time.

... as evidenced by the fact that it is now the UK’s biggest company by market capitalisation, now larger than Royal Dutch Shell. 

Their CEO, Pascal Soriot has been credited with much of the company’s recent success, much of which occurred prior to the coronavirus crisis. He is credited with shifting the company’s focus to be more in line with its competitive strengths, namely cancer medicines and those to do with respiratory issues. 

They are also currently collaborating with the University of Oxford on a vaccine to fight the coronavirus. 

In context:

1) These market fluctuations are indeed a sign of the times. As the FT writes, “a gain of 15 per cent so far this year values the Anglo-Swedish company’s equity at around £115bn. Shares in Shell, down 46 per cent over the same period, are now worth just £92bn.” Pharmaceutical stocks could indeed be seen as the beneficiaries of the Covid-19 crisis. There are also signs that investors have ‘blind faith’ in Big Pharma whilst possessing a growing dislike of Big Oil. 

... as Covid-19 lockdown measures has resulted in increased demand in the gaming industry. 

As businesses and schools have shut, Sony has reported a sharp rise in time spent on gaming. Whilst there have been supply-chain issues with the PS4, console nears the end of its life cycle so these shocks are said not to be of significance.

Serkan Toto, a games industry consultant, says that changes will have to be made. It may be that the console is only to be sold in Europe and the US, and the launch could be pretty heavily scaled back. “This is not an ideal situation for anybody”, he said.

In context:

1) Sony is not alone. Microsoft are also intended to release their new model of the Xbox, the Xbox Series X. In the race to sell more than 100m units, the PS4 easily outdid its Microsoft Xbox counterpart. It is unclear what effect the coronavirus will be to their respective target customers. 

... by Boeing on the advice of Shearman & Sterling. 

The $25bn USD offering is the sixth-largest investment grade bond offering. It includes debt instruments and maturity dates from 3-40 years. Boeing has stated that it does not intend to get any further funding through the US government or capital markets. 

CEO David Calhoun stated that the pandemic is affecting every part of their business. However, he also noted that “air travel has always been resilient.” 

They have also introduced cost saving measures, such as forgoing CEO and Chairman pay this year. 

In context:

1) The bond offering is one of many steps taken to increase liquidity. Potential investors were told that “the additional liquidity from this financing and other potential unsecured liquidity sources, including those that may be available from government-sponsored programmes such as facilities from the Federal Reserve, provides us with enough cushion to manage our business for the foreseeable future” by David Dohnalek, a senior vice-president at Boeing. 

...as the rivalry between China and America deepens, and the rise in nationalism and decline in multilateralism proliferates.  

 Health experts and students of the Covid-19 pandemic are becoming increasingly more concerned over the state of global relations amid crumbling economies and strained health care systems. The impetus for developing a vaccine raises the question of whether countries will choose to act in their unilateral interests or embrace a more collaborative, international approach. Unpromisingly, evidence suggests favour for the former, with America’s threat to cease annual funding of the WHO operating as one example of how fragmented global efforts are to finding a cure. 

 Health experts criticise such an approach for being short-sighted, stoutly noting the pandemic as a global issue, and one whose fix will require a global scale of manufacturing. As Chalkidou, the director of global heath at Centre for Global Development, said: countries are “going to run out of glass vials.”  

 Nationalistic attitudes and meagre co-operation in the early stages of the covid-19 pandemic sets a poor stage for what will happen when vaccine distribution begins. Previously, Germany accused the USA of ‘modern piracy’ when masks destined for Berlin’s police force were diverted to America. France too seized millions of masks belonging to a Swedish healthcare company. Most tellingly, when CureVac, a German biopharma company, was rumoured to be bought by the USA, the economic minster stated that ‘Germany is not for sale.’ 

 Encouragingly, EU countries and the WHO seem to be keeping the multilateral approach alive, with a series of fundraising summits – one raising €7.4B for the commitment of developing a vaccination and encouraging equitable access for poorer countries. 

 In context: 

 1. Fairer distribution systems: given the absence of a formal system for vaccine distribution it is unlikely that vaccine supply will meet global demand. In light of the Swine Flu pandemic, there is fear that vaccines will be more readily available to riches countries. If such is the case, income and wealth inequality is likely to heighten between the developed and developing economies, ultimately impacting global economic growth and living standards. 

... that sub-zero prices could occur yet again. 

The US’s Commodity Futures Trading Commission (CFTC), a commodities regulator, has issued a warning to brokers, clearing houses, and exchanges. It said that extreme price volatility is to be expected, and negative pricing is indeed a threat again. However, the US Energy Information Administration stated on Wednesday that stocks at Cushing declined by 3m barrels last week to 62.4m barrels.

In context:

1) Capacity constraints at the tank storage complex of Cushing, Oklahoma (the delivery point for WTI futures) caused the May contract to find itself in negative territory. The WTI futures are the most active commodity derivatives in financial markets; it is thus the benchmark that informs traders worldwide.

... after Covid-19 brought a lack of demand ahead of what would have been peak season.

 Avis, owner of Zipcar, has suffered $158m losses in Q1 of 2020. They are not alone, demand is virtually null for other car rental services, such as Barcelona’s SocialCar. Enterprise have found that the effect of coronavirus is greater than that of September 11th and the 2008 recession combined. 

Some rental services have sought loans, such as Germany’s Sixt, who’s loan is to the tune of €1.6bn. Europcar has taken a  €220m loan that is 90 per cent guaranteed by the French state. 

In context:

- This may mean a shift in the business model of rental car services. There are at present two schools of thought; ‘buyback’ and ‘at risk’. The former is utilised by such companies as Europcar, and may be less risky given the current climate – it entails having a fixed buyback cost for all the cars they are using. The latter, the at risk model, is used by companies such as Hertz and Enterprise (the industry’s largest player). It entails buying the cars outright, to sell at a later date and is riskier because of the lack of the safety net of a fixed resale value. 

… as the unprecedented nature of the pandemic offers the government a chance to implement a once-in-a-lifetime solution 

Economic forecasters predict increased levels of unemployment and lower income in the wake of the crisis – its effects lasting until 2022. British Chancellor Rishi Sunak will be looking to jump-start the economy and engineer a rebound in economic growth and employment once lock down ends. 

Suggestions include the doubling of investment in broadband infrastructure, and the implementation of schemes such as a ‘wage subsidy scheme.’ The latter involves the government covering half the wage of a new employee for a full year, conditional to the worker being retained and the employer making no new redundancies during that period. Further suggestions include financial support for furloughed workers phased out over several months, with the percentage subsidy decreasing each month. 

Huge increases in government spending is required to compensate for the far greater collapse in private demand. Nick Boles argues Boris Johnson should ask parliament to pass an act giving the Bank of England to undertake a programme of monetary financing of up to £400bn. 

In context: 

1. Ever present are the usual objections to the printing of money to fund increased government expenditure, which would result in inflationary pressures. This would be true if the fiscal spending increased overall demand in the economy, and if the markets expected the government to resort to monetary financing, neither of which are true. 

... amidst rising concerns that these payments lack prudential awareness. 

Legal & General (L&G), the UK’s largest asset manager, are following through with plans to pay over £750m to shareholders in dividends. This is in contrast to the decisions of its major competitor in Life Sciences, Aviva, who have cancelled dividends for this period. 

Whilst some companies have been subject to public and media outrage for continuing to pay dividends, L&G have not. This is likely because they have not applied for governmental financial support. However, it does mean that L&G will have less capital to keep themselves economically secure, and opens up a potential to need a government bail-out. 

In context:

1) Many governments want firms to have a cash buffer, which can be created by forgoing dividend payments, and some regulators in the euro area and Britain have already enforced dividend bans. 

... as it reaffirms the presence of an infrastructure that could be used to tackle corruption. 

The 10 countries comprising ASEAN have done surprisingly well with Covid-19, as evidenced by the fact that relatively few deaths have occurred. How well they have done is in part due to how prepared they are – a legacy of SARS. 

One battle they have not historically done well in is that against corruption. Reassuringly, the infrastructure used to tackle Covid-19 can also be used to tackle corruption: legal enforcement, social control, and surveillance technologies.

Corruption runs deep in ASEAN countries; the rule of law is far from strong, power is very much so concentrated in a few hands, and public officials are severely underpaid, thus economically pressuring them into accepting bribes. 

In context:

1) The governments’ complicity to corruption is unsustainable. In Indonesia, obtaining a construction permit bribe-free would take 200 days. Small and medium enterprises drive the economy of the region, and it is therefore necessary that the economy increases the ease of doing business to promote economic health. 

... after failing to pay legal minimum wage. This has lead to the Independent Workers’ Union of Great Britain (IWUGB) taking legal action against the Estonian transportation company.

Andrei Donisa, a former driver, has claimed he was not paid minimum wage and was unfairly dismissed as a result of failure to gather an adequate amount of fares. Upon deducting expenses from his earnings, Donisa found that he had been making less than the minimum wage (£8.22/hr). He similarly took issue with the fact that Bolt temporarily blocks drivers who accept fewer than half the rides they are offered, which appears contrary to one of its USPs – flexibility. 

In context:

1) What does Covid-19 mean for independent workers? In this time of heightened anxiety, it appears appreciated that Bolt, like its competitor Uber, has gone back on the decision to not offer financial support to its drivers. In just the UK, there are 4.8m workers in the gig economy – any company treating these workers poorly are likely to suffer damage to their reputation. It appears this is not something Bolt wants to risk given its goal of becoming the UK’s leader in ride hailing / food transportation apps.

... in a bid to create commercial safety amidst the Covid-19 pandemic.

Non-essential recruitment has come to a halt whilst current employees are being encouraged to take their leave during this period. 

Whilst cargo and transportation of medical supplies and other essential supplies continue, Emirates cannot “viably operate passenger services until countries re-open their borders”, says Chairman and CEO Ahmed Saeed al Maktoum. 

In context:

1) The airline industry has been hit especially hard by the Covid-19 pandemic. Covid could cost the airline industry $113bn in lost revenue, says the International Air Transport Association (IATA). Airlines such as Flybe have already declared bankruptcy.